Mutual Funds

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Mutual Funds
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Human Life Cycle
Phase I
Phase II
Phase III
Childs Marriage
Childs Education
Housing
Child birth
Marriage
38 yrs
10- 20 yrs
22 yrs
Earning Years
Post Retirement Years
Education
Age- 22 yrs
Age- 60 yrs
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Individual Investor Life Stages
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Value of Money over time
Impact of inflation on monthly expenses of Rs.
30,000 today
Value of Rs. 100,000 over time
At inflation of 5
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OPTIONS FOR INVESTING

• Deposit in Bank SB, RD, FDs, Locker )
• Loan a Friend/Relative on Interest
• Property Investments
• Invest in Bullion - Gold, Silver..
• Investment in Capital Markets - - Direct -
  Equity Share Markets - Debt Bonds
  Market - Indirect - Mutual Funds

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So what are my alternatives?

• Fixed Interest Products
• Bank Deposits
• Corporate Deposits
• RBI Bonds
• Corporate Bonds
• Rates of Return?
• Returns Net of tax?
• Wont Inflation eat into the return?

Returns net of tax/ inflation is poor hedge
against inflation
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Why Equities
Equities produce highest long-term returns
Equities the most attractive asset class
18.25
10.64
10.27
7.47
7.12
Inflation
Gold
G Secs
Bank FD
Equities
Source CLSA Cumulative annualised returns (1980
- 2004)
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EQUITIES-RISKY VOLATALIE

• BSE SENSEX IN LAST TWO YEARS

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How To Invest In Equities

• Direct Equity
• High risk, high return category.
• Needs a lot of time expertise.
• Substantial initial capital required.
• Mutual Funds
• One-Time Investment
• Systematic Investment Plan (SIP)

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What is a Mutual Fund?

• A Mutual Fund is a trust that pools the savings
  of a number of investors who share a common
  financial goal.
• Anybody with an investible surplus of as little
  as a few thousand rupees can invest in Mutual
  Funds.
• These investors buy units of a particular Mutual
  Fund scheme that has a defined investment
  objective and strategy.
• The money collected is invested by the fund
  manager in different types of securities. These
  could range from shares to debentures to money
  market instruments, depending upon the schemes
  stated objectives.
• The income earned through these investments and
  the capital appreciation realized by the scheme
  are shared by its unit holders in proportion to
  the number of units owned by them.

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Brief History

• First Phase 1964-87 Unit Trust of India
  (UTI) was established on 1963 by an Act of
  Parliament. At the end of 1988 UTI had Rs.6,700
  crores of assets under management.
• Second Phase-1987-1993 (Entry of Public Sector
  Funds) marked the entry of non- UTI, public
  sector mutual funds set up by public sector banks
  and Life Insurance Corporation of India (LIC) and
  General Insurance Corporation of India (GIC). SBI
  Mutual Fund was the first non- UTI Mutual Fund
  established in June 1987. At the end of 1993, the
  mutual fund industry had assets under management
  of Rs.47,004 crores.
• Third Phase-1993-2003(Entry of Private Sector
  Funds) 1993 was the year in which the first
  Mutual Fund Regulations came into being, under
  which all mutual funds, except UTI were to be
  registered and governed. The erstwhile Kothari
  Pioneer (now merged with Franklin Templeton) was
  the first private sector mutual fund registered
  in July 1993. As at the end of January 2003,
  there were 33 mutual funds with total assets of
  Rs. 1,21,805 crores.
• Fourth Phase since February 2003 In
  February 2003, following the repeal of the Unit
  Trust of India Act 1963. UTI Mutual Fund Ltd,
  sponsored by SBI, PNB, BOB and LIC. It is
  registered with SEBI and functions under the SEBI
  Mutual Fund Regulations

