Comparative Analysis of Fixed Deposit and Mutual Fund Returns

In this assignment, a comparison is made between the returns generated by fixed deposits and standard values. The results show that similar returns are obtained from both sources, indicating sufficient return generation by the portfolio. Additionally, a comparison is made with gold prices, using the London Bullion Market Association (LBMA) as the standard. It is observed that good returns are earned on the invested amount. Overall, it can be concluded that the portfolio has performed well in terms of generating returns.

CAPITAL MARKETS AND
INVESTMENT

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................................................................................3
Portfolio assets.........................................................................................................................................................................................3
Investment theories..................................................................................................................................................................................5
Portfolio evaluation.....................................................................................................................................................................................8
Sources of information..............................................................................................................................................................................14
REFERENCES..........................................................................................................................................................................................15

INTRODUCTION
Portfolio construction is one of the art that any finance expert have. There are number of tools and methods that are used to
construct the portfolio by the business firms. In the current report, 5 assets will be included namely bond, equity, mutual fund, fixed
interest and commodity. All these things are included in the portfolio in the specific proportion in order to make same in the balanced
manner and best return can be earned on same. Appropriate allocation will be given to the debt and equity in the portfolio and by
doing so return will be maximized on the portfolio. By considering risk and return profile of each investment avenue allocation of
fund is done among different securities. Investment will be made for the one year time period but same in the fixed deposit will be for
five years so that better amount of return can be earned on the investment. Investor is risk averse in nature and due to this reason in
balanced manner portfolio is prepared and proportion of 20% is given to the equity in the portfolio. 30% proportion will be given to
bond in the portfolio and same proportion will be given to the mutual fund in the portfolio so that 60% of the invested corpus remain
in safe zone.
Portfolio assets
Selection of assets in the portfolio and rationale behind choice
 Bond: Bond is the one of the main asset on which investors at large scale makes an investment. There are number of reasons
due to which investment is made in the bond. One of the main feature of bond is that in same invested amount remain
protected and its value cannot be depreciated. On investment low rate of return can be earned. It can be said that investment is
safe and on same return is earned (Glode, 2011). However, return is low but investment is safe. Investor is risk averse in nature
and due to this reason it is very important to make moderate portion of investment safe. Due to this reason it is decided that
30% investment will be made bond. In recent time period it is observed that more and more mutual fund houses and investors
are making investment in bond because equity market is unstable and turmoil in same reduce investor confidence on the stock
market in terms of returns. In past few months in global and domestic market investors lose money because there is a
pessimistic environment in the both markets and due to this reason large investors that track market very closely become panic

and sold equity in bulk which lead to decline in the shares and index value. Thus, it is very important to protect some amount
of money from devaluation. Hence, investment is made in the bond for capital appreciation and safety of same. Equity: Equity is another investment avenue where investment can be made. It must be noted that very low rate of return is
generated by the debt schemes and bonds. By making entire investment in the equity one cannot earn sufficient amount of
return on the invested amount (Kosowski, 2011). Thus, it is necessary to take some degree of risk so that desired return can be
generated by the portfolio. It can be said that there is huge importance of equity for the investors. Research results reflects that
in past year return of 11% is generated by the FTSE index and stocks also give sufficient return to the investors.owever, beta
value of the stocks is very high in range of 0.70 to 1.15 (Financial times, 2017). Thus, there is a very high risk on the
investment amount and at same time there is a high income earning opportunity in the equity. Investor is risk averse in nature
and it is very important to earn sufficient amount of return on the invested amount. Thus, proportion of 20% is given to the
equity in the portfolio. It can be said that by considering profile of the investor and market condition as well as return that can
be generated by the portfolio 20% allocation to equity is appropriate. Reasons for selection of firms is given below.
1. 3i group plc: 3i group plc is one of that largest company that is working in finance industry. There are multiple reasons
du to which mentioned firm is taken in to account. It must be noted that UK economy is coming on track gradually and
due ti this reason demand for finance will increase. Thus, it is expected that in the upcoming time period revenue of the
mentioned firm will increase. Return of 60.20% is generated by the mentioned company share. Thus, in the upcoming
time period better return can be generated by the mentioned firm shares.
2. Ashtead group: Ashtead group is operating a rental business and is one of well-known firm. Return of 91.65% is
generated by the mentioned firm in the past year and its beta value is 0.89 which reflects that if FTSE will increase then
stock can generate good amount of return.

