Technical Analysis PDF

Technical Analysis Prof. Siddhesh Soman  Technical Analysis Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities in price trends, volumes and patterns seen on charts It believes that past trading activity and pric...

Technical Analysis Prof. Siddhesh Soman  Technical Analysis Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities in price trends, volumes and patterns seen on charts It believes that past trading activity and price changes of a security can be valuable indicators of the security's future price movements It does not involve calculation of an Intrinsic Value but tries to evaluate security’s strength or weakness  Fundamental vs Technical Features Fundamental Approach Technical Approach Based on analysis of financial, Based on historical price & Valuation industry and economical volume movement of performance stock prices Approach Qualitative and Quantitative Quantitative Financial projections and Statistical and Tools management discussions mathematical View Long term Short term Intrinsic Value Calculated Not calculated  Dow Theory Invented by Charles Dow (Founder of The Wall Street Journal) between 1900-1902 Six Tenets (principles) of Dow Theory 1. The market has 3 movements 2. Market trends have 3 phases 3. The stock market discounts all news 4. Stock market averages must confirm each other 5. Trends are confirmed by volume 6. Trends exist until definitive signals prove that they have ended  Type of Charts – Line Charts – Bar Charts – Candle-Stick Charts – Point & Figure Charts Line Chart Bar Chart Candlestick Chart Support & Resistance  Relative Strength Index (RSI)  The RSI is a momentum indicator that measures the magnitude of recent price changes  It has value between 0 to 100  Value above ’70’ indicates ‘Overbought’ position while value below ’30’ indicates ‘Oversold’ position  Stochastic RSI is different from RSI in the sense that it moves faster from price overbought to oversold than RSI.  Value above ’80’ indicates ‘Overbought’ position while value below ’20’ indicates ‘Oversold’ position  Bollinger Bands  Invented by John Bollinger, it plots volatility bands around the average price  These are a set of lines plotted 2 standard deviations (positively and negatively) away from a simple moving average (SMA) of the security's price  Higher the volatility, larger will be the band width and vice-versa  If prices continuously touch the upper band it indicates overbought position & if it continuously touches lower band it indicates oversold position  Aroon Oscillator  The Aroon Oscillator is a trend-following indicator that uses aspects of the Aroon Indicator (Aroon Up and Aroon Down) to gauge the strength of a current trend and the likelihood that it will continue.  Aroon oscillator readings above zero indicate that an uptrend is present, while readings below zero indicate that a downtrend is present.  If Aroon Up is above Aroon Down: Indicates Bullish Trend  If Aroon Up is below Aroon Down: Indicates Bearish Trend Average Directional Index (ADI)  The average directional index (ADX) is a technical analysis indicator used by some traders to determine the strength of a trend.  The trend can be either up or down, and this is shown by two accompanying indicators, the negative directional indicator (-DI) and the positive directional indicator (+DI). Therefore, the ADX commonly includes three separate lines.  The ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20.  When ‘DI+’ is above ‘DI –’ this indicates bullish trend  When ‘DI+’ is below ‘DI –’ this indicates bearish trend  Close Location Value (CLV)  Close location value (CLV) is a metric utilized in technical analysis to assess where the closing price of a security falls relative to its day's high and low prices.  It moves in the range from -1 to +1, or, if multiplied by 100, in the range from -100% to +100%.  Close location value (CLV) readings close to 1 (or 100%) indicate that the closing price is near its high and would be considered a bullish sign.  CLV readings close to -1 (or -100%) reveal that the closing price is near its low and might be considered a bearish sign.  CLV readings that are close to zero are considered neutral.  Donchian Channels Donchian Channels are three lines generated by moving average calculations that comprise an indicator formed by upper and lower bands around a midrange or median band. The upper band marks the highest price of a security over N periods while the lower band marks the lowest price of a security over N periods. The area between the upper and lower bands represents the Donchian Channel.  