Mutual Funds

Presented By: Group 3 Arnab Moitra Manish Banga Mohit Kapoor Shersingh Bagel Stuti Sethi Sumit Dua
Group 3

Human Life Cycle

Phase I Phase II
Childs Marriage Childs Education Housing Birth of Children Marriage 22 yrs 38 yrs 10- 20 yrs

Phase III

Education Age 0- 22 yrs

Earning Years
Age 22- 60 yrs
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Post Retirement Years Age >60 yrs

Individual Investor: Life Stages

Young Independent-22yrs Young Married- 27 yrs

Consumption Savings

Consumption Savings

Middle Age-40 yrs

Retirement-60yrs

Consumption Savings

Consumption Savings

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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

100,000 79,599 62,368 48,102 38,288 30,000 37,689 78,353

Today

5 years

15 years

20 years

Today

5 years

15 years

20 years

At inflation of 5%

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Investment Options
Deposit in Bank: SB, RD, FD, Locker

Investment in Money Market instruments

Loan a Friend/Relative on Interest

Investment in Capital Markets: Direct or Indirect via Mutual Funds

Invest in Bullion - Gold, Silver etc.
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Property Investments

So what are the alternatives?

Fixed Interest Products
8.00% 7.00% 6.00% 5.00% 4.00%

1.06% 0.01% 1.95% 0.36% 2.10% 2.40%

0.71%

Bank Deposits Corporate Deposits RBI Bonds Corporate Bonds

2.25%

Rates of Return?
Returns Net of tax?

3.00% 2.00% 1.00%

4.54%

4.54%

4.54%

4.54%

Wont Inflation eat into the return?

0.00% Bank FD
Inflation

Company FD
Tax @ 30%

RBI Bond

Co Bonds
Net Returns

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Equities as Investment Option

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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 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. Money collected is invested by the fund manager in different types of securities shares, debentures, money market instrumentsdepending upon the schemes stated objectives.

Income earned through investments and capital appreciation realized by the scheme are shared by unit holders in proportion to the number of units owned

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How Mutual Fund works?

Brief History of mutual funds

First Phase 1964-87 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. 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. 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 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.

Third Phase-1993-2003(Entry of Private Sector Funds)

Fourth Phase since February 2003

Mutual funds growth over the years

MUTUAL FUND DATA, 2012

Name HDFC Mutual Fund Reliance Mutual Fund ICICI Prudential Mutual Fund 8139421.1 Birla Sun Life Mutual Fund 7688977.5 UTI Mutual Fund SBI Mutual Fund Franklin Templeton Mutual Fund 4086857.1 Kotak Mahindra Mutual Fund 3177282.8 DSP BlackRock Mutual Fund 3083760.2 IDFC Mutual Fund 3000186.2 7063814.4 Assets under management 10139253.8 9063582.4 Large Cap Birla SL Frontline Equity -A (G) Birla Sun Life Top 100 (G) Franklin India Bluechip (G) 3 month(%) 1 year(%) 5.7 4.3 5.6 18.2 15.2 9.6 10.9 10.3 15.5 13 17.8 31.5 27.4 13.8 20.4 13.8 14.4 10.8

ICICI Pru Focused Bluechip Eqty (G) 4.1 UTI Opportunities Fund (G) 1 0 2.6 2.5 3.5 6 3.6 1.8 3.1 2.8 -0.2

Birla Sun Life MNC Fund (G)

Small & Mid Cap HDFC MidCap Opportunities (G) IDFC Premier Equity - A (G) SBI Emerging Busi (G) Birla SL India GenNext (G) Diversified Equity Reliance Equity Oppor - RP (G) UTI Equity Fund (G) UTI India Lifestyle Fund(G) UTI MNC Fund (G) Mirae (I) Opportunities-RP (G)

5331126.2

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

Some terminologies.
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.

More terminologies
NAV
Market value of assets of scheme minus its liabilities. = Net Asset Value No. of Units Outstanding on Valuation date

Per unit NAV

Entry Load/Front-End Load (0-2.25%)

The commission charged at the time of buying the fund. To cover costs for selling, processing 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. Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher than NAV) Price at which close-ended scheme repurchases its units Price at which open-ended scheme

Exit Load/Back- End Load (0.25-2.25%)

Sale Price/ Offer Price

Re-Purchase Price/ Bid Price

Redemption Price

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

1. Expert on your side: You buy into the experience and skills of a fund manager and an army of professional analysts. 2. Limited risk: Mutual funds are diversified investments and hence do not rely on the performance of a single entity. 3. 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. 4. 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. 5. Convenience: You can invest directly with a fund house, or through your bank or financial adviser, or even over the internet. 6. Investor protection: A mutual fund in India is registered with SEBI, which also monitors the operations of the fund to protect your interests. 7. 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. 8. Transparency: Updates on the NAV, information on specific investments made by the mutual fund and the fund manager's strategy and outlook. 9. Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry out cost-effective brokerage transactions. 10.Tax benefits: Over the years, tax policies on mutual funds have been favorable to investors and continue to be so.