3. Baraatt development: Barratt development is operating in the home construction business. With elevation in economic
growth of the UK demand for homes will increase in the upcoming time period. Hence, it is expected that firm will
earn good amount of return in the upcoming time period. Hence, mentioned firm is included in the portfolio.
4. Intercontinental hotels: Intercontinental hotel is taken in the portfolio as it is working in the tourism industry. Tourism
industry is one of the industry in the UK that is growing at fast rate. Return of 33.85% was generated by the mentioned
firm in the past year and its beta value is 0.95. Thus, by considering past performance of stock, anticipated high growth
of industry and high beta value it is expected that good amount of return can be generated by the mentioned firm. Due
to this reason mentioned firm is included in the portfolio.
5. Sage group: Sage group is working in the software and computer science. Beta value is 1.12 and return percentage is
2.67%. Mentioned firm is operating in the technology sector and same is growing at rapid pace. Thus, it is expected
that mentioned firm may grow at rapid pace in the business. Hence, Sage group is included in the portfolio. Mutual fund: Mutual fund is the one of the main investment avenue on which in current time period most of investors and
institutional investors are taking interest. This is because investment in the mutual fund scheme to some extent ensure that
invested money will be safe and moderate amount of return will be earned on same. There are varied sort of mutual fund
schemes like balanced, growth and debt. All these things are different from each other. Balanced mutual scheme is one under
which in balanced manner investment is made in the debt and equity. On other hand, there is a growth scheme under which
entire investment is made in the equity that comes in the blue chip category or highly profitable firms. Debt schemes are one
under which investment is made in the debt instruments about 80% of the investment amount. In the current portfolio 30%
allocation is made to the mutual fund scheme and by doing so it is ensured that moderate return will be earned on the
investment and capital will remain safe. Under mutual fund scheme investment will be made on the AAP balanced fund under
which in balanced manner investment is made in the debt and equity. 60% investment is made in equity and 40% investment is

made on debt in the mutual fund scheme. It can be said that 30% investment is made in the mutual fund scheme and by using
same portfolio risk is controlled. Fixed interest: After making entire investment in different securities the remaining amount will be invested in the bank
deposits. It is necessary to make investment in the bank deposits because investment in same is secured at specific interest rate.
It is very important to earn interest at different rates on varied securities because by doing so it is ensured that in some
securities huge amount of return will be earned. It can be said that there is huge importance of the fixed interest investment in
the portfolio (Hoepner, Rammal and Rezec, 2011). In the current report, 10% allocation is made to the fixed interest bank
deposit. Commodity: Under category of commodity investment will be made in the bullion and under this specific number of lots will
be purchased. There are some specific reasons due to which investment is made in the gold. It must be noted that in there is
inverse relationship between equity and gold. This means that when share price declined demand of gold increased in the
market. Gold is considered as safe heaven and when there is turmoil in the stock market investors usually makes an investment
in gold in order to earn sufficient return on the portfolio.
Investment theories
Efficient market hypothesis theory
Efficient market hypothesis theory is one of the most important theory that state that it is impossible to beat the market in terms
of performance. Means that specific stock or firms shares cannot give return more than same is generated by the index. This means
that even any news comes in the market due to same any stock cannot outperform market. It is assumed in the theory market is
efficient and when any news comes in the market its effect is incorporated in all firms shares automatically. This means that all firms
shares traded at fair value in the market and according to news relevant effect comes in the shares price. This theory believed that any
company share never remain undervalued or overvalued in the market. This theory can be used in the portfolio construction and by
following same one without using discounted cash flow and other equity valuation model can take inclusion decisions in respect to the

financial instrument in the portfolio. Simply one have to identify the risk and return profile that is associated with the product and
must accordingly make decision in respect to including any specific security in the portfolio. By using this theory one can also
estimate maximum likely return that can be earned on the portfolio. Means that as per this theory stocks cannot beat the market return.
Thus, if for the last three month FTSE grow by 6% then it can be assumed that stocks or portfolio of same will generated return of less
than 6% which may be 4% to 5% (Agapova, 2011). Thus, by using this theory one can estimate likely return that can be generated by
the portfolio. It can be said that by using mentioned theory standard return that need to be earned can be determined.
Capital asset pricing model
Capital asset pricing model is the one of the most important theory that can be used by the individuals to make decisions in
respect to investment. This model help one in calculating the required rate of return on the investment amount. In this regard some
variables are taken in to account namely beta, risk free rate of return and market return. In order to compute required rate of return first
of all value of risk free rate of return is taken in to account. Thereafter, from the market return risk free rate of return is deducted and
same is multiplied by beta. Then computed value is added to the risk free rate of return to compute required rate of return in the
portfolio. Risk free rate of return is subtracted from the market return because same react the risk premium. The excess return that is
earned on the specific security is multiplied by beta because it reflect the rate of variation that may come in the return of any stock
with small change in the index value. By doing so it is identified that with change in index what value may be of risk premium then
risk free rate of return is added to same in order to calculate real return that can be earned on the investment amount. By using this
model one can identify the return that one needs to earn for the risk that is taken on investment (Chen, Ferson and Peters, 2010). If
required rate of return is high and market is expected to be unstable in the upcoming time period then in that case one can abstain from
making investment in specific company share whose CAPM value is high. Thus, capital asset pricing model can be used in the
portfolio construction
Modern portfolio theory

