Mutual Funds

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Mutual Funds
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Disclaimer

• Me - no expert
• Not Comprehensive
• Majority from websites and some practical
  experience

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Contents
Mutual Fund Defined
Brief History
Regulations
Terminologies Demystified
Organization of Mutual Fund
Risk Behavior
Types of Schemes
Investment Strategies
Equity Funds
Buying a Mutual Fund
Selecting a Mutual Funds
Keeping Track
Mutual Funds Comparision
Reference Websites
Warning Signals
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Mutual Fund ??

• Form of trust that pools the funds of a whole lot
  of investors to make more money by investing in
  an array of financial instruments.
• Advantages of a MF
• Professional Management
• Diversification
• Flexibility in choice - selection, redemption
• Low costs
• Transparency

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Brief History

• 1964-UTI
• 1987- Public Sector banks, Insurance Companies
• SBI, Canbank, PNB LIC, GIC
• 1993- Private Sector
• Kothari Pioneer ( later merged with Franklin
  Templeton), J P Morgan, Morgan Stanley, George
  Soros and Capital International

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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 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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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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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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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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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.

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Websites

• http//news.moneycontrol.com/mf/glossary.php
• http//www.investopedia.com/university/mutualfunds
  /default.asp
• http//www.valueresearchonline.com
• http//www.amfiindia.com/
• http//www.sbimf.com/portal/static/calculator/Risk
  Assess/RiskAssessCal1.asp
• http//www.mutualfundsindia.com/resourcecentre.asp