Chaikin Money Flow (CMF) Chaikin Money Flow (CMF) is a volume-weighted average of accumulation and distribution over a specified period. A CMF value above the zero line is a sign of strength in the market, and a value below the zero line is a sign of weakness in the market.  Ease of Movement Ease of movement is a momentum indicator that demonstrates the relationship between the rate of change in an asset’s price and its volume. An indicator value of greater than zero denotes that the asset is being bought (or “accumulated” in technical analysis lingo). A value of less than zero generally denotes that the asset is being sold (“distributed”). Accumulation Distribution (A/D) The accumulation distribution indicator (A/D) provides information regarding the money flow in a stock. The word “accumulation” refers to the level of buying and “distribution” the level of selling Bullish Trend: A/D increases along with Price Increase Bearish Trend: A/D decreases along with Price Decrease Bullish Divergence: A/D increases when price is decreasing Bearish Divergence: A/D decreases when price is increasing  Moving Average Convergence Divergence (MACD)  Moving Average Convergence Divergence (MACD) is a trend- following momentum indicator that shows the relationship between two moving averages of a security’s price.  The MACD line is by default, the difference between the 12 and 26 period EMA.  The signal line indicates the 9-period EMA (default setting) of the MACD Line.  The histogram, which represents the difference between the MACD and Signal lines.  When the “crossover” occurs, and the fast line (MACD) starts to “diverge” or move away from the slower line (Signal Line), it often indicates that a new trend has formed.  Money Flow Index (MFI)  The Money Flow Index (MFI) is a technical oscillator that uses price and volume data for identifying overbought or oversold signals in an asset.  It can also be used to spot divergences which warn of a trend change in price. The oscillator moves between 0 and 100.  An MFI reading above 80 is considered overbought and an MFI reading below 20 is considered oversold, although levels of 90 and 10 are also used as thresholds.  Unlike conventional oscillators such as the Relative Strength Index (RSI), the Money Flow Index incorporates both price and volume data, as opposed to just price. For this reason, some analysts call MFI the volume-weighted RSI. Parabolic SAR & Super Trend  Parabolic SAR Indicated by ‘Small Dots’ appearing above or below the price chart  If the dots are appearing below the price chart, it indicates bullish trend  If the dots are appearing above the price chart, it indicates bearish trend If Supertrend line is Green, it’s a bullish sign and if it’s red, it indicates a bearish sign Introduction to Security Analysis Prof. Siddhesh Soman  Return 1) HPR = [(Cl. Price – Op. Price) + Income Component] x 100 Op. Price 2) Annualized Return i) BEY = HPR x (12/m) ii) EAY or EAR = [(1 + HPR)^(12/m)] – 1  Q.1 SBI stock was trading at Rs. 250 per share 2 years back, the stock is currently trading at Rs. 300 and the share has paid dividend of Rs.30 in last 2 years. Find out the HPR. Also calculate Annualized Return.  Q.2 L&T stock was trading at Rs. 1,250 per share 6 months back, the stock is currently trading at Rs. 1,350 and the share has paid dividend of Rs.15 in last 6 months. Find out the HPR. Also calculate BEY and EAY.  Q.3 Yes Bank’s stock was trading at Rs.25 per share 3 months back, the stock is currently trading at Rs. 20 and the share has not paid any dividend in last 3 months. Find out the HPR. Also calculate BEY and EAY. Securities Risk & Return Analysis Prof. Siddhesh Soman  Q.4 Calculate the average return, standard deviation, variance & coefficient of variation of the following 2 securities: Year JK Cement Return Infosys Return 1 10% -1% 2 -5% 5% 3 20% 7% 4 -2% 8% 5 16% 4%  Q.5 Calculate the average return, standard deviation, variance & coefficient of variation of the following 2 securities: Probability Britannia Nestle 0.3 8% 30% 0.1 -2% -13% 0.4 15% 25% 0.2 -1% -7%  Systematic Risk vs Unsystematic Risk Systematic Risk Unsystematic Risk Affects the entire economy It is company-specific risk Unavoidable Avoidable Can’t be reduced through Reduced through diversification diversification As per CAPM and modern As per CAPM and modern portfolio Theory, investors should portfolio Theory, investors be compensated only for taking should not be compensated for higher systematic risk taking higher unsystematic risk E.g. Inflation, Recession, Taxation E.g. Labour Strike, Failure of a changes, war, Pandemic, Govt. product, Management