INVESTMENT MANAGEMENT

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Prof. Abhijeet Chandra

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Vinod Gupta School of Management
Indian Institute of Technology Kharagpur

N Lecture 24: Risk Indicator of a Mutual Fund

• Riskiness of mutual fund products

• Risk parameters of an equity mutual fund scheme

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• Equity mutual fund
• Market capitalisation
• Volatility

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• Liquidity

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Mutual Funds
Classification: Takeaways Hybrid
Schemes

Debt
Schemes Solution oriented

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Schemes

Categorization of
Equity

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Schemes Mutual Fund Schemes Other
Schemes

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Investors Seeking Indirect Investment Opportunities
Mutual Funds
Risk- Return Trade-off
+

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E(Ri) - Rf
- +
0

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beta
-
Mutual Funds
Risk- Return Trade-off: Labeling of Mutual Fund Products

• On the recommendation of mutual fund advisory committee (MFAC), the SEBI suggests
all mutual fund products to be carrying a Risk-o-meter to indicate the riskiness of the
scheme.
• Risk-o-meter for each MF scheme shall have one of the following six levels of riskiness:

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• Low risk
• Low-to-moderate risk

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• Moderate risk
• Moderate-to-high risk
• High risk, and
• Very high risk
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Mutual Funds
Risk- Return Trade-off: Labeling of Mutual Fund Products
• Risk level of a scheme is required to be evaluated using the recommended methodology
and a score is to assigned to determine the riskiness of the scheme.
• The underlying securities of a mutual fund scheme shall be assigned a numerical value
for each of the parameters based on which the riskiness score shall be calculated.

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• For the purpose of evaluation of riskiness, the asset under management (AUM) of the
security forming part of MF scheme portfolio shall be as on the last day of a given

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month.
• For schemes holding portfolio of different types of assets, such as debt,
equity, equity derivatives, other derivatives, gold, cash, other mutual

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funds, unique scores are assigned to arrive at the value of the risk-o-
meter for that scheme.
Mutual Funds
Risk- Return Trade-off: Labeling of Mutual Fund Products
• Using the reference range, the risk value is assigned and mapped to the riskiness to
depict in the risk-o-meter:

Risk Value Risk Level as per Risk-o-meter

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≤1 Low
＞ 1 to ≤ 2 Low to Moderate

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＞ 2 to ≤ 3 Moderate
＞ 3 to ≤ 4 Moderate to High
＞ 4 to ≤ 5
＞5
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High
Very High
Mutual Funds
Risk-O-Meter of Equity Schemes: Market Capitalisation
• For assigning value w.r.t. MCap in the Risk-O-Meter, following references are used:

MCap of the underlying security MCap Value

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Large Cap 5
Mid-Cap 7

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Small Cap 9

• MCap data as published by AMFI on six-monthly basis shall be considered.

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Based on wt. avg. of the MCap of each security (wt. being AUM of the
security), MCap Value of a portfolio shall be assigned.
Mutual Funds
Risk-O-Meter of Equity Schemes: Volatility
• For assigning value w.r.t. Volatility in the Risk-O-Meter, following references are used:

Daily Volatility of the Security Volatility Value

Price (based on ~2yr daily data)

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≤1% 5
>1% 6

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• Based on wt. avg. of the Volatility values of each security (wt. being AUM
of the security), Volatility Value of a portfolio shall be assigned.
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In case of a security being traded on multiple exchanges, the most
conservative volatility value across stock exchanges for a given month
shall be taken into account.
Mutual Funds
Risk-O-Meter of Equity Schemes: Impact Cost (Liquidity Measure)
• For assigning value w.r.t. Impact Cost/Liquidity in the Risk-O-Meter, following references
are used:
Average Impact Cost of the Security for the Impact Cost Value
month

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≤1% 5
> 1 % to ≤ 2 % 7

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>2% 9
• Based on wt. avg. of the Impact Cost values of each security (wt. being

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AUM of the security), Impact Cost Value of a portfolio shall be assigned.
In case of a security being traded on multiple exchanges, the average
impact cost value for all stock exchanges for a given month shall be taken
into account.
Mutual Funds
Risk-O-Meter of Equity Scheme: Investment in IPOs and Newly Listed Securities
• Risk-O-Meter value for equity portfolio shall be simple average of market capitalization
value, volatility value, and impact cost value.
• If a scheme has investment in IPOs or recently-listed securities, MCap Value is based on
market cap. of the security as on the last trading day of the month w.r.t. the threshold

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MCap for large cap, mid-cap, and small cap as published by AMFI.
• For volatility value, a score of 6 is assigned for the first three month of trading

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of a security. After that, Volatility value is calculated as suggested above.
• A security that traded for only first three months receives a score of 5 for
Impact Cost value; subsequently it is calculated on the basis of standard

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methods.
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Cash component in the portfolio is assigned a value of 1.
• SEBI has proposed guidelines for indicating riskiness of mutual fund schemes
based on the holdings (e.g., debt, equity, gold, etc.) and levels of risks.

• In a typical equity mutual fund scheme, risk indicator is characterized by

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market capitalization, volatility, and impact costs.

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• Based on the proposed range of values, riskiness is indicated for
each mutual fund scheme.

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• SEBI Circular: SEBI/HO/IMD/DF3/CIR/P/2020/197, dt. Oct. 2020

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