A Study to Show How Investors Pile on Risk to

Earn Reasonable Returns

Submitted in Partial fulfillment of the requirements

for

Post Graduate Diploma in Management (PGDM)

Submitted by

CA. Harshit Shah

Roll No.: PG-15-051

Batch: 2015-17

IES Management College and Research Centre, Bandra (W),

Mumbai

IES Management College and Research Centre, Bandra (W),

Mumbai

MAY – JUNE 2016

Student’s Declaration

I hereby declare that this report, submitted in partial fulfillment of the requirement

for the award for the PGDM Course, to IES Management College and

Research Centre is my original work and not used anywhere for award of any

degree or diploma or fellowship or for similar titles or prizes.

I further certify that without any objection or condition subject to the permission

of the company where I did my summer project, I grant the rights to IES

Management College and Research Centre to publish any part of the project if

they deem fit in journals/Magazines and newspapers etc without my permission.

Signature

Name: CA. Harshit Shah

Date: Class: PGDM

Place: Mumbai Roll No. : PG-15-051

Certificate from the Faculty Guide

This is to certify that the dissertation submitted in partial fulfillment for the award

of PGDM course of IES Management College and Research Centre is a result

of the bonafide research work carried out by CA. Harshit Shah under my

supervision and guidance. No part of this report has been submitted for award of

any other degree, diploma, fellowship or other similar titles or prizes.

Faculty Guide

Signature: ______________

Date: Name: Dr. Suchismita Sengupta

Place: Mumbai Designation : Associate Professor

Acknowledgement

This project has been a great learning experience for me and I would like to

express my sincere gratitude to all the people who guide me through the project

and without the valuable guidance and suggestions of these people this project

would not have been completely successful.

I owe enormous intellectual debt towards my Faculty Guide Dr. Suchismita

Sengupta, Asst. Professor, IES Management College and Research Centre, Mrs.

Nikita Shah, Asst. Professor, S.P.Jain Institute of Management, Mr. Vrushank

Mehta, Head Corporate Strategy & Land Acquisition, The Wadhwa Group and

Mr. Purab Gupta, Head Trading, KIFS Securities Private Limited, for their

continuous support and cooperation throughout my project without which the

present work would not have been possible.

Contents

Nominal Return ...............................................................................................................9

Real Returns ..................................................................................................................13

Return Increases from 5% to 6% and then to 7% .........................................................16

Freeze Risk at 12%........................................................................................................17

Two Assets Portfolio .....................................................................................................19

Risk Appetite of Investors.............................................................................................21

Executive Summary ............................................................................................................1

Introduction .........................................................................................................................2

Objectives............................................................................................................................6

Methodology .......................................................................................................................6

Assumptions........................................................................................................................7

Analysis and Findings .........................................................................................................8

Conclusion ........................................................................................................................22

Reference ..........................................................................................................................23

Chart A: Nominal Returns (%) ...........................................................................................9

Chart B: Risk at 12% Nominal Return .............................................................................10

Chart C: Portfolio at 12% Nominal Return.......................................................................10

Chart D: Comparative Risk at different Expected Returns (Nominal) .............................11

Chart E: Portfolio at 13% Return Chart F: Portfolio at 13% Return .....................12

Chart G: Risk at 5% Return (Real) ...................................................................................13

Chart H: Real Return (%)..................................................................................................14

Chart I: Portfolio Composition for different years ...........................................................14

Chart J: Portfolio at 13% Return.......................................................................................16

Chart K: Portfolio at different Returns .............................................................................16

Chart L: Risk @12% vs. Return (Nominal)......................................................................17

Chart M: Risk @16% vs. Return (Nominal).....................................................................17

Chart N: Risk of two Asset Portfolio for 12% Expected Nominal Return .......................19

Chart O: Portfolio Mix on 2016 Chart P: Portfolio Mix on 2016 .....................20

Chart Q:Risk under all three types of portfolio for an Expected Nominal Return of 12%

...........................................................................................................................................21

1

Executive Summary

In today’s world people have many investment options. Gone are those days where

people had Sovereign Bonds and Gold for investment. As time pass these options

increased from just two to many others like Equity Market, Real Estate, etc. There has

been a drop in returns from Sovereign Bonds which has compelled the investors to move

towards this other options for investment and earn the same return which this Sovereign

Bonds use to give. Other Options like Equity Market and Real Estate have given a high

returns over a long period of time say Equity Market gives ~15% over a decade. Such

high return is often associated with high risk as we know High Return High Risk and

Low Risk Low Return.