change, changes, Policy Changes Legal cases Types of Risk Capital Market Theory Prof. Siddhesh Soman  CAPM It’s a single factor model to arrive at an equilibrium return from as asset The General form of equation is y = a + bx Expected Return as per CAPM E(R) = Rf + [β x (Rm- Rf)] Where, Rf = Risk-free return Β = Beta or Systematic Risk Rm = Return from market portfolio Rm- Rf = Market Risk Premium  Jensen’s Alpha It is a measure of Abnormal or Excess Return over and above return as per CAPM Jensen’s Alpha = Average Return – E(R) as per CAPM If Alpha is Positive, it indicates the security is undervalued & if Alpha is Negative the security is considered to be Overvalued  Q.1 Calculate the co-variance, coefficient correlation, Beta of the following 2 securities: Year Tata Steel BSE – Sensex 1 18% 12% 2 -2% 0% 3 13% 18% 4 -2% -5% 5 8% 8% If return on Treasury Bonds is 7%, calculate the expected return as per CAPM & Jensen’s Alpha  Q.2 Calculate the co-variance, coefficient correlation, Beta of the following 2 securities: Probability HUL NIFTY 0.3 -1% 10% 0.1 5% -5% 0.4 7% 20% 0.2 8% -2% If return on Treasury Bonds is 3%, calculate the expected return as per CAPM & Jensen’s Alpha Portfolio Theory Prof. Siddhesh Soman  Capital Allocation Line (CAL) All the portfolios that can possibly be created from combining a risk-free asset with a risky asset lie on the CAL On X-axis it has Standard Deviation which is the measure of Total Risk On Y-axis it has Expected Return The slope of CAL is called as Sharpe Ratio or Reward to Variability Ratio Capital Allocation Line (CAL) Efficient Frontier & Minimum Variance Portfolio It is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return  Capital Market Line (CML) The capital market line is a special case of the CAL where the portfolio of risky assets is the market portfolio The line is tangent to the efficient frontier at Point M i.e. Market Portfolio It is considered to be the New Efficient Frontier Capital Market Line (CML)  Characteristic Line Characteristic line is a regression line, plotting performance of a particular security or portfolio against that of the market portfolio at every point in time. The y-axis on the chart measures the excess return of the security over the risk-free rate of return. The x-axis on the chart measures the market's return in excess of the risk free rate. The slope of Characteristic Line is called as Beta Characteristic Line Security Market Line (SML)  Q.1 Calculate the expected rate of return as per CAPM & draw SML to identify Undervalued/Overvalued securities Security Beta Average Return A 1 11 % B 1.5 4% C 0.5 6% D 2 17 % Nifty (Market 1 10 % Portfolio) Return on government’s risk-less security is 5% Chapter: Portfolio Risk & Return Prof. Siddhesh Soman  Q.1 Calculate portfolio return & portfolio beta from the following data Stock E (R) β X -5% 0.2 Y 20% 1.4 Z 12% 0.6 You may assume that the weight of securities x, y & z in the portfolio are 0.3, 0.1 & 0.6 respectively  Q.2 Calculate portfolio Risk from the following information. Weight of stock A in the portfolio is 0.4 and that of stock B is 0.6. Stock σ A 4% B 16% Assume the correlation coefficient (r) between the 2 stocks is: (solve 5 cases differently) i) 0 ii) 0.5 iii) -0.5 iv) -1 v) 1  Q.3 Calculate the average return, standard deviation & correlation of stocks A & B Year A B 1 10% 7% 2 -5% 1% 3 20% 15% 4 7% 3% Form a portfolio of stocks A & B assuming equal proportion then calculate the average return & standard deviation of that portfolio Portfolio Theory Prof. Siddhesh Soman  Capital Allocation Line (CAL) All the portfolios that can possibly be created from combining a risk-free asset with a risky asset lie on the CAL On X-axis it has Standard Deviation which is the measure of Total Risk On Y-axis it has Expected Return The slope of CAL is called as Sharpe Ratio or Reward to Variability Ratio Capital Allocation Line (CAL) Efficient Frontier & Minimum Variance Portfolio It is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return  Capital Market Line (CML) The capital market line is a special case of the CAL where the portfolio of risky assets is the market portfolio The line is tangent to the efficient frontier at Point M i.e. Market Portfolio It is considered to be the New Efficient Frontier Capital Market Line (CML)  Characteristic Line Characteristic line is a regression line, plotting performance of a particular security or portfolio against that of the market portfolio at every point in time. The y-axis on the chart measures the excess return of the security over the risk-free rate of return. The x-axis on the chart measures the