Describe the challenges to properly comparing the performanc

Describe the challenges to properly comparing the performance of an equity fund to a fixed- income mutual fund? (L04-4) 35.

Solution

A fixed income fund invests in government bonds, corporate bonds and commercial papers and is more prone to interest risks due to chances of volatility in the interest rate regime.

While an equity fund invests in the stocks of publicly traded corporations and the weightage of stocks differ based on its mandate and risk return profile of the fund.

Typically a fixed income fund is considered less risky because of its investment in debt and also has lower return expectations. The equity fund on the other hand is more risky and hence more return is expected of it. Since the risk and return expectations of both the type of funds are quite different, it is not prudent to compare these funds and it would be difficult to find a common benchmark to compare the performance of both of the type of funds since these have different risk return profile altogether.