Through our study, we have shown that in today’s time, any investor who wish to earn a

reasonable return has to take higher risk than that which he use to take a decade ago for

the same return. This is seen in both case of Nominal and Real Returns. We have also

seen that real returns from Nifty and Gold were unable to give positive returns for many

years under the period of study, making investors take high risk to earn reasonable real

return with lowering G Secs return. By freezing the risk which an investor is willing to

take we saw that the investor could not earn his desired reasonable nominal return and

indirectly it meant that he had to take more risk to earn his desired return.

Two asset portfolios (Nifty & G Secs and Gold & G Secs) also reflected the same picture

which the three asset portfolio had, Piling of Risk to Earn Reasonable Return. This three

combination shows that investors can invest in any one combination of portfolio to earn

same return based on their risk appetite. Nifty & G Secs being attached with High Risk,

Gold G Secs with Moderate Risk and All three Assets portfolio with Low Risk.

2

Introduction

For an Investor of the age 24 years in India, he/she has to plan for his retirement and for

this he/she has many options today to invest, some of them are:

Public Provident Fund: It is the safest and secure long- term investment

product amongst the best investment options in India. It is totally tax-free.

Mutual Funds: People who want to invest in equities and bond with a

balance of risk and return generally choose to invest in mutual funds.

Equity Shares: It is the best amongst the list of top 10 best investment

options in India for the long period of time.

Real Estate Investment: One of the fastest growing sectors in India is real

estate, holding the huge prospects in major sectors like housing,

commercial, hospitality, manufacturing, retail and more.

Gold ETF: Gold is one of the oldest and evergreen investment products. If

you are looking for a gold investment option you can simply opt for any

gold investment format like gold deposit scheme, gold ETF, Gold Bar,

Gold mutual fund etc.

Post Office Monthly Income Scheme: Is a monthly income plan of Post Office

Saving Schemes is very suitable for retired people with regular income

requirements. This government saving scheme does not have any risk -

related factor but the interest is quite low.

Company / Bank Fixed Deposits

Unit Linked Insurance Plans: It is also known as ULIPs, which falls under the

list of top 10 best investment options in India. It invests in debt and

equities markets. The fluctuation is counted by the net asset value (NAV).

Bonds: If you feel uncomfortable in investing in mutual funds and direct

equity market investments, then you can try investing in bonds. Investing

in bonds can be one of the best investment options since there are many

good bonds which actually provide a high rate of return on inves tments.

Term Deposits with NBFC

Debentures, etc.

3

In developed countries like USA various investment options are:

Certificates of Deposits: With a certificate of deposit (CD) you trade depositing

your money for a specific length of time to a financial institution. In return, you

get a set interest rate for that period and it does not change, no matter what

happens to interest rates. You are locked in until maturity of the term length.

Treasury Inflation Protected Securities: The U.S. Treasury has several types

of bond investments for you to choose from. One of the lowest risk is called a

Treasury Inflation Protection Security or TIPS. These bonds come with two

methods of growth.The first is a fixed interest rate that doesn’t change for the

length of the bond. The second is built-in inflation protection that is guaranteed

by the government. Whatever rate inflation grows during the time you hold the

TIPS, your investment’s value rises with that rate.

Money Market Funds: A money market fund is a mutual fund with the main

purpose of not losing any value of your investment. The fund also tries to pay out

a little bit of interest as well to make parking your cash with the fund worthwhile.

The fund’s goal is to maintain a net asset value (NAV) of $1 per share.

