Alpha is a measure of the difference between a portfolio\u2019s actual returns and its expected performance, given its level of risk as measured by beta. A positive alpha figure indicates the portfolio has performed better than its beta would predict. In contrast, a negative alpha indicates the portfolio has underperformed, given the expectations established by beta.<\/p>\n<\/div><\/div><\/div>
A measure of a fund\u2019s sensitivity to market movements. The beta of the market is 1.00 by definition. Morningstar calculates beta by comparing a fund\u2019s excess return over T-bills to the market’s excess return over T-bills, so a beta of 1.10 shows that the fund has performed 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant. Conversely, a beta of 0.85 indicates that the fund\u2019s excess return is expected to perform 15% worse than the market\u2019s excess return during up markets and 15% better during down markets.<\/p>\n<\/div><\/div><\/div>
Standard deviation is the statistical measurement of dispersion about an average, which depicts how widely a stock or portfolio\u2019s returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that is most likely for a given investment. When a stock or portfolio has a high standard deviation, the predicted range of performance is wide, implying greater volatility.<\/p>\n<\/div><\/div><\/div>
A risk-adjusted measure developed by Nobel Laureate William Sharpe. It is calculated by using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the subaccount\u2019s historical risk-adjusted performance. The Sharpe ratio is calculated for the past 36-month period by dividing a sub account annualized excess returns by its annualized standard deviation. Since this ratio uses standard deviation as its risk measure, it is most appropriately applied when analyzing a sub account that is an investor\u2019s sole holding. The Sharpe Ratio can be used to compare two sub accounts directly on how much risk a sub account had to bear to earn excess return over the risk-free rate.<\/p>\n<\/div><\/div><\/div>
A fund that tracks a particular index and attempts to match returns. While an index typically has a much larger portfolio than a mutual fund, the fund’s management may study the index’s movements to develop a representative sampling, and match sectors proportionately.<\/p>\n<\/div><\/div><\/div>
Exchange-traded funds are a broad class of funds, excluding closed-end funds, which trade throughout the day over an exchange. ETFs have low annual expenses, but you must pay commissions to trade them. ETFs do not redeem shares for cash, and thus do not need to sell securities (possibly realizing capital gains) to pay investors who redeem their shares. They are typically more tax-efficient than mutual funds. Unlike closed-end funds, ETFs market prices usually closely track their NAVs. Most ETFs are index funds.<\/p>\n<\/div><\/div><\/div>
Dividend distribution tax\u00a0is the\u00a0tax\u00a0imposed by the\u00a0Indian Government\u00a0on companies according to the\u00a0dividend\u00a0paid to a company’s investors. In the union Budget 2018 Dividend Distribution Tax of 10% on Equities and Equity Mutual Funds is introduced, Investors relying on dividends from equity funds such as balanced funds would have to reconsider their investment strategies. DDT will reduce the in-hand return to investor, if the dividend option is opted for. Dividend, however, remains tax-free in the hands of the investor. The fund houses will have to deduct DDT before declaring dividend.<\/p>\n<\/div><\/div><\/div><\/div><\/div>
The price return is the rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, while the income generated by the assets in the portfolio, in the form of interest and dividends, is ignored.<\/p>\n<\/div><\/div><\/div>
The total return index is a type of equity index that tracks both the capital gains\u00a0of a group of stocks over time, and assumes that any cash\u00a0distributions, such as dividends, are reinvested back into the index.For instance, according to Morningstar, the typical dividend yield on benchmarks is in the ballpark of 1.5% per annum, which means that the TRI benchmark will outperform price index by 150 basis points per annum.<\/p>\n<\/div><\/div><\/div>
Yield to Maturity is the most popular measure of yield in the Debt Markets. YTM refers to the rate of return an investor receives if the investor holds on to the bond till its maturity The calculation for YTM is based on the coupon rate, the length of time to maturity and the market price of the bond. YTM is basically the Internal Rate of Return on the bond. One of the major assumptions underlying the YTM is that the coupon interest paid over the life of the bond is assumed to be reinvested at the same rate.<\/p>\n<\/div><\/div><\/div>
Debt funds invest in various fixed income or debt securities and each security in the portfolio may have a different maturity. A bond\u2019s maturity date indicates the specific future date on which an investor gets his principal back i.e. the borrowed amount is repaid in full. Average Maturity is the weighted average of all the current maturities of the debt securities held in the fund. The weights are the percentage holding of each security in the portfolio. Average maturity helps to determine the average time to maturity of all the debt securities held in a portfolio and is calculated in days, months or years. For e.g. a debt fund having an average maturity of 5 years constitutes debt securities held by the fund that, on an average, will mature in 5 years, though individual securities may have maturity different than 5 years.<\/p>\n<\/div><\/div><\/div>
This is a weighted average of all the maturities of the bonds in a portfolio, computed by weighting each maturity date by the market value of the security.<\/p>\n<\/div><\/div><\/div>
Duration \u2013 Measure to know what changing interest rates could do to your fixed income portfolio\u2026. Modified Duration expresses the sensitivity of the price of a bond to a change in interest rate. The price of a bond and interest rates have an inverse relationship, i.e. if the interest rates rise, the price of the bond would fall and vice versa. The modified duration explains the extent of rise or fall in bond price, given a change in interest rate.<\/p>\n<\/div><\/div><\/div><\/div><\/div>