Modern portfolio theory is the one of the most important theory that is used to construct the portfolio. This theory was
prepared by the Harry Markowitz. This theory state that investor that is risk averse in nature can maximize the return at a given level
of risk. It is the one of the main theory that is used in the current time period to construct portfolio. There are number of advanced
tools and methods that are used to create optimum portfolio. By using efficient frontier method different portfolio are created at
different level of risk with maximum return. It can be said that modern portfolio theory is the one of the important theory that is used
to construct the portfolio. This theory state that portfolio must be diversified in nature and under this multiple security must be
included in the portfolio. Inclusion of more security lead to reduction in risk of portfolio (Bogle, 2015). This theory is used in the
current time period and under this portfolio managers while constructing portfolio include number of securities like equity, bond and
mutual fund etc. There are number of calculations that are done by the portfolio managers to construct the portfolio and under this
excel is usually used to develop efficient frontier chart. By viewing a chart one easily identify the portfolio and proportion that
different stocks and securities must have on the portfolio.
Investment styles
Investment style refers to the investment strategy like active and passive strategy. Active strategy refers to the strategy under
which elements of the portfolio are changed frequently. On other hand, passive strategy is the one under which investment is kept in
the specific security for the long time period. There is a huge difference between both strategy in terms of usage and change in the
portfolio. Under active strategy it is assumed that market is highly volatile in nature and due to this reason it is necessary to change the
portfolio. Thus, active strategy is followed and under this portfolio is changed frequently by the managers. On other hand, in case of
the passive strategy it is assumed that market will not change frequently and it will reach to certain level after different fluctuations.
Hence, under passive strategy investment is made in the portfolio for long time period (Gil-Bazo, Ruiz-Verdú. and Santos, 2010). This
investment theory is used at large scale by the portfolio managers because by doing so return on same is maximized. In the current
time period most of portfolio managers are using active strategy because market is highly volatile in nature and by using mentioned
strategy higher return can be earned on the invested amount.

Portfolio evaluation
Table 1Weight percentage and portfolio return
Initial investment 150000 Weight Expected return Weighted return
Bond 45000 30.00% 9% 2.700%
Equity 30027 20.00% 46% 9.117%
Mutual fund 45000 30.00% 0.07% 0.020%
Fixed interest 14523 10.00% 11% 1.149%
Commodities (Gold) 15450 10.00% 16.18% 1.618%
Total 150000 100% Portfolio return 14.605%
Table 2Return and beta profile of stocks
S.N
O Companies Price Return (%) y-o-y Beta Industry
1 3i group plc 772.5 60.20% 1.71 Financial
2 Ashtead Group 1624 91.85% 0.89 Rentals
3 Barratt development (BDEV) 588 12.51% 0.67 Home construction
4 Intercontinental hotels (IHG) 3853 33.85% 0.95 Tourism
5 Sage group (SGE) 653 2.67% 1.12 Software and computer

service
Table 3Expected return and total investment on stocks
Companies Price Stocks Total investment Expected return Weight
3i group plc 772.5 4 3090 102.23% 10.29%
Ashtead Group 1624 4 6496 81.86% 21.63%
Barratt development (BDEV) 588 3 1764 8.71% 5.87%
Intercontinental hotels (IHG) 3853 4 15412 32.21% 51.33%
Sage group (SGE) 653 5 3265.0 2.87% 10.87%
30027.0 100.00%
Table 4Gain or loss on portfolio
Companies
Pric
e
Expected
return
Stock
s
Expected
price
Capital
gain
Total value at
end
Total capital
gain
3i group plc
772.
5 102.23% 4 1562 789.74 6248.97 3159
Ashtead Group 1624 81.86% 4 2953 1329.35 11813.40 5317
Barratt development
(BDEV) 588 8.71% 3 639 51.22 1917.67 154
Intercontinental hotels
(IHG) 3853 32.21% 4 5094 1240.95 20375.82 4964

Sage group (SGE) 653 2.87% 5 672 18.74 3358.72 94
Total capital gain 13688
New value 43714.58
Opening value 30027.00
Gain/loss 13687.58
Table 5Return on bond
Bon
d Item Price
Number of
units
Total
value CAGR
End
value Capital gain
UK Gilt Treasury Stk
5% 104.351 431 45000 9 49050 4050
Table 6Return on mutual fund schemes
Mutual
fund Liquid fund 1 2 3 4
CAG
R Value at end
Capital
gain
1
71 AAP Balanced
fund 15% 3% 3% 7% 7% 45030.38671 30.3867057

