RISK MANAGEMENT IN MUTUAL

FUND - EXPENSE COMPARISON IN

MUTUAL FUNDS
T H E F U T U R EO F F I N A N
C E

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W h a t are
Mutual
Funds?
Mutual funds are investment vehicles
that pool money from multiple investors
to invest in a diversified portfolio of
stocks, bonds, or other securities. They
are managed by professional fund
managers who aim to generate returns
that align with the fund's investment
objectives.
W h a t i s Risk
Management
Identifying, assessing, and mitigating
potential risks to minimize losses and
maximize returns. It involves
diversification, asset allocation,
regular portfolio rebalancing, and
other strategies to manage market,
credit, liquidity, operational, and
interest rate risks.
Benefits of Mutual
Funds
Diversification
1.
Professional
2.
Management
3. Convenience
4. Economies of Scale
5. Liquidity
6. Regulatory Oversight
7. Tax Efficiency
8. Flexibility
9. Low Minimum
Investment
Risk in Mutual Funds
Market Risk: Mutual funds are subject to volatility in the market due to fluctuations in
stock prices, bond prices, or broader market indices.

Interest Rate Risk: Changes in interest rates can impact *debt funds*. When interest rates
rise, the value of existing bonds (held by debt funds) falls.

Credit Risk: The risk that a bond issuer defaults on payment obligations (principal or
interest). This affects debt and hybrid funds investing in lower-rated instruments.

Liquidity Risk : The inability to sell investments at the desired time without incurring losses.
This occurs if the fund holds illiquid securities or during unfavorable market conditions.

Reinvestment Risk: The risk of reinvesting interest or dividend income at a lower rate,
particularly in debt funds.
Risk Management Strategies
Navigating the complexities of mutual fund investments
requires a robust risk m a n a g e m e n t strategy. here s o m e
key key techniques that fund m a n a g e r s apply to protect
investor capital a n d optimize returns.

1.Diversification
Asset Classes
Spreading investments across diff erent asset classes like
stocks, bonds, a n d real estate c a n mitigate overall portfolio
risk.

Sectors
Diversifying across various economic sectors reduces
2.Active Portfolio Management
Constant Monitoring
Security Selection
Continuously tracking the
Carefully choosing individual
performance of investments and
securities within each asset
adjusting the portfolio as needed
class to optimize risk-adjusted
to adapt to changing market
returns.
conditions.

1 2 3

Tactical Asset Allocation

Making short-term adjustments to
the portfolio's asset allocation
based on market trends
and opportunities.
3.Asset
Allocation
Strategic Asset Allocation
Determining the l o n g - term allocation of
assets across diff erent asset classes ba s ed on the
investor's risk tolerance a n d investment objectives.
Rebalancing
Periodically adjusting the portfolio to maintain the desired
asset allocation a n d re-align with the investment strategy.
4.Credit Analysis
Issuer Creditworthiness
Assessing the fi nancial strength a n d default risk of bond
issuers.
Ratings and Covenants
Monitoring credit ratings and bond
covenantsto identify potential risks.

5.Liquidity Management
Maintaining Sufficient Cash
Keeping a portion of the portfolio in liquid
assets to meet redemption requests a n d unexpected
expenses.
Trading Strategies
Employing liquidity-sensitive trading strategies to
6.Regulatory Compliance
Adhering to Regulations
Complying with all relevant securities regulations a n d
guidelines.

Risk Reporting a n d Disclosure

Providing transparent a n d accurate information to
investors about the fund's risk profile a n d investment
strategy.
 Comparison of Mutual
1. Performance Metrics
Funds
a. Historical Return: This represents the past performance of a mutual fund over different periods
(e.g. 1 year, 3 years, 5 years). While historical returns do not guarantee future performance they
provide insight into the fund’s ability to generate consistent returns under varying market
conditions.
b.Alpha: A measure of a fund’s performance relative to its benchmark. A positive alpha
indicates the fund has outperformed its benchmark after adjusting for risk, showcasing the fund
manager’s added value.
c. Sharpe Ratio: It evaluates risk adjusted return, indicating how much excess return the fund has
delivered for the additional risk taken. Higher Sharpe ratios suggest better risk reward efficiency.
d.Treynor Ratio: The Treynor ratio also called the reward-to-volatility ratio is a performance
measure used to assess how much additional return a portfolio generates for every unit of risk
assumed
2. Risk Levels
a. Standard Deviation: Measures the fund’s return volatility. Higher standard deviation indicated
higher risk and return fluctuations.
b.Beta: Indicates the funds sensitivity to market movements. A beta greater than 1 means the
fund is more volatile than the market, while a beta less than 1 indicates lower volatility.
c.Riskometer: A regulatory tool that categorizes funds into risk levels (e.g. low, moderate, high, very
high) based on their underlying assets, helping investors match their risk tolerance.