market's return in excess of the risk free rate. The slope of Characteristic Line is called as Beta Characteristic Line Security Market Line (SML)  Q.1 Calculate the expected rate of return as per CAPM & draw SML to identify Undervalued/Overvalued securities Security Beta Average Return A 1 11 % B 1.5 4% C 0.5 6% D 2 17 % Nifty (Market 1 10 % Portfolio) Return on government’s risk-less security is 5% Chapter: Portfolio Risk & Return Prof. Siddhesh Soman  Q.1 Calculate portfolio return & portfolio beta from the following data Stock E (R) β X -5% 0.2 Y 20% 1.4 Z 12% 0.6 You may assume that the weight of securities x, y & z in the portfolio are 0.3, 0.1 & 0.6 respectively  Q.2 Calculate portfolio Risk from the following information. Weight of stock A in the portfolio is 0.4 and that of stock B is 0.6. Stock σ A 4% B 16% Assume the correlation coefficient (r) between the 2 stocks is: (solve 5 cases differently) i) 0 ii) 0.5 iii) -0.5 iv) -1 v) 1  Q.3 Calculate the average return, standard deviation & correlation of stocks A & B Year A B 1 10% 7% 2 -5% 1% 3 20% 15% 4 7% 3% Form a portfolio of stocks A & B assuming equal proportion then calculate the average return & standard deviation of that portfolio Reward to Risk Ratios Prof. Siddhesh Soman  Sharpe, Treynor & M- Square Sharpe Ratio = E (Rp) – Rf σp Treynor Ratio = E (Rp) – Rf βp M-Square (M2) = Rf + (Sharpe Ratio of Portfolio x σ of benchmark)  Q.1 Calculate the Sharpe ratio, Treynor ratio & M- Squared measure from the following information & comment which security is better A B Sensex E (Rp) 15 % 20 % 12% σp 10 % 12 % 8% βp 1.2 1.8 1 Rf 6%  Factor models and arbitrage pricing theory Prof. Siddhesh Soman  Multi-Factor Models It employs multiple factors in its calculations of equilibrium asset prices or asset returns The general form of equation is y = a + b1x1 + b2x2 + b3x3 Fama& French 3 factor Model E (R) = Rf + [β1 x (Rm- Rf)] + β2 x SMB + β3 x HML SMB = Small Minus Big (Size Premium based on Market Capitalization) HML = High Minus Low (Value Premium based on BV to MV)  Fama French 5-Factor Model MRP (Market Risk Premium) is the excess of Return from Market Portfolio over Risk-free Return SMB (Small Minus Big) is the average return on the nine small stock portfolios minus the average return on the nine big stock portfolios HML (High Minus Low) is the average return on the two value portfolios minus the average return on the two growth portfolios RMW (Robust Minus Weak) is the average return on the two robust operating profitability portfolios minus the average return on the two weak operating profitability portfolios CMA (Conservative Minus Aggressive) is the average return on the two conservative investment portfolios minus the average return on the two aggressive investment portfolios Arbitrage Pricing Theory (APT) It is another type of Multi- Factor model It is based on the concept that an asset’s return can be predicted by using multiple economic variables The number & the type of variables considered in the model are as per the choice of the analyst The variables can be premiums based on GDP, Inflation, market indices, exchange rates etc.  Random Walk Theory – The theory states that the stock market movements are random & can’t be predicted – The prices do not act on any predictive fundamental or technical indicators – Those who believe in the random walk theory recommend using a “buy and hold” strategy – Investing in a selection of stocks that represent the overall market – for example, an index mutual fund or ETF based on one of the broad stock market indexes, such as the Sensex, Nifty, S&P 500 Index. Efficient Market Hypothesis Prof. Siddhesh Soman  Efficient Market Hypothesis It is a theory which states that the asset prices fully reflect all the available information in the market  Efficient Market Hypothesis Weak Form: Only Fundamental Analysis can help you identify undervalued securities & give you excess return Semi-Strong Form: Only Non-public information can give you excess return Strong Form: The only way to earn higher return is to take higher risk. No type of analysis or information can give you excess return inprotected.com Portfolio Management Process Prof. Siddhesh Soman  Process of Portfolio Management  Determine Objective & Constraints of the investor  Developing Investment policy statement (IPS)  Determining the Asset Allocation Strategy  Evaluating Performance, rebalancing portfolio & make necessary changes in the portfolio if required  Objectives & Constraints R-R-T-T-L-L-U  Return objective  Risk (Ability & Willingness)  Time Horizon  Taxation  Legal Aspects  Liquidity Needs  