An old Axiom :

“It is not wise to put all eggs into one basket”

……… was probably in the minds of those who formed the first mutual fund.

Presented by:Richi Shrivastava

Amit MukherjeeKeshri N.TripathiKanhaiya Gupta

MUTUAL FUND MUTUAL FUND

Expenses of MFExpenses of MF What MFs are not?What MFs are not?

MF Comparison with U.S.MF Comparison with U.S.Portfolio ManagementPortfolio Management

Risk ManagementRisk ManagementInvestment strategyInvestment strategy

Organization of Mutual FundOrganization of Mutual Fund Types of SchemesTypes of Schemes

Concept Concept

Content Content

RegulationsRegulations

Reference WebsitesReference Websites

• A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

• The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.

• The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.

• Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Concept Concept

SEBI (mutual fund) Regulation,1996Structure of MF in India

Organizational Structure of MF Organizational Structure of MF

Sponsor• Akin to the Promoter of the company,• Contribute min 40% of net worth of AMC,• Posses sound financial record over five years period,• Establishes the Fund,• Gets it registered with the SEBI,• Forms a trust, & appoints Board of trustee.

Trustees• Holds assets on behalf of unit holders in trust.• Trustees are caretaker of unit holders money.

• Two third of the trustees shall be independent persons (not associated with the sponsor).

• Trustees ensure that the system, processes & personnel are in place.

• Resolves unit holders GRIEVANCES.

• Appoint AMC & Custodian, & ensure that all activities are accordance with the SEBI regulation.

Custodian • Holds the fund’s securities in safekeeping,• Settles securities transaction for the fund,• Collects interest & dividends paid on securities,• Records information on corporate actions.

Examples of custodian

HDFC CITY BANK

ABN AMRO IIT CORPORATE SERVICES

SBI INDIA STANDARD CHARTRED

SHCIL DEUTSCHE BANK

Asset Management Company• Floats schemes & manages according to SEBI.• Can not undertake any other business activity, other

than portfolio mgmt services.• 75% of unit holders can jointly terminate

appointment of AMC.• At least 50% of independent directors.• Chairman of AMC can not be a trustee of any MF.

Examples of AMC

UTI ICICI Prudential Reliance

SBI Canbank ING Vysya

Stanchart Taurus HSBC

Distributor / Agents• Sell units on the behalf of the fund.• It can be bank, NBFCs, individuals.

Banker• Facilitates financial transactions,• Provides remittance facilities.

Registrar & Transfer Agent• Maintains records of unit holders’ accounts &

transactions• Disburses & receives funds from unit holder

transactions,

• Prepares & distributes a/c settlements,• Tax information, handles unit holder communication,• Provides unit holder transaction services.

Examples of R & T Agents

CAMS KARVY

MCS Ltd Datamatics

MN Dastoor & Co IIT Corporate Services

Computeronics TCS

ICICI Infotec UTI ISL

• SEBI (MF), 1996 as regulator of MF.Provisions of SEBI IMPACT

Legal character of MF •MF can be set up only as TRUST.•MF can’t invest in Gold, silver & real asset.•Unit holder can’t challenge trustees.

Structure of MF •Arms-length relationship b/w various constituents.•Independent custodian.

Registration of MF •Must fulfill eligibility criteria u/s 7.•AMC have min net worth of 10 cr.

Operation of MFs •Disclosure of information.•Advertisements. •Daily pricing.•Risk management system.

Regulatory Aspect Regulatory Aspect

• Incorporated on 22 August, 1995.• Apex body of all the registered AMCs.• All AMCs are its member.• Objective to maintain high ethical & professional

standard. • Provide certificate to Agents to sell MF• Best practice guidelines.• Code of ethics.

Role of AMFI Role of AMFI

Each category is classified into more sub-categories.

Fund schemes Portfolio objectives

Growth & Income High Risk & High Return

Balanced Moderate Risk & Return

Liquid & Money Market Fixed Return

Gilt Zero Risk

ELSS Tax Saving

Fund of funds Additional diversification

AMFI Classification of MF schemes AMFI Classification of MF 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 (ETFs, foreign funds)

Other classification of MF schemes Other classification of MF schemes

• Exchange traded funds are Mix of stocks & MFs.

• Like MF, they comprise a set of specific stocks- e.g. an index like Nifty/ Sensex or commodity like gold, or Real estate .

• Like equity they are traded on stock exchange on real time basis.

• There have been a couple of ETFs from Prudential ICICI AMC and UTI AMC.

What are ETFs What are ETFs

Risk –Return of different schemes Risk –Return of different schemes

• Systematic Investment Plan (SIP) – Invest a fixed sum every month. (6 months to 10 years)– 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.

– Nowadays ,Insurance is free with SIP.• 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)• Flexi Withdrawal Plan (FWP)

Investment Strategy Investment Strategy

Portfolio Management Process Portfolio Management Process

Investor objective

Optimal Portfolio

Portfolio Optimization

Expected Return

Volatility &Correlation Estimates

Constraints on Portfolio choice

Fund Management Process Fund Management Process

Return Risk

market

Group /IndustryGrowth Cyclical stable

Individual Stock

Active Strategy

Beta or Market Risk

Extra market co-varianceOr

Group /Industry Risk

Specific Risk

Passive Strategy

Fund manager’s Investment JudgmentsFund manager’s Investment Judgments

Risk management is defined as the:

“Overall process of identifying & understanding the full spectrum of an organization’s risk & taking informed action to help it achieve its strategic objectives, reduce the likelihood of failure & decrease the uncertainty of overall business performance”

Risk Management Risk Management

• Risk Management function.

• Disaster recovery & business contingency plans.• Insurance against third party loss (R&TA), arising from

error & omission.

Risk category Risk factorsFund management Volatility in performance, portfolio concentration,

Interest rate movement, liquidity risk & credit risk.

Operations Deal error, settlement problem, NAV & fund pricing error, inaccurate financial reporting, fraud.

Customer Error in deal processing, fraud .

Marketing & distribution New product development, selling & distribution

Other business risk Critical knowledge loss, skills shortage, third party risk

• An Overview • Developed market• Low cost countries (LCC) having total expense (.3%), (.59%),

even less than one.• Organizational structure is different from India.• Vast product variety e.g. diamond, currency, metal ETFs, small

cap MF, macro cap MF, bear market MF, kids MF, commodity MF, donor advised MF(tax exemption)etc.

• Vast variety of different countries equity & debt fund

Comparison with US marketComparison with US market

•(An asterisk indicates fee is included in a fund’s expense ratio)•As per SEBI Rule expense ratio should be 2.5% for equity & 2.25% for debt fund of fund value.

Accounted for in FUND RETURN Not included in FUND RETURN

Management fee* Front end sales load

Group fee* Back end sales load

Performance fee* Transaction fee

Administrative fee* Redemption fee

12(b)-1 fee* Account maintenance fee

Brokerage costs Bid ask spreads

Interest costs

Expenses of MFExpenses of MF

• MFs are not ‘get rich quick investments’

• MFs are not ‘risk free investment’• MFs are not ‘assured return

investment’• MFs are not ‘a universal solution to all

investment needs’

What MFs are not……..What MFs are not……..

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.mutualfundsindia.com/resourcecentre.asp

books

• Mutual fund industry in India- ICFAI university press.

• Mutual fund product & services- Taxman (IIFB).

• Security analysis-Taxman (IIFB).

References References

THANK YOU