Municipal Bonds: When a state or local government needs to borrow money, it

doesn’t use a credit card. Instead, the government entity issues a municipal bond.

These bonds, also known as munis, are except from federal income tax at the

very least.

U.S. Savings Bonds: These are similar to TIPS because they are also backed by

the federal government. The likelihood of default on this debt is microscopic,

which makes them a very stable investment. There are two main types of US

Savings Bonds: Series I and Series EE.

Annuities: Annuities have a bad reputation with some investors because shady

financial advisors over-promoted them to individuals where the annuity wasn’t

the right product for their financial goals. Annuities don’t have to be scary things;

they can help stabilize your portfolio over a long period.

Cash Value Life Insurance: Another controversial investment is cash value life

insurance. First, this insurance pays out a death benefit to your beneficiaries

when you die; a term life insurance policy gives you this. Other types, known as

cash value policies, do that and also build up an investment account from your

4

payments. Whole life insurance and universal life insurance are the chief cash

value offerings.

Dividend Paying Stocks and Mutual Funds: One of the easiest ways to

squeeze a bit more return out of your stock investments is simply to target stocks

or mutual funds that have nice dividend payouts. If two stocks perform exactly

the same over a given time, one with no dividend and the other paying out 3% per

year, then the latter stock is a better choice.

Preferred Stock: This is a type of stock has both an equity (stock) portion and a

debt portion (bond). In the credit hierarchy, governing which investors get paid

first during a bankruptcy, preferred stock sits between bond payments, which

come first, and common stock dividends, which come last.

Peer to Peer Lending: P2P lending is a completely different type of investment.

Instead of buying shares in a company and its future profits, you lending your

money to someone else in hopes they will pay you back. This makes peer to peer

lending risky if you screen poorly. If you fund a terrible loan, you might not get

your money back.

Real Estate

Risks and Returns are the two terms that click in your mind instantly whenever

you hear about Investment. All the three terms- Investment, Risks and Returns are

interlinked and interdependent. High investment leads to more risk which further

leads to higher returns.

Timeframe, Tolerance, Diversification, and Knowledge, these are the four

strategies which can reduce your exposure to investment risk. You should stay

invested for longer in that product with which you feel comfortable. Don't get

stuck to any one type of investment option and put efforts to understand the

financial world to become a good investor.

The process of constructing an investor portfolio can be viewed as a sequence of two

steps: (1) selecting the composition of one’s portfolio of risky assets such as stocks and

long-term bonds and (2) deciding how much to invest in that risky portfolio versus in a

safe asset such as short-term Treasury bills. Obviously, an investor cannot decide how to

allocate investment funds between the risk-free asset and that risky portfolio without

5

knowing its expected return and degree of risk, so a fundamental part of the asset

allocation problem is to characterize the risk-return tradeoff for this portfolio.

According to Callan Associates Inc. research and as published in the same in The Wall

Street Journal, in U.S. in 1995 investors

invested 100% in Bonds to earn 7.5% having

6% risk attached to it. Over of period of 25

years this risk increased from 6% to 17.2% to

earn a strongly considered reasonable return

of 7.5%. During the same period investment

in Bonds shrink from 100% (1995) to 52%

(2005) and 12% (2015). Other asset class like

Global Stocks, Real Estate and Private Equity

were added to portfolio to earn the same

return of 7.5%.

“Do Investors in India also have to grapple with high risk

to earn reasonable return?”

6

Objectives

To understand, the impact on Risk of

Portfolio when the Expected Reasonable

Return of Portfolio is same over the

period of time.

To create awareness among the

Investors, be it Retail or HNI or a

Corporate, that over a long run Risk of

Portfolio increases due to Volatility to

Earn Same Reasonable Return.

Methodology

The data for analysis is collected from secondary sources. These comprised of

nseindia.com, The Bombay Bullion Association, Newspapers and RBI Database. Data

was collected from the period 1991 to 2016 for the study. In this we have excluded 1992

as it represented abnormal rise in Nifty since 1991.