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GROWTH IN ASSETS UNDER MANAGEMENT
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MUTUAL FUND DATA April 30th, 2009
Category Category Sales Sales Sales Redemption Asset Under Management Asset Under Management Asset Under Management
      Existing schemes Total Total as on Apr 30 , 2009 as on Mar 31 , 2009 Inflow/ Outflow
      Existing schemes Total Total as on Apr 30 , 2009 as on Mar 31 , 2009 Inflow/ Outflow
B Bank Sponsored   118793 118793 87357 93839 81013 12826
C Institutions   55866 55866 48898 26115 23092 3023
Private Sector Joint Venture Private Sector Joint Venture Private Sector Joint Venture Private Sector Joint Venture Private Sector Joint Venture Private Sector Joint Venture Private Sector Joint Venture Private Sector Joint Venture
  Indian   239486 239605 184342 172701 153432 19269
  Predominantly Foreign   23329 23329 19571 23843 22857 986
  Predominantly Indian   250760 250760 198352 198866 180163 18703
D Total Private Sector   513575 513694 402265 395410 356452 38958
  Grand Total (BCD)   688234 688353 538520 515364 460557 54807
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Organization of a Mutual Fund
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Regulations

• Governed by SEBI (Mutual Fund) Regulation 1996
• All MFs registered with it, constituted as trusts
  ( under Indian Trusts Act, 1882)
• Bank operated MFs supervised by RBI too
• AMC registered as Companies registered under
  Companies Act, 1956
• SEBI- Very detailed guidelines for disclosures in
  offer document, offer period, investment
  guidelines etc.
• NAV to be declared everyday for open-ended, every
  week for closed ended
• Disclose on website, AMFI, newspapers
• Half-yearly results, annual reports
• Select Benchmark depending on scheme and compare

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Terminologies Demystified

• Asset Allocation
• Diversifying investments in different assets such
  as stocks, bonds, real estate, cash in order to
  optimize risk.
• Fund Manager
• The individual responsible for making portfolio
  decision for a mutual fund, in line with funds
  objective.
• Fund Offer Document
• Document with investment objectives, risk
  factors, expenses summary, how to invest etc.
• Dividend
• Profits given to the investor from time to time.
• Growth
• Profits ploughed back into scheme. This causes
  the NAV to rise.

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Terminologies Contd

• NAV
• Market value of assets of scheme minus its
  liabilities.
• Per unit NAV Net Asset
  Value
• No.
  of Units Outstanding on Valuation date
• Entry Load/Front-End Load (0-2.25)
• The commission charged at the time of buying the
  fund.
• To cover costs for selling, processing
• Exit Load/Back- End Load (0.25-2.25)
• The commission or charge paid when an investor
  exits from a mutual fund. Imposed to discourage
  withdrawals
• May reduce to zero as holding period increases.
• Sale Price/ Offer Price
• Price you pay to invest in a scheme. May include
  a sales load. (In this case, sale price is higher
  than NAV)
• Re-Purchase Price/ Bid Price
• Price at which close-ended scheme repurchases its
  units

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TYPES OF MUTUAL FUNDS
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Types of Mutual Fund Schemes

• By Structure
• Open-Ended anytime enter/exit
• Close-Ended Schemes listed on exchange,
  redemption after period of scheme is over.
• By Investment Objective
• Equity (Growth) only in Stocks Long Term (3
  years or more)
• Debt (Income) only in Fixed Income Securities
  (3-10 months)
• Liquid/Money Market (including gilt) Short-term
  Money Market (Govt.)
• Balanced/Hybrid Stocks Fixed Income
  Securities (1-3 years)
• Other Schemes
• Tax Saving Schemes
• Special Schemes
• ULIP

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SPECIAL SCHEMES-EXAMPLE

• Funds based on Size of the Companies Invested in
• Large cap fundsFunds that invest in companies
  whose total market cap is above Rs40bnMid cap
  funds Funds that invest in companies whose
  market cap is between Rs20-40bnSmall cap funds
  Funds that invest in companies whose market cap
  is below Rs20bn

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10 REASONS TO INVEST IN MUTUAL FUNDS

• Expert on your side   When you invest in a
  mutual fund, you buy into the experience and
  skills of a fund manager and an army of
  professional analysts
• Limited risk Mutual funds are diversification in
  action and hence do not rely on the performance
  of a single entity.
• More for less For the price of one blue chip
  stock for instance, you could get yourself a
  number of units across a number of companies and
  industries when you invest in a fund!
• Easy investing You can invest in a mutual fund
  with as little as Rs. 5,000. Salaried individuals
  also have the option of investing in a monthly
  savings plan.
• Convenience You can invest directly with a fund
  house, or through your bank or financial
  adviser, or even over the internet.
• Investor protection A mutual fund in India is
  registered with SEBI, which also monitors the
  operations of the fund to protect your interests.
  