3. Fund Manager’s Expertise

a.Track Record: The experience and past performance of a fund manager in handling various
market conditions are crucial. A consistent and skilled manager often ensures better fund
performance.
b. Investment Strategies: A manager’s approach to security selection (e.g. growth vs value investing),
timing of trades, and macroeconomic insights play a key role in achieving the fund’s objectives.
Funds managed by seasoned professionals with a clear strategy are often more reliable.
4. Investment objective and style
a. Growth funds: Focus on capital appreciation by investing in equities with high growth potential.
Suitable for long term investors with higher risk tolerance.
b.Income funds: Prioritize stable income generation by investing in bonds or dividend-paying
stocks, ideal for conservative investors.
c. Balanced funds: Combine equity and debt exposure to provide both growth and stability,
appealing to moderate-risk investors.

5. Liquidity and Exit load

a. Liquidity: Refers to how quickly investors can redeem their units without significant loss. Open-
ended mutual funds offer better liquidity as they allow redemptions on any business day.
b.Exit load: A fee imposed on investors for redeeming mutual funds units within a predetermined
timeframe. Higher exit loads discourage premature withdrawals, promoting long-term investment
discipline.
EXPENSES OF MUTUAL
FUND
Impact of expenses on
returns
Cost-Efficiency: High expense ratios can significantly eat into the overall returns of a fund. For
example, if an investment generates a 7% return but has a 2% expense ratio, the investor’s net
return drops to 5%. Lower expense ratios allow investors to retain a larger portion of their returns.

Long-Term Impact: While a seemingly small difference in expense ratios may not appear
substantial in the short term, it can lead to significant differences in cumulative returns over an
extended investment horizon. Even seemingly minor savings can compound over time.

Benchmark Comparison: Expense ratios should be considered when comparing fund

performance against a benchmark or other similar funds. A fund’s ability to outperform its
benchmark is more meaningful if it does so while maintaining a lower expense ratio.
Strategies to Mitigate the Impact of Expense Ratios

1. Choose Low-Cost Funds

2. Consider Passive Investing
3. Monitor Expense Ratios Regularly
4. Avoid Funds with High Loads
5. Consider Tax-Efficient Funds
6. Diversify Your Investment
Sebi Guidelines on Expense Ratio in Mutual
Funds
SEBI caps mutual fund TER by AUM, with equity funds at 2.25%. Proposed reforms
focus on uniform TER, transparency, and better investor safeguards.

Asset Size (Average Daily Net Assets ) Maximum TER for Regular Plans Maximum TER for Direct Plans

Up to ₹ 500 crore 2.55% 1.80%

₹500 crore to ₹ 750 crore 2.45% 1.70%

₹750 crore to ₹ 2000 crore 2.30% 1.55%

₹2000 crore to ₹ 5,000 crore 2.05% 1.30%

₹5,000 crore to ₹ 10,000 crore 1.80% 1.05%

₹10,000 crore to ₹ 50,000 1.55% 0.80%

crore Above ₹ 50,000 crore 1.05% 0.30%

○Impact of the
guidelines
- for investors
- for A M C s

○Rationale
C a s e s t u d y Of Mutual
Funds
5 Year
Returns
 Conclusi
on
1. Importance of Risk Management
a. Portfolio Stability : Risk management strategies are essential for maintaining stability in a mutual fund
portfolio. They help mitigate the impact of unpredictable market movements, ensuring that investor’s
funds are safeguarded against excessive losses during volatile periods. For e.g.
Diversification across asset classes and sectors reduces dependency on the performance of any single
investment, limiting overall risk.

b.Investor confidence: Effective risk management fosters trust among investors, as it demonstrates the
fund managers commitment to protecting capital while pursuing returns. Confidence in a funds ability to
handle risks encourages investors to stay invested, which is crucial for achieving long term financial goals.
2. Significance of Expense Ratio
a. Impact on Returns: The Total Expense Ratio (TER) directly reduces the net returns earned by investors. A
high TER means a significant portion of the fund’s returns is absorbed by management an operational
costs, leaving less for the investor. Conversely, funds with lower expense ratios provide higher take-home
returns. For instance, a fund generating a gross annual return of 10% with a TER of 2% will leave the
investor with an 8% net return.

b.Cost efficiency in fund selection: Expense ratios severe as a key criterion for a cost conscious investors
when choosing between funds. By comparing TER’s across funds with similar objective and performance,
investors can identify options that maximize value while minimizing costs.

3. Key takeaways for investors

a.Align fund selection with financial goals and risk appetite: Investors should prioritize funds that match
their personal financial objectives (e.g. wealth creation, income generation, or capital preservation) and
risk tolerance. For e.g., Equity funds are suitable for long-term growth-oriented investors with high-risk
tolerance, while debt funds cater to conservative investors seeking steady returns with lower risk.
b. Opt for funds with Competitive TER and Consistent Performance: While expense ratios are important,
they should be considered in conjunction with fund performance. Funds with slightly higher TERs may still
be preferable if they deliver superior risk-adjusted returns over time. Consistent performance over multiple
market cycles indicates a fund’s reliability.
Thank
you.