The data is that analyzed to get Average Nominal and Real Return and Standard

Deviation. Average Nominal and Real Return is calculated by taking a sample of 8 years

like for 2000 average of 1992 to 1999 and for 2001 it was 1993 to 2000 and so on so for.

Similarly Standard Deviation was also calculated with 8 years sample. In case of

Average Nominal and Real Returns and Standard Deviation of 2000, we have considered

data from 1993 to 1999 as 1992 reflected abnormal rise in Nifty, 240% rise since 1991.

Real Returns are calculated by taking WPI (Whole Sale Price Index) for Inflation which

was derived from RBI. Real Returns are calculated using (1+Nominal Return)/(1+Real

Return).

7

Assumptions

Average Nominal / Real Return: We have considered 8 years for taking average

returns. It is being done so in lines with Nifty 8 years cycle (based on an article

dated 12th February, 2016 in the The Hindu Business Line)

Risk: We have used Standard Deviation formula for calculating the risk attached

with various assets. The basic idea is that the standard deviation is a measure of

volatility: the more a stock's returns vary from the stock's average return, the

more volatile the stock.

Inflation: The wholesale price index (WPI) is the main measure of inflation. The

WPI measures the price of a representative basket of wholesale goods. In India,

wholesale price index is divided into three groups: Primary Articles, Fuel and

Power and Manufactured Products

Nominal Return: Have considered 12%, 13% and 14% as reasonable Nominal

Return which an Investor wishes to earn.

Real Returns: It is derived after considering and average Inflation of 7%. (i.e.,

[1+Nominal Return] / [1+Inflation]).

Optimum Portfolios are developed for various periods by Simplex Method (LPP).

8

Analysis and Findings

In our study, we have selected three different assets to form a portfolio. This three are

selected based on their nature and risk attached to them.

First Asset is G Sec, i.e. Government Securities; G Secs are usually referred to risk free

securities. However, these securities are subject to only one type of risk i.e., interest-rate

risk Subject to changes in the overall interest rate scenario, the price of these securities

may appreciate or depreciate.

Second Asset is Gold; this is considered to be the Safe Haven Asset for Investment.

Whenever there is Global Crisis like a War or Man Made Disaster or Natural Disaster,

investors resort to Gold for Investment. The risk attached to this asset is a bit higher than

G Sec.

Third Asset is Nifty, popularly known as Nifty 50, as it represents equity markets in

India. Risk attached to this asset is higher than G Sec and Gold. This is mainly due to the

reason of High Volatility.

We have one more asset for investment, Real Estate, In India we have RESIDEX by

National Housing Bank that represents the growth in Real Estate. Since it was first

developed in 2007, it was not possible to get any data for years prior to this and hence we

have not considered Real Estate in Portfolio.

In a way, G Sec represents the Debt Market, Gold Commodity and Nifty the Equity

Market in order to form a portfolio.

9

Nominal Return

The Investors in India mainly have three asset classes for investment; they are in Debt

Market, Equity Market and Commodity Market, G Sec shall represent Debt Market

having least risk attached to it, Nifty shall represent Equity Market and Gold is a Safe

Haven for investment in the world. Nominal Returns from this three Asset Class was,

Chart A: Nominal Returns (%)

Source: Author

Its only G Sec which gave positive nominal returns since 1996 to 2016 and at that time

Nifty gave a nominal return of +81.14% to -36.19% and Gold +39.19% to -14%. The

volatility in these two assets was due to various reasons like Subprime Crisis, Ketan

Mehta Scam, Dot Com Bubble, Iraq War, Oil Price Rise, etc. And when a portfolio is

formed comprising of this three assets with a view to earn a reasonable return of

12%p.a we have a rise in risk from 1.3% in 2000 to 7.6% in 2016.

