Mutual 1

Mutual Funds
chopra.rajiv@icai.org
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
60
Retirement
40
Middle Age
27
Young Married
22
Young Independent
Individual Investor: Life Stages
Earnings
Consumption
Savings
All individuals have a finite period to save for their investment goals
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
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
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
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
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 attractive
asset class
Equities produce highest long-term returns
EQUITIES-RISKY & VOLATALIE
BSE SENSEX IN LAST TWO YEARS
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)
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.
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
GROWTH IN ASSETS UNDER
MANAGEMENT
MUTUAL FUND DATA April 30th,
2009
Category Sales Redemption Asset Under Management

Existing
sche
mes
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
Organization of a Mutual Fund
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
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.

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

Redemption Price
Price at which open-ended scheme

Type of
Mutual Fund
Schemes
Structure
Investment
Objective
Special
Schemes

Open Ended
Funds
Close Ended
Funds
Interval Funds
Growth Funds
Income Funds
Balanced Funds
Money Market
Funds
Industry Specific
Schemes
Index
Schemes
Sectoral
Schemes
TYPES OF MUTUAL FUNDS
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
SPECIAL SCHEMES-EXAMPLE
Funds based on Size of the Companies
Invested in
Large cap funds:Funds that invest in
companies whose total market cap is above
Rs40bn
Mid cap funds: Funds that invest in companies
whose market cap is between Rs20-40bn
Small cap funds: Funds that invest in
companies whose market cap is below Rs20bn
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.
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 schemes exempt from tax
Indexation benefit available for long term non equity schemes
Equity short term capital gain @10%
STCG in Debt funds Rates applicable for the investor
Deduction of Rs. 1 lac under section 80C
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)
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
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
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)

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
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

Systematic Investing, An Example
9.40
6.93
6.46
7.57
8.31
9.10
8.93
8.01
8.12
8.75
9.35
7.60
2
3
4
5
6
7
8
9
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
106.39
units
154.75
units
When the price is highest,
you buy the least number of units
When the price is lowest,
you buy the highest number of units
Investing at Peak SIP is the way
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
6.77
2.79
-
20
40
60
80
100
120
140
160
25 30 35 40 45 50
Investment Wealth at 60
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)
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)
Investing in Equity Funds
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
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)
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.

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

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
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
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
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.

Mutual 1

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