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Mutual Funds
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Education Earning Years Post Retirement Years
Phase I Phase II Phase III
Age- 22 yrs Age- 60 yrs
Marriage
Child birth
Childs Education
Childs Marriage
Housing
22 yrs 38 yrs 10- 20 yrs
Human Life Cycle
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60Retirement
40Middle Age
27Young Married
22Young Independent
Individual Investor: Life Stages
Earnings
Consumption
Savings
All individuals have a finite period to save for their investment goals
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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%
Investors need to beat inflation
30,000
38,288
62,368
79,599
Today 5 years 15 years 20 years
100,000
78,353
48,102
37,689
Today 5 years 15 years 20 years
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OPTIONS FOR INVESTING
Deposit in BankSB, 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 thereturn?
Returns net of tax/ inflation is poor hedge against inflation
4.54%
1.95%
0.01%
4.54%
2.10%
0.36%
4.54%
2.40%
1.06%
4.54%
2.25%
0.71%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Bank FD Company FD RBI Bond Co Bonds
Inflation Tax @ 30% Net Returns
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Why Equities
7.47% 7.12%
10.64% 10.27%
18.25%
Inflation Gold G Secs Bank FD Equities
Source : CLSA
Cumulative annualised returns (1980 - 2004)
Equities the most attractiveasset class
Equities produce highest long-term returns
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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 ofinvestors who share a common financial goal.
Anybody with an investible surplus of as little as a few thousandrupees 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 tomoney market instruments, depending upon the schemes statedobjectives.
The income earned through these investments and the capital
appreciation realized by the scheme are shared by its unit holders inproportion 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 banksand 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 KothariPioneer (now merged with Franklin Templeton) was the first private sector mutual fund registeredin 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 MutualFund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions underthe SEBI Mutual Fund Regulations
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GROWTH IN ASSETS UNDERMANAGEMENT
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MUTUAL FUND DATA April 30th,
2009
Category Sales Redemption Asset Under Management
Existingschemes
Total Total as on Apr 30, 2009
as on Mar 31, 2009
Inflow/Outflo
w
B Bank Sponsored 118793 118793 87357 93839 81013 12826
C Institutions 55866 55866 48898 26115 23092 3023
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(B+C+D) 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 TrustsAct, 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, offerperiod, investment guidelines etc.
NAV to be declared everyday for open-ended, every week for closedended
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 ValueNo. 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
Redemption Price Price at which open-ended scheme
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Type ofMutual Fund
Schemes
StructureInvestmentObjective
SpecialSchemes
Open EndedFunds
Close EndedFunds
Interval Funds
Growth Funds
Income Funds
Balanced Funds
Money MarketFunds
Industry SpecificSchemes
IndexSchemes
SectoralSchemes
TYPES OF MUTUAL FUNDS
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Types of Mutual Fund Schemes By Structure Open-Endedanytime enter/exit
Close-Ended Schemeslisted on exchange, redemption after period of
scheme is over.
By Investment Objective Equity (Growth)only in StocksLong 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/HybridStocks + 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 CompaniesInvested in
Large cap funds:Funds that invest in
companies whose total market cap is aboveRs40bnMid cap funds:Funds that invest in companieswhose market cap is between Rs20-40bn
Small cap funds:Funds that invest incompanies whose market cap is below Rs20bn
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10 REASONS TO INVEST INMUTUAL FUNDS
Expert on your side: When you invest in a mutual fund, you buy into the experience and skillsof a fund manager and an army of professional analysts
Limited risk: Mutual funds are diversification in action and hence do not rely on the performanceof a single entity.
More for less: For the price of one blue chip stock for instance, you could get yourself a numberof 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 individualsalso have the option of investing in a monthly savings plan.
Convenience: You can invest directly with a fund house, or through your bank or financialadviser, or even over the internet.
Investor protection: A mutual fund in India is registered with SEBI, which also monitors theoperations of the fund to protect your interests.
Quick access to your money: It's good to know that should you need your money at shortnotice, you can usually get it in four working days.
Transparency: As an investor, you get updates on the value of your units, information on specificinvestments 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 @ 14.1625% for individuals and 22.66%
for corporates under debt oriented schemes
No DDT under equity schemes
Long term capital gain in equity schemesexempt from tax
Indexation benefit available for long term non equity schemes
Equity short term capital gain @10%
STCG in Debt fundsRates 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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Growth Dividend
payoutDividendreinvestment
Bonus
NAV 20 20 20 20
Units 100 100 100 100Value (Rs) 2,000 Rs 2,000 Rs 2,000 Rs 2,000
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 incash
- Rs 100 - -
Additionalunits
- 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 unitswhen the share prices are low. Average cost price tends tofall below the average NAV.
Systematic Transfer Plan (STP)
Invest in debt oriented fund and give instructions to transfera fixed sum, at a fixed interval, to an equity scheme of thesame 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 pinchof it being directly deducted, yet the small amount is powerfully workingtowards your financial security
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Systematic Investing, An Example
9.40
6.936.46
7.578.31
9.108.938.018.12
8.759.35
7.60
23
4567
89
10
Jan-04 Feb -04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug -04 Sep -04 Oct -04 Nov-04 Dec-04
106.39units
154.75units
When the price is highest,you buy the least number of units
When the price is lowest,you buy the highest number of units
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Investing at PeakSIP is the way
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Start Early : SIP
A gap of 5 only years can result in a lot of difference in wealth creation !
Rs. 1000 invested per month @15% p.a. till the age of 60 yrs
4.20 3.60 3.00 2.40 1.80 1.20
148.61
70.10
32.84
15.16
6.772.79
-
20
40
60
80
100
120
140
160
25 30 35 40 45 50
Investment Wealth at 60
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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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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 sectorfundsin 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 forat least 3-5 years (managed well and provides consistent returns)
Investing in Equity Funds
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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 inflationequity 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.