-14.4%

39.2%

81.1%

-36.2% -60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Nominal Returns (%)

Gold Nifty G Sec

10

Chart B: Risk at 12% Nominal Return

Source: Author

Chart C: Portfolio at 12% Nominal Return

In 2000, G Sec comprised of 94%

of the portfolio and this dropped to

39% in 2016. This is mainly

because of drop in Yield in G Sec,

from 11.78% in 1992 to 7.5% in

2016, which compelled investors

to move towards other asset class

which seemed to be riskier than G

Sec. Risk attached to Nifty and

Gold as on 2016 was 29% to 15%

respectively and at that time G Sec

had just 1% risk. Source: Author

1.3%

2.9% 3.1%

2.0%

2.6%

31.6%

21.0%

10.9% 10.1%

8.4%

15.5%

6.3% 5.3%

7.2% 7.0%

9.1% 7.6%

12% 12% 12%

11.4%

10.5%

11.5%

12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12%

10%

10%

11%

11%

12%

12%

13%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Risk at 12% Nominal Return

Risk Nominal Return

Gold 5%

Gold 33%

Nifty 1%

Nifty 28%

G Sec 94%

G Sec 39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2016

Portfolio at 12% Return (Nominal)

Return 12% 12%

Risk 1.3% 7.6%

11

From Chart A, we can see that in 2003 to 2005 we were even unable to earn the return

on 12% even after investing 98% in G Sec and 1% each in Nifty and Gold. They returns

during this period was,

Period Average Nominal Return / Risk

Gold Nifty G Sec

2003 1.5% / 10% 1.1% / 19% 11.6% / 2%

2004 2.1% / 10% 1.4% / 19% 10.7% / 3%

2005 2.6% / 10% 11.6% / 32% 9.5% / 3%

Table 1, Source: Author

In 2005, Risk was the maximum at 31.2% due to heavy investment in Nifty i.e. 98% and

still we could not earn the return of 12%. Risk was highest as Nifty had 32% risk

attached with it for just 15% of return.

Chart D: Comparative Risk at dif f erent Expected Returns (Nominal)

Source Author

From Chart D it is evident that even though the nominal returns increased from 12% to

13% and later to 14%, risk was rising and it showed an upward trend. Risk rose from

1.1.% in 2000, for both Nominal return of 13% and 14% to 9.3% and 9.9% in 2016 for

13% and 14% return respectively. Portfolio combination was,

1.1% 9.3%

9.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Comparative Risk at different Expected Returns (Nominal)

Risk @ 13% Nominal Return Risk @ 14% Nominal Return

12

Chart E: Portfolio at 13% Return Chart F: Portfolio at 13% Return

Source: Author

Source: Author

If we see to compare Chart C, E and F, we understand that in 2016 to earn an

Incremental Return of 1%, our proportion of investment in G Sec decreased from 39% to

24% and then to 9%. Due to decrease in investment in G Sec, investment in Nifty and

Gold receives a boast and resulted in increase in risk of portfolio. Average Nominal

Return and Risk attached,

Period Average Nominal Return / Risk

Gold Nifty G Sec

2000 0.1% / 9% 3.5% / 35% 12.7% / 1%

2016 14.7% / 15% 14.4% / 29% 8% / 1%

Table 2, Source: Author

The table shows that risk attached with G Sec has remained same i.e. 1% but return has

dwindle from 12.7% to 8%, a drop of 4.7% and this drop has resulted in piling of risk

for investors from 1.3% to 7.6%.

Gold 1%

Gold 42%

Nifty 1%

Nifty 34%

G Sec 98%

G Sec 24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2016

Portfolio at 13% Return

Gold 1%

Gold 58%

Nifty 1%

Nifty 33%

G Sec 98%

G Sec 9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2016

Portfolio at 14% Return

13

Real Returns

Earlier we had seen that when we expected a Nominal Return of 12% / 13% / 14%, we

were unable to achieve that return with G Sec Bonds only, we had to invest in little risky

asset like Gold and Nifty which increased our risk over the period of 16 years from 2000

to 2016. Was it the same picture when we expected a Real Return, after considering an

average inflation (WPI) of 7%?