Unique Circumstances  Overall Risk Tolerance Ability To Take Risk Willingness To Take Risk Below Average Above Average Below-average risk Education/Resolution Below Average tolerance required Below-average risk Above-average risk Above Average tolerance tolerance Characteristics of different type of investors Risk Liquidity Investor Time Horizon Tolerance Needs Depends on Depends on Depends on Individual Individual Individual Individual Banks Low Short High Insurance Life: Long Low High cos General: Short Mutual Depends on Depends on High Funds Fund Fund Pension High Long Low plans Trusts High Long Low  Asset Classes  Equities  Fixed Income Securities  Cash equivalents  Commodities  Currencies  Alternative investments (Real estate, Hedge Funds, Private Equity, Venture Capital, Precious metals, Artworks, Crypto etc.)  Asset Allocation Define Strategic Asset Allocation & Tactical Asset Allocation Select the best suited asset allocation keeping in mind client’s objectives & constraints Diversification is a must Review & Rebalance Asset Allocation Rebalancing of Portfolio Economic Cycle Overview of Fixed Income Securities Prof. Siddhesh Soman  Type of Bonds I Based on Issuer Treasury Bonds (Fully backed): Issued by Central government Municipal Bonds (Fully backed): Issued by state or local government Agency Bonds (May or may not be backed): Issued by government entities Corporate Bonds (No backing): Issued by Corporates  Type of Bonds II Based on Coupon Type Fixed Rate Bonds: Bonds which offer fixed coupon Flexible or Floating Rate Bonds: Bonds which offer coupon rate which changes according to a benchmark rate Zero Coupon Bonds: Bonds which do not pay any coupon. These are always issued at discount. Inflation Indexed Bonds: The principal or coupon or both are linked to an inflation/deflation index. These provide hedge against rising inflation in the economy.  Type of Bonds III Based on Embedded Options Convertible Bonds: Bonds which can be converted to equity shares. Hence are considered as an hybrid instrument FCCB (Foreign Currency Convertible Bonds): A convertible bond which is issued in currency other than the issuer’s domestic currency Callable Bonds: Bonds which can be redeemed by the issuer before the actual maturity. The call option is always held by the issuer. Putable Bonds: Bonds which can be redeemed by the investor before the actual maturity. The put option is always held by the Bondholder.  Type of Bonds IV Based on Credit Risk Investment Grade: Bonds which have low credit risk or risk of default. The issuer is regular in repayment. Speculative Grade or High yield or Junk Bonds: Bonds which have very high credit risk or risk of default. The issuer is financially unstable. Bonds classification based on credit risk  Basic Bond Terminologies Face value: The value printed or depicted on the bond Coupon: The income received by the bondholder. Coupon is always charged as a % of Face Value. Yield: Total return realized by the investor Redemption Value: The value received by the bondholder at the time of redemption/repayment of bond Intrinsic Value: The actual worth of the Bond which can be calculated based on cash flows generated from the bond Market Price: The current price in the market at which the bond is trading  Bond Valuation Q.1 Face value = Rs.100, Yield = 7%, Tenure = 3 years, Find the intrinsic value of the zero coupon bond. Q.2 Face Value= Rs. 1,000, Coupon Rate= 8% p.a., Yield =10% p.a., What will be the intrinsic value of this irredeemable bond. Q.3 Face Value= Rs. 1,000, Coupon Rate= 12% p.a., Yield =8% p.a., Redeemable after 5 years at par. What will be the intrinsic value of the bond. Q. 4 A Bond with 3 yr maturity Rs. 5,000 FV Bond, which pays coupon @ 12% semi annually. The bond will be redeemed @ premium of 5% at the end of 3 yrs. Similar Bonds in the market are presently yielding 8%. Find out the intrinsic value. If CMP is 5,500 advise whether the bond should be purchased or not..  Yield Q.1 Face value of the 8%, bond is ₹ 1000 and is currently trading at ₹ 900. Calculate Current Yield (CY) of Bond. Q.2 5 year Zero Coupon Bonds of FV ₹ 500 is presently trading @ 300. What is its YTM? Q.3 An Irredeemable bond with 10% coupon rate with Face value of Rs.1,000 is currently trading at 1,100, Calculate its YTM? Q.4 6%, 1000 Face Value bond presently trading at 910 and is redeemable at par at the end of 3 yrs. The bond pays annual coupon. Calculate YTM.  