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Taking Volatility On Your Stride

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Taking Volatility On Your Stride
Taking Volatility On Your Stride
Sandip Mukherji - 16 June 2019

Tough times do not last, but tough people do” —this adage holds true in the present situation. The markets (both Debt and Equity) are extremely volatile and the next six months to a year look highly uncertain as I am writing this article. With the moratorium of the US against Iran expiring, the crude prices of the Indian crude basket look to be going up. The results of the Lok Sabha elections look uncertain. Although the core inflation is in the comfortable range but the food inflation has gone up due to the prediction of deficit monsoons. The US has indicated three rate hikes this year but has exercised restraint till now. And, if this does not look gloomy enough, there is always the threat of an underlying geopolitical factor.

However by the time this piece goes to print the picture will be clearer but these terms will be useful for the future in selection of funds.

Beta

It is a measure of volatility – a beta of less than 1.0 indicates that the investment will be less volatile than the market, and more than 1.0 indicates higher investment volatility. For example, if a fund portfolio’s beta is 1.2, it is theoretically 20 per cent more volatile than the market. A fund type will also have variance in its beta, for example, a large cap fund will usually have less beta than a mid or small cap fund.

Standard Deviation

It measures the volatility of the fund’s returns in relation to its average returns.  As for example, if a fund has a 12 per cent average rate of return and a standard deviation of four per cent, its return will range from eight to 16 per cent.

 Alpha

The excess return in a fund generated by the fund manager, relative to the benchmark is called alpha. The more the alpha, the better returns in excess of its benchmark the fund has generated.

 Sharpe Ratio

It means how much risk a fund has taken to generate a particular return and is achieved by calculating the fund return subtracted by the current fixed deposit return and then divided by the standard deviation. The higher the Sharpe Ratio, better is the fund’s performance as compared to the risk taken by it.

 For debt funds one has to take few more factors into consideration, namely;

 Yield To Maturity

It signifies the return of the fund, given the entire bonds in the funds are held till maturity, factoring in all the interest whether paid or unpaid.

 Average Maturity

This figure tells you the duration of the average maturity of the bonds held in the fund. The higher the average maturity, the higher the volatility of the fund.

 Modified Duration

This figure when multiplied by the movement of interest rate will tell you the yield of the fund when the interest rate moves up or down by a percent. For example, if the interest rate has moved up by two per cent and a particular fund has a modified duration of 2.5, then the yield of the fund will be 2x2.5= 5 per cent. This could also be reversed, making it a significant measure of volatility with regard to the change in interest rates.

At the end of it all, I would like to reiterate that if you have chosen wisely and considered the above factors while making a choice, then your portfolio will weather all storms and deliver good returns. Also, remember that if you have invested for the long run, shorter term volatilities do not matter. The BSE Sensex was introduced in 1979 and since then has delivered 16 per cent plus CAGR returns despite the market vagaries.

Hence, keep faith and happy investing!

 

The author is the wealth advisor and Founder, Tangerine Ideas

 

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