Chart G: Risk at 5% Return (Real)

Source: Author

Chart G shows that even returns in real term i.e. 5% could not be earned with rise in risk

from 2000 to 2016. Risk rose from 2.1% in 2000 to 7.2% 2016 i.e. 242% rise, highest

risk was witnessed in 2010 i.e. 10.8%. Average Nominal Returns from these assets could

not beat inflation and gave negative returns for many years.

2.1%

2.1%

2.3%

2.3%

1.9%

6.6%

9.1%

10.2%

8.4% 7.6%

10.8%

7.0% 7.1%

8.5% 8.9%

10.1%

7.2%

0%

1%

2%

3%

4%

5%

6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Risk at 5% Real Return

Risk Real Return

14

Chart H: Real Return (%)

Source: Author

Out a total period under consideration (Chart H), Nifty gave negative real returns for 8

years, highest being -40.9% and even Gold gave negative real return for 8 years. G Sec

also witnessed negative real returns for two years i.e. 2009 and 2011. Huge volatility was

witnessed in Nifty, its Real Returns in 2009 jumped from -40.9% to 67.4% in 2010, such

volatility in assets return increases the risk for earning reasonable returns.

Chart I: Portfolio Composition for dif f erent years

Source: Author

-40.9%

67.4%

-18.0% -1.0% -60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0% Real Return (%)

Gold Nifty G Sec

G Sec 95%

G Sec 39% 5%

1%

-3%

10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2004 2015 2016

Portfolio Composition for different years

Gold Nifty G Sec G Sec Returns Nifty Returns Gold Returns

15

As Average Real Return (Chart I) of G Sec dropped from 5% to 1%, between 2004 to

2015, investment in G Sec also declined from 95% to 39% during the same period and

Investors diverted their investment from G Sec to Gold and Nifty which gave an Average

Real Return from -3% in 2004 to 10% for Gold and 6% for Nifty in 2015. Such volatility

in all the assets resulted in increase in portfolio risk from 1.9% as on 2004 to 10.1% in

2015.

16

Return Increases from 5% to 6% and then to 7%

This shows that risk was same for

both all expected real returns in 2000,

i.e. 2.1% and it has remained same till

2004. Optimum Portfolio mix could

not fetch more than 5% of Real

Returns till 2004 and it was this

reason that Risk was same. In 2005 to

earn an incremental 1% real return

from 5%, we had to take an additional

risk from 6.6% to 21.6% and to earn

2% additional real return we had to

take a risk of 30.2%.

Chart J: Portfolio at 13% Return

Portfolio under the three expected returns

for 2005, Chart K, Source: Author, shows that

the major reason for increase in risk was

increase in investment in Nifty. As

proportion increased, risk too increased from

7% to 22% and 30% due to Nifty. Average

Real Return and Risk as on 2005 was,

Chart K: Portfolio at dif f erent Return s

Table 3, Source: Author

Average Real

Return

Risk

Gold -2% 10%

Nifty 7% 31%

G Sec 5% 3%

21.6%

8.7% 2.1%

30.2%

10.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Comparative Risk at different

Expected Real Returns

Real Returns at 6% Real Returns at 7%

Gold 1%

Gold 1%

Gold 1%

Nifty 22%

Nifty 71%

Nifty 98%

G Sec 77%

G Sec 28%

G Sec 1%

7%

22%

30%

0%

5%

10%

15%

20%

25%

30%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

5% 6% 7%

Gold Nifty G Sec Nifty Risk

17

Freeze Risk at 12%

Chart L: Risk @12% vs. Return (Nominal)

Source: Author

The above chart shows that, it was difficult to earn a reasonable return (nominal) of

12% even after having a 12% risk appetite. Of the 17 years reflected in the chart, we

could earn 12% or more in just 6 years, it was from the period 2007 to 2013. In the year

2003 and 2004, we had earned just 4.8% return (nominal) which was below 5% Return

(Real). This indirectly shows that Investors have to pile on risk to earn reasonable return.