TAXATION
Type of Mutual Fund Short term Cap gain Treatment Long term Cap gain Treatment Dividend Distribution Tax (DDT)

Equity Mutual Funds

15% taxation

NIL

NIL

Debt Mutual Funds(non Taxed as per individual Liquid schemes) tax slab of the investor

Money Market and Liquid Schemes Gold ETFs

Taxed as per individual tax slab of the investor

Same as Debt Mutual Funds

10% without 12.5% plus 5% indexation OR 20% surcharge plus 3% with indexation, plus cess, totally 3% cess 13.519% 10% without 25% plus 5% indexation OR 20% surcharge plus 3% with indexation, plus cess, totally 3% cess 27.038% Same as Debt Mutual Same as Debt Funds Mutual Funds

Short term: Fund held for less than 365 days Long Term: Fund held for more than 365 days
Source: www.moneycontrol.com

Note: The amount invested in tax-saving funds (ELSS) is eligible for deduction under Section 80C, However the aggregate amount deductible under the said section cannot exceed Rs 100,000 (in a financial year).

What is your Risk Appetite

Sectoral Funds
High Risk High Return

Equity Funds
Index Funds Balanced Funds Debt Funds Liquid Funds

Low Risk Low Return

Types of Risk involved

Historical analysis - Return is remembered, Risk forgotten Market Risk - overall stock or bond markets fall.

Non-Market Risk - Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings.
Credit Rate Risk - Bonds are debt obligations. Corporate defaulting on their interest and principal payment obligations leads to fall in credit ratings. MF Risk - Volatility (fluctuation of NAV) Standard Deviation: how much the actual performance of a fund over a period of time deviates from the average performance. Low SD = good Websites give star rating ( basis = risk-adjusted return) Sharpe Ratio - returns that a fund delivered were commensurate with the kind of volatility it exhibited; looks at both, returns and risk, and delivers a single measure that is proportional to the risk adjusted returns. High SR =Good

Mutual Fund: Dividend options

Growth option: No change. Over time, the NAV will grow. Whenever you redeem the units, you get your entire earnings by way of capital appreciation. Dividend payout: The unit holder will get Rs 100 as dividend while the NAV falls to Rs 19. Dividend re-investment: The dividend of Rs 100 is not paid in cash but is used to purchase 5.2631 more units. Bonus option: You get 10 more units, because of which the NAV falls to Rs 18.1818. Before declaration of dividend / bonus Growth Dividend payout Dividend reinvestment Bonus

NAV
Units Value (Rs)

20
100 2,000

20
100 Rs 2,000

20
100 Rs 2,000

20
100 Rs 2,000

After declaration of dividend / bonus

NAV
Units Value (Rs)

20
100 2000

19
100 1900 Rs 100

19
105.2631 2000 -

18.1818
110 2000 -

Dividend received -

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 Transfer Plan is of two types fixed STP - A fixed STP is where investors take out a fixed sum from one investment to another. Capital Appreciation STP - A capital appreciation STP is where investors take the profit part out of one investment and invest in the other. Systematic Withdrawal Plan (SWP) Fixed payout amount to the holders at predetermined intervals, generally monthly, quarterly, semiannually or annually. Three main reasons for using SWPs are To meet living requirements (usually when retired) For tax planning purposes To comply with mandatory retirement plan withdrawal rules after reaching the age of 70.

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 Advantages of Systematic Investment Planning Encourages Regular Investments (just like recurring deposit schemes) A Convenient way to invest regularly Lower initial investment without cutting into regular expense Long term perspective Rupee Cost Averaging Benefit to counter volatility it brings down the average cost of your Investments No timing the market Meet investment objective with investment needs Helps to match the risk / return profile Automated - Completely automated process. No hassles of writing cheque every month

Magic of SIP
Sensex @ 20000 Jan2008
You start at 20000 and end at 20000 again after 5 years. Actual gain in index Nil

Sensex

Sensex
But through monthly SIP of Rs. 1,000 you get a return of around 11% pa

20000
Dec10

20000 Jan13

Sensex 15000

Sensex 15000

Sensex 9000 Mar09

Buy more units when Sensex is low thereby bringing down the average NAV of your investment

Sensex 15000 Nov11

SIP - How Rupee Cost Averaging helps

Month Amount Rising Market Falling Market Volatile Market Units NAV Units Units NAV (Rs) Allotted (Rs) Allotted NAV (Rs) Allotted 10 1000.00 10 1000.00 10 1000.00 10.5 952.38 9.75 1025.64 10.5 952.38 12 833.33 9 1111.11 9 1111.11 14 714.29 7 1428.57 11 909.09 17 588.24 6.5 1538.46 13 769.23 18 555.56 6 1666.67 11.5 869.57 81.50 4643.79 48.25 7770.45 65.00 5611.38 13.58 8.04 10.83

1 2 3 4 5 6 Total

10000 10000 10000 10000 10000 10000 60000

Avg. Purchase NAV (Total of NAVs/No. of investments Avg. cost per unit (Total Investment /No of units held) Put aside an amount regularly Discipline is the key

12.92

7.72

10.69

Rupee cost averaging Control volatility

* - This example uses assumed figures and is for illustrative purposes only.

 Add Sumits slides here

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 Add SherSinghs slides here

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