• Quick access to your money It's good to know
  that should you need your money at short notice,
  you can usually get it in four working days.
• Transparency As an investor, you get updates on
  the value of your units, information on specific
  investments made by the mutual fund and the fund
  manager's strategy and outlook.
• Low transaction costs A mutual fund, by sheer
  scale of its investments is able to carry out
  cost-effective brokerage transactions.
• Tax benefits Over the years, tax policies on
  mutual funds have been favourable to investors
  and continue to be so.

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TAXATION

• All dividends declared by debt / equity oriented
  schemes are tax free in the hands of the investor
• Dividend distribution tax _at_ 14.1625 for
  individuals and 22.66 for corporates under debt
  oriented schemes
• No DDT under equity schemes
• Long term capital gain in equity schemes
  exempt from tax
• Indexation benefit available for long term non
  equity schemes
• Equity short term capital gain _at_10
• STCG in Debt funds Rates applicable for the
  investor
• Deduction of Rs. 1 lac under section 80C

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Risks

• Historical analysis
• Return is remembered, Risk forgotten
• Risk Potential for Harm
• Market Risk
• Non-Market Risk
• Credit Rate Risk
• MF Risk Volatility (fluctuation of NAV)
• Standard Deviation
• Websites give star rating ( basis risk-adjusted
  return)

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Before declaration of dividend / bonus Before declaration of dividend / bonus Before declaration of dividend / bonus Before declaration of dividend / bonus Before declaration of dividend / bonus
  Growth Dividend payout Dividend reinvestment Bonus
NAV 20 20 20 20
Units 100 100 100 100
Value (Rs) 2,000 Rs 2,000 Rs 2,000 Rs 2,000
After declaration of dividend / bonus After declaration of dividend / bonus After declaration of dividend / bonus After declaration of dividend / bonus After declaration of dividend / bonus
NAV 20 19 19 18.1818
Units 100 100 105.2631 110
Value (Rs) 2000 1900 2000 2000
Dividend received in cash - Rs 100 - -
Additional units - - 5.2631 10
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Investment strategies

• Systematic Investment Plan (SIP)
• Invest a fixed sum every month. (6 months to 10
  years- through post-dated cheques or Direct Debit
  facilities)
• Fewer units when the share prices are high, and
  more units when the share prices are low. Average
  cost price tends to fall below the average NAV.
• Systematic Transfer Plan (STP)
• Invest in debt oriented fund and give
  instructions to transfer a fixed sum, at a fixed
  interval, to an equity scheme of the same mutual
  fund.
• Systematic Withdrawal Plan (SWP)

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What is a Systematic Investment Plan?

• An investment plan to invest a fixed amount
  regularly at a specified frequency say, monthly
  or quarterly.

SIP is a simple method of investing used across
the world as a means to creating wealth
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Benefits of SIP

• Regular
• Investments happen every month unfailingly
• Power Of Compounding
• Rupee Cost Averaging
• Forced saving
• Helps you overpower the temptation to spend fully
• Helps you build for the future
• Automated
• Completely automated process
• No hassles of writing cheque every month
• Light on the wallet
• Investment amount can be so small that you do not
  even feel the pinch of it being directly
  deducted, yet the small amount is powerfully
  working towards your financial security

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Systematic Investing, An Example
When the price is highest, you buy the least
number of units
154.75 units
106.39 units
When the price is lowest, you buy the highest
number of units
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Investing at Peak SIP is the way
Simple plotting of closing price of BSE Sensex
for the first of every month.  The time period
considered here is from 1/1/1990 to 02/12/2005   
Source Credence Analytics
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Start Early SIP
Rs. 1000 invested per month _at_15 p.a. till the
age of 60 yrs
A gap of 5 only years can result in a lot of
difference in wealth creation !
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Equity Funds