Yield Curve The yield curve is a graph which depicts the relationship between yields and maturity for bonds of the same asset class and credit quality. Yield curves can be created for any type of fixed income security, including Treasuries, investment grade and high yield bonds. The Treasury yield curve is widely considered the market benchmark, as it is often used as a basic reference point by investors to evaluate market conditions and relative value between fixed income securities. Types of Yield Curve Duration  Types of Duration Macaulay Duration Modified Duration Effective Duration Key-Rate Duration Money Duration/PVBP  Macaulay Duration Macaulay duration is a weighted average of the times until the cash flows of a fixed-income instrument are received. The concept was introduced by Canadian economist Frederick Macaulay. It is a measure of a time required for an investor to be repaid the bond’s price by the bond’s total cash flows. The Macaulay duration is measured in units of time (e.g., years). The Macaulay duration for coupon-paying bonds is always lower than the bond’s time to maturity. For zero-coupon bonds, the duration equals the time to maturity.  Modified Duration Relative to the Macaulay duration, the modified duration metric is a more precise measure of price sensitivity. It is primarily applied to bonds, but it can also be used with other types of securities that can be considered as a function of yield. The modified duration figure indicates the percentage change in the bond’s value given an X% interest rate change. Unlike the Macaulay duration, modified duration is measured in percentages.  Convexity Bond convexity is a measure of the non-linear relationship of bond prices to changes in interest rates, the second derivative of the price of the bond with respect to interest rates. Convexity demonstrates how the duration of a bond changes as the interest rate changes Introduction to Mutual Funds Prof. Siddhesh Soman  Introduction to Mutual Funds 2 Pooled Cash Investmen t Units AMC (MF Financial Investors Schemes) Instruments Return – Return MF Expense  In India, as of November 2021, there are 44 Asset Management Companies (AMCs) offering more than 2,500 schemes.  Mutual Funds are regulated by SEBI and all AMCs are associated to AMFI (Association of Mutual Funds in India)  The AUM of the Indian MF Industry has grown from ₹ 6.42 trillion as on 30th September, 2011 to ₹36.74 trillion as on September 30, 2021 more than 5½ fold increase in a span of 10 years  Mutual Funds Mutual fund is a vehicle (in the form of a ‘trust’) to mobilize money from investors, to invest in different markets and securities, in line with the common investment objectives agreed upon, between the mutual fund and the investors. In India, as of December 2020, there are 44 Mutual Fund houses offering more than 2,500 schemes.  4 Units Direct/ Regula NAV r Basic Units Terminologi es Growth/ Re- investme nt/Divide AUM nd SIP/ SWP/ STP Factors affecting MF Decisions 5 Quantitative Qualitative Historical Returns Type of Scheme Risk Measures Style of Investing MF Ratios Exp./Qualification of MF Current NAV Manager Portfolio Allocation AMC Brand image Age of the Fund Social influences 6  Types Mutual Funds (contd.) 7  Index Funds  Fund of Funds  Value Funds: Value investment strategy  Contra Funds: Contrarian Strategy  Focused Funds: Max 30 stocks only focused on a particular cap (min 65% in equity)  Dividend Yield Funds: High dividend yield (min 65% in equity)  ELSS: 3 years lock-in and tax benefits  Arbitrage Funds  Balanced Funds  Business Cycle Funds  How MFs Function For running the scheme of mutual funds, operating expenses are incurred. Investments can be said to have been handled profitably, if the following metric is positive: (A) +Interest income (B) + Dividend income (C) + Realized capital gains (D) + Valuation gains (E) – Realized capital losses (F) – Valuation losses (G) – Scheme expenses When the investment activity is profitable, the true worth of a unit increases. The true worth of a unit of the scheme is otherwise called Net Asset Value (NAV) of the scheme.  NFO & MF trading When a scheme is first made available for investment, it is called a ‘New Fund Offer’ (NFO). During the NFO, investors get the chance of buying the units at their face value (generally Rs.10 per unit). Post-NFO, when they buy into a scheme, they need to pay a price that is linked to its NAV.  Advantages of MFs Professional Management Diversification Economies of Scale Liquidity Tax Benefits & Tax Deferral Systematic Approach  Limitations of MFs Lack of Customization as compared to PMS Choice Overboard No Control Over Costs  Useful Links How to study Mutual Fund Schemes https://www.morningstar.in/default.aspx https://www.moneycontrol.com/mutual- funds/best-funds/equity.html 12