Mutual Fund

Investor Perspective
Basics of Investments:
Risk Aversion Risk Management

Bank Deposits, PPF, NSC, Insurance, Kisan Vikas Patra etc.

Mutual Funds

Low Risk/Low Return

Managed Risk/High Return

Myths about Mutual Funds
1. Mutual Funds invest only in shares. 2. Mutual Funds are prone to very high risks/actively traded. 3. Mutual Funds are very new in the financial market. 4. Mutual Funds are not reliable and people rarely invest in them. 5. The good thing about Mutual Funds is that you don¶t have to pay attention to them.

Facts about Mutual Funds 1. 2. Mutual Funds are the best solution for people who want to manage risks and get good returns. 4.S. Mutual Funds market is very evolved in U. The biggest advantage of Mutual Funds is their ability to diversify the risk. 3. Mutual funds also invest in debt securities which are relatively much safer. Equity Instruments like shares form only a part of the securities held by mutual funds. . Mutual Funds are their in India since 1964.A and is there for the last 60 years.

There are various funds to suit investor needs. both as a long term investment vehicle or as a very short term cash management vehicle.Facts about Mutual Funds 5. The truth is as an investor you should always pay attention to your mutual funds and continuously monitor them. US-64 is very much a part of the market and is not immune to its vagaries. . The crisis has risen due to mismanagement of the fund. 6.

An equity fund would buy equity assets ± ordinary shares. A balanced fund will have a mix of equity assets and debt instruments. A bond fund would buy debt instruments such as debenture bonds. Mutual Fund shareholder or a unit holder is a part owner of the fund¶s asset. . or government securities/money market securities. warrants etc.Mutual Funds A mutual fund is a common pool of money into which investors place their contributions that are to be invested in different types of securities in accordance with the stated objective. preference shares.

Mutual Funds Operations Flow Chart (Reference: .

Public Sector mutual funds. Some of the mutual funds launched during this period are SBI Mutual Fund. Phase II ± 1987 ± 93: 1987 marked the entry of non-UTI. UTI started offering some special purpose schemes like ULIP and Children¶s Gift Growth Fund. Later in ¶70¶s and ¶80¶s. These were launched to suit the needs of different class of investors. UTI was set up by Parliament under UTI act and given a monopoly. Master share.History of Mutual Funds Phase I ± 1964 ± 87: In 1963. Canbank Mutual Fund. Indian Bank Mutual Fund. the first equity fund was launched in 1986. Also marked a spurt in launch of assured funds like . GIC Mutual Fund and PNB Mutual Fund. LIC Mutual Fund. The first scheme launched by UTI was Unit Scheme-64.

It gave greater choice to the Indian Investors. Phase III ± 1993 ± 96: Permission was granted for entry of private sector funds. This phase also marked the launch of an open-end funds. investment management techniques and investor servicing technology that makes the Indian mutual fund industry vibrant and growing. These private funds have brought in with them the latest product innovations. . Equity funds with assured returns were launched which later ended in disaster.History of Mutual Funds Cantriple. Phase IV ± 1996: Investor friendly regulatory measures have been taken both by SEBI to protect the investor. BOI Double Square Plus. and by the government to enhance investor¶s returns through tax benefits. Magnum Triple.

2000/-. . ‡ Wide Choice to suit risk-return profile: Investors can chose the fund based on their risk tolerance and expected returns. ‡ Reduction/Diversification of Risks: The potential losses are also shared with other investors. ‡ Reduction of transaction costs: The investor has the benefit of economies of scale. ‡ Professional management: The investment management skills.Advantages of Mutual Funds ‡ Portfolio diversification: It enables him to hold a diversified investment portfolio even with a small amount of investment like Rs. ensure a much better return as compared to what an investor can manage on his own. along with the needed research into available investment options. the funds pay lesser costs because of larger volumes and it is passed on to the investors.

get updated market information and so on. ‡Transparency: Fund gives regular information to its investors on the value of the investments in addition to disclosure of portfolio held by their scheme.Advantages of Mutual Funds ‡ Liquidity: Investors may be unable to sell shares directly. Investors can sell the units in the market if it is closedended fund. When they invest in mutual funds. they can cash their investment any time by selling the units to the fund if it is open-ended and get the intrinsic value. easily and quickly. the proportion invested in each class of assets and the fund manager's investment strategy and outlook . ‡ Convenience and Flexibility: Investors can easily transfer their holdings from one scheme to other. Funds also offer additional benefits like regular investment and regular withdrawal options.

he may again need advice on how to select a fund to achieve his objectives. ‡ Managing a portfolio of funds: Availability of a large number of funds can actually mean too much choice for the investor. So.Disadvantages of Mutual Funds ‡ No control over costs: The investor pays investment management fees as long as he remains with the fund. ‡ Delay in redemption: It takes 3-6 days for redemption of the units and the money to flow back into the investor¶s account. . ‡ No tailor-made portfolios: The very high net-worth individuals or large corporate investors may find this to be a constraint as they will not be able to build their own portfolio of shares. even while the value of his investments are declining. He also pays for funds distribution charges which he would not incur in direct investments. bonds and other securities.

Broad Types of Mutual Funds .