• Diversified equity funds
• Index funds
• Opportunity funds
• Mid-cap funds
• Equity-linked savings schemes
• Sector funds like Auto, Health Care, FMCG etc
• Dividend Yield Funds
• Others (Exchange traded, Theme, Contra etc)

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Investing in Equity Funds

• Errors
• Invest in only top performing funds
• These cannot go wrong
• Replicate past performance in future
• Appropriate way
• Right Mix of equity MFs (Top 3-4 funds, may all
  be mid-cap funds)
• Have variety of funds like diversified funds,
  mid-cap funds and sector funds in right
  proportion.
• Beginner- it makes sense to begin with a
  diversified fund
• Gradual exposure to sector and specialty funds.
• Look at performance of various funds with similar
  objectives for at least 3-5 years (managed well
  and provides consistent returns)

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Tired of your savings account?

• Extra Cash in savings A/c?? Consider Cash Funds
• Liquidity Savings account wins
• b/w a savings account and a fixed deposit, no ATM
  (Now- Rel Regular Savings Fund)
• Safety Savings account wins
• All mutual funds are subject to market risks
• Returns Cash funds win
• Upto about 17.5 return
• Performance Cash funds win
• Interest rate fluctuations covered by quick
  maturation
• Invest when surplus money in savings a/c based on
  expense ratio

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Investing Checklist

• Draw up your asset allocation
• Financial goals Time frame (Are you investing
  for retirement? A childs education? Or for
  current income? )
• Risk Taking Capacity
• Identify funds that fall into your Buy List
• Obtain and read the offer documents
• Match your objectives
• In terms of equity share and bond weightings,
  downside risk protection, tax benefits offered,
  dividend payout policy, sector focus
• Check out past performance
• Performance of various funds with similar
  objectives for at least 3-5 years (managed well
  and provides consistent returns)

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Checklist Contd

• Think hard about investing in sector funds
• For relatively aggressive investors
• Close touch with developments in sector, review
  portfolio regularly
• Look for load' costs
• Management fees, annual expenses of the fund and
  sales loads
• Does the fund change fund managers often?
• Look for size and credentials
• Asset size less than Rs. 25 Crores
• Diversify, but not too much
• Invest regularly, choose the S-I-P
• MF- an integral part of your savings and
  wealth-building plan.

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Portfolio Decision

• The right asset allocation
• Age in debt instruments
• Reality different financial position, different
  allocation
• Younger Riskier
• Selecting the right fund/s
• Based on schemes investment philosophy
• Long-term, appetite for risk, beat inflation
  equity funds best
• TRAPS TO AVOID
• IPO Blur
• Begin with existing schemes (proven track record)
  and then new schemes
• Avoid Market Timing

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MF Comparison

• Absolute returns
• difference of NAV
• Diversified Equity with Sector Funds NO
• Benchmark returns
• SEBI directs
• Fund's returns compared to its benchmark
• Time period
• Equal to time for which you plan to invest
• Equity- compare for 5 years, Debt- for 6 months
• Market conditions
• Proved its mettle in bear market

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Buying Mutual Funds

• Contacting the Asset Management Company directly
• Web Site
• Request for agent
• Agents/Brokers
• Locate one on AMFI site
• Financial planners
• Bajaj Capital etc.
• Insurance agents
• Banks
• Net-Banking
• Phone-Banking
• ATMs
• Online Trading Account
• ICICI Direct
• Motilal Oswal, Indiabulls- Send agents

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Keeping Track

• Filling up an application form and writing out a
  cheque end of the story NO!
• Periodically evaluate performance of your funds
• Fact sheets and Newsletters
• Websites
• Newspapers
• Professional advisor

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Warning Signals

• Fund's management changes
• Performance slips compared to similar funds.
• Fund's expense ratios climb
• Beta, a technical measure of risk, also climbs.
• Independent rating services reduce their ratings
  of the fund.
• It merges into another fund.
• Change in management style or a change in the
  objective of the fund.