Basics of Mutual Funds - RAJ (2)
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Transcript of Basics of Mutual Funds - RAJ (2)
8/6/2019 Basics of Mutual Funds - RAJ (2)
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Mutual FundsWhat, Why and How
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What is a Mutual Fund?
Mutual Funds pool money from many small
investors with similar (one could say mutual)
objectives, to achieve Economies of Scale and
Diversification in the investment of these
funds.
This can result in higher returns at lower risk
Mutual Fund- Know now
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Graphically speaking...Graphically speaking...MFStep 1 : Make investments
Investor community
Step 5: Returns provided to investors
Earnings to the
Fund House/ Distributor
Step 4: Expenses
deducted
from the returns
Various Assets
Mutual Fund- Know now
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Where is the money invested
Your money is invested in various securities depending
on the objectives of the scheme you choose.
STOCKS BONDS MONEY MARLKET
Mutual Fund- Investment
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What are the types of mutual funds ..(1)
Open end schemes: You can invest or redeem in these schemes at any time
Closed end schemes: You can invest during the initial issue period and your
money is locked in for a stipulated period (ranging from 2 to 15 years)
What are the types of mutual funds ..(2)
Based on the investment objective
Growth schemes: Invest in shares of companies. Have the potential to deliver
better returns over the long term as compared to other mutual fund schemes
Mutual Fund- Types
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What are the types of mutual funds ..(3)
Types of growth funds
Diversified Funds
Sector Funds
Index Funds
What are the types of mutual funds ..(4)
Income schemes: Invest in fixed income securities such as bonds issued by
corporate and other government agencies
Gilt Funds invest exclusively in government securities for added safety
Mutual Fund- Types
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What are the types of mutual funds ..(5)
Balanced schemes: Invest in both shares and bonds,
thereby receiving income that can moderate the effects
of price fluctuations due to stocks
Money market schemes: Invest in short term
instruments such as certificates of deposits and short
term bonds
Mutual Fund- Types
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Other types of schemes
Need based schemes
Tax-Saving schemes
Equity Linked Savings Schemes Pension Schemes
Future needs schemes
Childrens Savings Plans
Retirement benefit schemes
Mutual Fund- Other Schemes
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The risk return tradeThe risk return trade--off..off..
Risk
Investment horizon
Liquid Fund
Debt Funds
Balanced FundsRatio of Debt : Equity
Growth FundsIndex, Active diversified
Sector funds
Risk and Investment
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Investment PyramidInvestment Pyramid
Capital Preservation
Risk: Low to Medium
Period: Less than 1 year
Income
Risk: Medium to Low
Period: 1 to 3 years
CapitalGrowth
Risk: Medium to High
Period: 3 to 5 years
Investor Portfolio Composition
GrowthFunds
Stocks
Income/Bond FundsCompany Fixed Deposits
Bonds
Debentures
Money Market Funds
Short-term Deposits /Government Paper
Risk and Investment
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Why invest in a mutual fund?..(1)Professional Management:
experience and resources to thoroughly analyze the
economy/markets to spot good investment opportunities
Why invest in a mutual fund?..(2)
Diversification:
Reduces the risk to which you would've been exposed
by investing in a single stock/bond Invests in a broad
cross section of industries or companies - negative
performance of one security will not have as much
of an impact on the fund
Why Mutual fund?
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Why invest in a mutual fund?..(3)
Liquidity & Convenience:
You will be able to get your money back within a short period as
compared to other securities
Very little paperwork
Helps avoid problems such as bad deliveries, delayed
payments and unnecessary follow up with brokers and
companies
Why Mutual fund?
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Why invest in a mutual fund?..(4)
Tax Efficiency:
Some mutual fund schemes offer tax benefits under
Section 88 Dividends declared under mutual fund schemesare tax free in the hands of the investor*
Mutual funds offer favorable post tax returns
�However, some funds are required to pay
dividend distribution tax
Why Mutual fund?
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How do I make money from a mutual fund?..(1)
Capital appreciation:
As the value of securities in the fund increases, the fund's unit price will
also increase. You can make a profit by selling the units at a price higher
than at which you bought
Income Distribution:The fund passes on the profits it has earned
in the form of dividends
How you make money in Mutual fund?
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How to choose the right scheme
Determine your financial goals and your time horizon
Determine your tolerance for risk
Study the objectives of the funds availableand match them with your need
The right scheme
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How to choose the right fund house
Look for:
Professional management
Performance track record
Quality of service
Choice of schemes
The right Fund house
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How to make the winning mutual fund investment(1)
Start Early
Save regularly
Use a portfolio approach spread your investments across sectors
and asset classesSee that your portfolio contains both short term and long term investments
How to make the winning mutual fund investment(2)
Monitor your investment portfolio periodically in light of market changes andchanges in your life
Stay calm, steady and disciplined keep your goals firmly in sight do not get
carried away by emotions or temporary market fluctuations
The winning combination
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Basics of Systematic Investing
& Asset Allocation
Systematic Investing
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What is Systematic Investing?
The term systematic investing, applies to the process
of investing regularly i.e. at fixed intervals, say, monthly
or quarterly.
Why should one systematically invest?
