Portfolio Construction and The Reduction of Diversifiable Risk

Abstract

The study attempts to construct the optimum mutual fund portfolios by the open-ended mutual fund schemes (income & growth). The study also examines whether the newly constructed portfolios are able to reduce diversifiable risk and which type of mutual fund schemes is better. For the achievement of these objectives, monthly closing net asset values of the open-ended income and growth schemes have been considered and the data have been obtained from the website of Association of Mutual Funds in India (AMFI). Similarly, the yields of 7 years Gov. dated securities have been taken into account as the proxy of risk free rate and finally, the monthly index values of Bombay Sensitive index have been considered as market surrogate for this study. The study period has been considered from 2001 to 2010. It has been observed from the study that the diversifiable risk (unsystematic risk) of both types of schemes (Income & Growth) is in decline when new portfolios have been made. It has also been found that the unsystematic risk of the newly constructed portfolios of income as well as growth schemes is higher.

Keywords: Mutual Fund, Portfolio Construction, Diversifiable Risk, Market Index, Risk-Free Rate

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