Table 7Investment on bullion
Commodities
(Gold) Bullion
CAGR for 6
months Final value
Lot
s
Earlier
price Final price
Total capital
gain
1 1030 16.18%
1196.67272
7 15 15450
17950.0909
1 2500.090909
Table 8Investment on bank deposits
Fixed interest Value at end Capital gain
1 2.20% 16192.38481 1669.4
Table 9Capital gain on portfolio
Securities Amount Income Capital gain Capital gain %
Bond 45000 49050 4050 18.46%
Liquidity 45000 45030.38671 30.38670569 0.14%
Fixed interest 14523 16192 1669 7.61%
Equity 30027 43715 13688 62.39%
Commodities (Gold) 15450 17950 2500 11.40%
Results 150000 171937 21937 100.00%

Table 10Expected return on portfolio
S.NO Companies Price
Return (%) y-
o-y Beta
Expected
return
1 3i group plc 772.5 0.602 1.71 102.23%
2 Ashtead Group 1624 0.9185 0.89 81.86%
3 Barratt development (BDEV) 588 0.1251 0.67 8.71%
4 Intercontinental hotels (IHG) 3853 0.3385 0.95 32.21%
5 Sage group (SGE) 653 0.0267 1.12 2.87%

 Bond: Benchmark refers to the standatrd against which performnace of the bond is compared. It must be noted that in case of
bonds government bond is used as standard. In the present case investment is proposed to be made in the bond which is
relarted to the government. Hence, it is diffiuctl to determine the standard for bond in the current portfolio. In case one make
an investment in any bond that is related to the private company government bond can used as standard. It can be said that
there is huge importance of the benchmarks because by using same performnace of the specific security is measured. It is very
important to track down the performnace of the portfolio because by doing so it can be decided by an individual whether
investment can be carried out on specoific security or not (Nohel, Wang and Zheng, 2010). One on time can decide to exit
from the investmenbt and can make same on the most profitable avenue. It can be said that there is a signficent importance of
the bechmarking for equity investors. One must take due care while selecting anything as bechmark for the portfolio because
by comparing performance of same with the bechmark accurate performnance of the portoflio is measured.

 Equity: In case of equity bechmark will be FTSE 100. This is because all investment in the equity is made in the firms that
comes in the category of equity and is component of the FTSE 100 index. In order to measure performnace of the equity
portoflio percentage change of same will be compared with the index and by doing so it will be identified whether portoflio
perform well or worst. It can be observed that investment of 30027 is made in the equity and after investment its value is
43714 which means that return of 43% is earned on the invested amount. On other hand, FTSE yearly return is 15% which
reflets that portfolio outperofrm the index and give sufficient amount of reutrn to the investor. It can be observed that higher
return is obtaind on the 3i group plc of 102.23% followed by Asthead group 81.86%, Baratt development 8.71%,
Intercontinental hotels 32.21% and Sage group 2.87%. Mutual fund: In case of mutual fund scheme Mixed Investment 20-60% Shares will be considered as benchmark. Sector refers
to the any standard that is used as parameter to compare the performance of fund with the standard. Mixed Investment 20-60%
Shares refers to the 60% equity and 40% debt which show the balance between equity and debt in the market. It must be noted
that mutual fund scheme that is included in the portfolio is also balanced fund. Mixed Investment 20-60% Shares also indicate
balance between debt and equity (Financial times, 2017). It can be said that appropriate benchmark is set for the mutual fund
scheme. Point to be noted is that there is very low return on the mutual fund scheme which is 0.07% which is lower than the
standard. In the upcoming time period value of mutual fund can increase at rapid pace. This is because in the balanced fund
majority of portion is covered by equity. If in case market will be in uptrend return on portfolio can be increased. Fixed interest: Rate of intertest that is given on average basis by the commercial banks in the UK for fixed interest deposits
can be considered as standard for the interest that is received on the deposits that are with the commercial bank in the portfolio.
On comparison of the return that is obtained on fixed deposit with the standard value it can be identified that similar returns are
geenrated. Hence, it can be said that suffieient amount of retunr is geenrated by the portfolio. Commodity: In case of gold price that is given by the LBMA which is also known as London Bullion market association will
be taken as standard and by considering same performance of the portfolio can be measured (7IM AAP Balanced class C inc,

2017). On compariosn of gold price with the standard it can be said that good amount of return is earned on the invested
amount.
Sources of information
There are multiple sources from which information in respect to financial securities is obtained and idea for development of
portfolio is obtained. Entire market related data is taken from financial time’s website. Apart from this, information about mutual fund
scheme is taken prudential website. Fact sheet of the mutual fund scheme is downloaded and from same relevant information is
obtained. Apart from this, different sites are visited on internet to gather relevant data.