Chart M: Risk @16% vs. Return (Nominal)

Source: Author

9.5%

10.9% 11.7%

4.8%

4.8%

10.3% 10.6%

12.4% 12.8%

11.9%

10.9%

13.4%

15.1%

12.1%

11.8%

10.0%

10.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Risk @12% vs. Return (Nominal)

Return Risk @12%

8.4%

10.4% 11.5%

2.6%

2.7%

10.5% 11.2%

13.7% 14.4%

13.4%

12.1%

15.5%

17.6%

13.5%

13.1% 10.6%

11.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Risk @16% vs. Return (Nominal)

Return Risk @16%

18

When risk is increased from 12% to 16%, we have earned 12% or more for 8 years out

of 17 years but in 2003 and 2004, returns (nominal) dropped to 2.6% from 4.8% when

risk was 12%. Year 2003 and 2004 have behaved as outliners.

19

Two Assets Portfolio

Instead of investing in a portfolio of three assets, we have considered a combination of

two assets i.e. G Sec and Gold and other being G Sec and Nifty.

Chart N: Risk of two Asset Portfolio f or 12% Expected Nominal Return

Source: Author

It is evident that investment in a portfolio of Gold & G Sec is less risky than that of G

Sec 7 Nifty. Risk rose from 2.8% to 18.5% for Nifty & G Sec Portfolio but in case of

Gold & G Sec it raised from 1.3% to 8.9%. During 2005, Nifty & G Sec portfolio had a

risk of 31.9% and Gold & G Sec had 2.7%, but things changed in 2008, Nifty & G Sec

portfolio had a risk of 10.1% from its peak of 31.9% in 2005 and Gold & G Sec portfolio

had a risk of 12.25 making it risky for that particular period. Co incidentally, this risk of

12.2% was the highest for Gold & G Sec portfolio for period under consideration.

1.3% 2.7%

12.2%

8.9%

2.8%

31.9%

10.1%

18.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Risk of Two Asset Portfolio for 12% Expected Nominal Return

G Sec & Gold G Sec & Nifty

20

Chart O: Portfolio M ix on 2016 Chart P: Portfolio Mix on 2016

Source: Author Source: Author

For just 2% drop in investment in G Sec resulted in increase of Portfolio Risk from 8.9%

to 18.5% as on 2016. This reflects the riskiness attached in investment in Nifty. As the

expected return earned from both the portfolios is 12%.

60%

40%

Portfolio Mix on 2016

Gold G Sec

62%

38%

Portfolio Mix on 2016

Nifty G Sec

21

Risk Appetite of Investors

Chart Q:Risk under all three types of portfolio f or an Expected Nominal Return of

12%

Source: Author

It is evident from Chart Q that investment in all three assets portfolio is a less risky that

any other type of portfolio. Even though all three assets portfolio is less risky, risk rise

from 1.3% in 2000 to 7.6% in 2016. Hence, if an investor is willing to take higher risk he

can invest in a portfolio of Nifty & G Sec, less risk than in Gold & G Sec and least risk

than in a combination of all three assets.

2.7%

8.9% 2.8%

18.5%

1.3%

31.6%

7.6% 0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Risk under all three types of Porfolio for an Expected Nominal Return

of 12%

Gold & G Sec Nifty & G Sec All Three Assets

22

Conclusion

Risk and Return are two sides of same coin. We have always been looking at one side

of coin i.e. Return and have continued to develop investment portfolios based on this

Return. After this study, we can see that it is also important to look at the other side

while investing.

Money making is becoming riskier as risk attached to same level of return both nominal

and real is showing an upward trend. Decrease in returns from G Secs has made

investors in India invest in risky assets and this resulted in overall increase in their

portfolio.

23

Reference

G Sec, RBI records, Weighted Average Interest Rates of Central Government

Securities.

Gold, Market rates of 24 Carats 10 gms as on 31st March of every year, The

Bombay Bullion Association/Newspaper.

Nifty, Closing Index value on 31st March of every year as provided by

nseindia.com

Inflation (WPI), RBI Database

Forbes article dated 7th January, 2013 on “How to Find Low Risk, High Return

Investment”