�When chasing a financial goal, the simplest form of
planning is to invest regularly
�Most of us calculate our earnings, expenses and savings
monthly. The easiest way to plan our investments,therefore, is on a monthly basis
Systematic Investing
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Why don't most people save regularly?
1. Lack of awareness/ concern/ planning for financial goals
2. No money left after monthly expenses
3. Hassle of keeping track of investments4. Unaware of power of compounding
Systematic Investing- Basic Issues
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FV = PV (1 + r)n
FV = Future Value
PV = Present Value
r = Rate of Return/ Coupon Rate
n = No. of compounding periods
The mother of all equations
Systematic Investing
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FV = PV (1 + r)n
Enhancing Future Value
The more youThe more you
save, makes asave, makes a
differencedifference
The soonerThe sooner
you start,you start,
makes amakes a
differencedifference
PV nr
The moreThe more
you earn,you earn,
makes amakes adifferencedifference
Systematic Investing
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The more you save, makes a differenceThe Power of Compounding
Past performance may or may not be sustained in future
Growth rate of 7% p.a.Total Amount
Saved
Value after 25
yearsAmount saved permonth
5,000 1,500,000 4,073,986
3,000 900,000 2,444,391
1,500 450,000 1,222,196
1,000 300,000 814,797
The power of compounding
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The sooner you start, makes a difference
The Power of Compounding
Past performance may or may not be sustained in future
#VALUE!Total Amount
Saved
Value at the
age of 60Starting Age
25 420,000 2,309,175
30 360,000 1,500,295
35 300,000 957,367
40 240,000 592,947
The Power of Compounding
The power of compounding
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The more you earn, makes a difference
Past performance may or may not be sustained in future
#VALUE!Value after 10
years
Value after 25
yearsGrowth Rate
5% 155,929 597,991
7% 174,094 814,797
10% 206,552 1,337,89014% 262,091 2,727,278
The Power of Compounding
The power of compounding
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The more you earn, makes a difference
#VALUE! Value after
10 years
Value
after 25
yearsGrowth Rate
8% 184,166 957,367
10% 206,552 1,337,890
15% 278,657 3,284,074
20% 382,364 8,626,708
The Power of Compounding
The power of compounding
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Savings is for Future Goals
Save for future
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The Arithmetic of Financing Life
Objective Years to go Current Cost Future Cost
Build a house 5 10 lacs 13 lacs
Sons MBA 10 3 lacs 5 lacs
Daughters
marriage
15 5 lacs 9 lacs
Retirement Fund 25 15 lacs 40 lacs
Life objective- cost structure
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Making Volatility Work for you
Rupee Cost Averaging
Average Sales Price of Units : Rs. 12 ( i.e. Rs. 48/4 months)
Average Purchase Cost of Units : Rs 11.61 ( i.e. Rs. 4000/344.444 units)
Month Amount Invested
(Rs.)
Sale Price (Rs.) No. of Units
Purchased
1 1000 12 83.333
2 1000 15 66.667
3 1000 9 111.111
4 1000 12 83.333
TOTAL 4000 48 344.444
Volatility- Cost averaging
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Sensex- and sensibilities
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Time Matters not Timing
Scheme Start DateTotal
InvestEnd Date Value CAGR(In%)
Reliance Growth Gr. 5/31/1996 87000 7/30/2003 215240 24.87
Reliance Vision Gr. 5/31/1996 87000 7/30/2003 219620 25.21
Sensex 5/31/1996 3724 7/30/2003 3780 0.01
S & P Nifty 5/31/1996 1089 7/30/2003 1183 0.02
Time is important
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Unmatched ConvenienceMinimum investment of Rs.500 on a monthly or quarterly basis
Choice of post-dated cheques or direct debit with selected banks
Cheques payable anywhere in India accepted
Statement of account provided with each transaction
Note: Some of the above facilities are available with investments in select funds and/ or at select
centres. Please refer to offer document for specific details.
Its easy- convenient
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What is Asset Allocation?
Its about diversifying ones portfolio among asset
classes such as bonds, stocks, real estate, or cash.
Its referred to in terms of the target percentages for eachasset class. For example, a portfolio could have a mix of 60
percent stocks, 30 percent bonds and 10 percent cash.
Its the financial representation of an investors personality:
the ideal asset allocation is one that best balances aninvestors profile and objectives
Asset allocation- find the right combination
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Brinson, Hood and Beebower :
Det er minants of Por tfolioPer for mance, 1986, 1991: Asset
Allocation helps explain over
93% of a portfolios
performance.
Significance Relative to ReturnSignificance of Asset Allocation
Asset allocation- find the right combination
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Suggesting the Right Allocation
Profile the client for ability and willingness to take risk
Match with clients objectives
Iron out mismatches, if any
Asset allocation- find the right combination
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Periodic Review
Making Asset Allocation WorkReview of objective - EXAMPLE
Years to goal Equity Allocation %
TODAY 10 70%
After 5 yrs 5 60%
After 7 yrs 3 40%
After 9 yrs 1 10%
A periodic review of objectives can ensure an investor is not left atthe mercy of the equity markets when he needs his money
Asset allocation- find the right combination
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