Products, Markets and Performance Measurement
This domain tests the product landscape available to Indian advisory clients and your ability to judge performance on a comparable, risk-adjusted basis. Expect questions that combine product features with the correct return measure.
Product map
- Equity shares; debt instruments including G-Secs, T-bills, state development loans, corporate bonds and tax-free bonds; money-market instruments such as commercial paper and certificates of deposit.
- Mutual funds (active, index, ETF, hybrid), portfolio management services, AIFs in Categories I, II and III, REITs and InvITs, sovereign gold bonds and the NPS.
- For each, know the risk profile, liquidity, minimum ticket, tax treatment and the regulatory wrapper it sits under.
Measuring performance
- Distinguish absolute from annualised return (CAGR); use XIRR for irregular cash flows such as SIPs; use rolling returns to judge consistency.
- Compare on a total-return basis over matched periods against the correct benchmark and peer set; growth-option NAV captures reinvested income.
- Risk-adjusted measures: Sharpe ratio (total risk), Treynor and beta (systematic risk), Jensen's alpha, information ratio and tracking error, maximum drawdown.
Worked example
A fund's NAV moves from ₹20 to ₹30 in three years. CAGR = (30/20)^(1/3) − 1 ≈ 14.5%. With a risk-free rate of 6% and standard deviation of 18%, its Sharpe ratio is (14.5 − 6)/18 ≈ 0.47. A peer returning 13% with a standard deviation of 10% has (13 − 6)/10 = 0.70. Reasoning: the peer delivered more return per unit of risk, so raw return alone is a misleading ranking.
Traps that cost marks
Mixing absolute and annualised figures; comparing different periods; using price return for a dividend-paying stock; ranking funds on one-year returns; mismatching the benchmark; quoting XIRR and CAGR interchangeably.