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Q1 Mr. Mahendra Kumar would like to invest in mutual funds. He has been suggested by his friend to choose a fund from any of the three mutual funds, as given in the table below. Mr. Mahendra learns that he can use Sharpe’s ratio, Treynor’s ratio and Jensen’s Alpha to measure the performance of a mutual fund. Help Mr. Mahendra to rank the three funds on each of the measures.
|Beta of the portfolio
|Return from the market
|Risk free rate of return
Q2 Mr. Virendra Kumar invests Rs. 10,000 in a stock that gives him dividend of Rs. 100, Rs. 200 and Rs. 300 at the end of the first, second and third year respectively. He sells his holdings at Rs. 13,500 at the end of the third year. How much returns did he earn, as per Money weighted rate of return method?
Further, instructions- students can directly calculate the IRR either using in-built formula in MS Excel or create calculations of Present Values (PVs) in MS Excel. Find sum of PVs and set the sum to zero by changing the value of the discounting rate. (you may use Goal Seek function of MS Excel to accurately calculate the IRR). The rate at which the sum is zero is IRR.
Q3 Mr. Dhirendra Kumar is a 24 years old professional, working as a programmer for the largest software company in India. He has earned his bachelor degree of engineering in Computer Science from IIT Mumbai and has been working for the company for last three years. He belongs to Pathankot and his parents live there. For last three years, he has been staying in Bengaluru along with his other colleagues in a rented accommodation.
He plans to get married not before the age of 28 and would like to have his own house before he gets married. His father is working currently at Pathankot and is due to retire in another ten years. He plans to convince to his parents to shift to Bengaluru from Pathankot to stay with him post his father’s retirement.
Mr. Dhirendra is the star performer of his company. He currently enjoys a package of Rs. 18 lakhs per annum. After accounting for his expenditure, he has been able to save close to Rs. 30 lakhs over the last three years. Till date he has been putting his savings in either Fixed deposits (FDs) of his bank or some of the tax savings instruments such as Public Provident Fund etc. However, now he would like to see his investments grow much faster so that he can meet his marriage related expenditure four years later and also make the down payment for his new house before marriage.
He has been getting various investment advices from different people telling him where to put his money. His parents are advising him to buy some gold every year and put rest of the money in FD. His boss tells him to buy the house right away, even though it could be smaller than he would need later. According to his boss, value of his small house would appreciate in four years and that the sale proceeds would partially fund the new purchase. Some of his friends have told him that investing in high safety corporate bonds will give him better returns than putting money in PPF. Amongst all this, he is getting the constant feed through newspapers of Sensex and Nifty scaling new heights every other day and a few one-off stories of rags to riches.
Mr. Dhirendra is thoroughly confused between the choices and he now approaches a professional (you) to advice him on the right investment strategy. Some questions that you need to answer for Mr. Dhirendra:
a) Where should he put his money, in gold, in FD, in PPF, in real estate, in corporate bonds or in stocks? Or do you have some other strategy in mind? Provide your answer with the rationale. ( 5 Marks)
b) Should he invest in any of these assets directly or should he choose the mutual fund route or create a portfolio of mutual funds? How will choosing the mutual fund route (single mutual fund or a portfolio of mutual funds) will prove beneficial to Mr. Dhirendra? Explain your recommendation with reasons for the same. ( 5 Marks)