For example. ‡ Fund size and its total investment go up if more new subscriptions come in than redemptions and vice-versa. Some funds offer repurchase after a fixed period. ‡ Units maybe traded at a discount or premium to NAV based on investor¶s perception about the funds future performance and other market factors. . ‡ Investors are not allowed to buy or redeem the units directly from the funds. ‡ Listed on stock exchange and investors can buy or sell units through the exchange. Closed-end Fund ‡ One time sale of fixed number of units. ‡ Unit capital of the fund is not fixed but variable. UTI MIP offers a repurchase after 3 years.Open-end Vs. Closed-end Funds Open-end Fund ‡ Available for sale and repurchase at all times based on the net asset value (NAV) per unit.

the investors get units for the complete amount invested. No-load Funds Marketing a new mutual fund scheme involves initial expenses. ‡ Deferred load is charged to the investor over a period of time. The longer he stays with the fund. ‡ Contingent deferred sales charge: Different amount of loads are charged to the investor depending upon the time period the investor has stayed with the fund.Load Vs. Very often. lesser the amount of exit fund he is charged. ‡ Back-end or exit load is charged to the investor at the time of his exit from the scheme. These expenses are charged to the investors through loads and are recovered from the investors in different ways: ‡ Front-end or entry load is charged to the investor at the time of his entry into the scheme. These are hence are no-load funds. . In no-load funds. AMC¶s do not charge any initial expenses to the investor in the IPO.

preservation of capital and moderate income. ‡ It is most sensitive to market interest rates. The price falls when the interest rates goes up and vice-versa.e. ‡ Invest in Treasury bills issued by government. typically over one year. . Certificates of deposit issued by banks. less than one year maturity. ‡ Virtually zero risk of default as it is backed by the Government.Mutual Fund Types Money Market Funds/Cash Funds ‡ Invest in securities of short term nature I. Gilt Funds ‡ Invest in Gilts which are government securities with medium to long term maturities. ‡ Aim to provide easy liquidity. ‡ Gilt funds invest in government paper called dated securities. Commercial Paper issued companies and inter-bank call money.

Debt Funds Debt Funds/Income Funds ‡ Invest in debt instruments issued not only by government. ‡ Have a higher risk of default by borrowers as compared to Gilt funds. ‡ Debt funds can be categorized further based on their risk profiles. ‡ Target low risk and stable income for the investor. banks and financial institutions and other entities such as infrastructure companies/utilities. ‡ Have higher price fluctuation as compared to money market funds due to interest rate fluctuation. . but also by private companies. ‡ Carry both credit risk and interest rate risks.

.Equity Funds Equity Funds: ‡ Invest a major portion of their corpus in equity shares issued by companies. ‡ Equity funds must have a long-term objective. acquired directly in initial public offering or through secondary market and keep a part in cash to take care of redemptions. ‡ Risk is higher than debt funds but offer very high growth potential for the capital. ‡ Equity funds can be further categorized based on their investment strategy.

moderate capital appreciation and preservation of capital. ‡ Objective is to gain income. ‡ Ideal for investors with a conservative and long-term orientation. ‡ Almost equal proportion of debt/money market securities and equities. Normally funds maintain a Equity-Debt ratio of 55:45 or 60:40. preference and equity shares. convertible securities. .Hybrid Funds Balanced Funds: ‡ Has a portfolio comprising of debt instruments.

Options Available to the Investor .

Mutual Funds Vs. Other Investments Product Bank Deposit Equity Instruments Debentures Fixed Deposits by Companies Bonds Return Low High Moderate Moderate Safety High Low Moderate Low Liquidity High High or Low Low Low Tax Benefit No No No No Convenience High Moderate Low Moderate Moderate Moderate Moderate Yes Moderate .

Mutual Funds Vs. Other Investments Product RBI Relief Bonds PPF National Saving Certificate National Saving Scheme Monthly Income Scheme Return Moderate Moderate Moderate Safety High High High Liquidity Low Low Low Tax Benefit Yes Yes Yes Convenience Moderate Moderate Moderate Moderate High Low Yes Moderate Moderate High Low Yes Moderate .

Other Investments Product Life Insurance Mutual Funds (Open-end) Mutual Funds (Closedend) Return Moderate Moderate Safety High Moderate Liquidity Low High Tax Benefit Yes No Convenience Moderate High Moderate Moderate High Yes High .Mutual Funds Vs.

‡ A bank deposit is guaranteed by the bank for repayment of principal and interest whereas a debt fund has no contractual guarantee for repayment of principal or interest. even though there is no contractual guarantee as in a deposit. the investor has to assess the risk in terms of credit ratings of the bank which gives an indication of the financial soundness of the bank. Debt Funds ‡ Bank Deposits cater to investor class that look for safety and accepts a relatively low return. . a debt fund is not rated by any agency. ‡ In bank deposits. They cannot be compared with equity funds but with debt funds. The investor has to assess the risk on the portfolio held by the fund. A conservative debt fund can give higher returns than a bank deposit. ‡ Bank deposits are not totally free from risk and generally give lower returns. However.Bank Deposits Vs.

instruments like NSC and bank deposits give lower returns and higher safety to the investor.Mutual Funds Prove Best! While instruments like shares give high returns at the cost of high risk. . Mutual Funds aim to strike a balance between risk and return and give the best of both to the investor.

Fund Structure and its Constituents .

Fund Structure Fund Sponsor Trustees Asset Management Company Depository Agent Custodian .

‡ Form a Trust and appoint a Board of Trustees. in accordance with SEBI regulations. .Fund Sponsor The Fund Sponsor ‡ Any person or corporate body that establishes the Fund and registers it with SEBI. SEBI regulations also define that a sponsor must contribute at least 40% to the net worth of the asset management company. ‡ Appoints Custodian and Asset Management Company either directly or through Trust.

Trustees Trustees ‡ Created through a document called the Trust Deed that is executed by the Fund Sponsor and registered with SEBI.a corporate body. ‡ 2/3 of the trustees shall be independent persons and shall not be associated with the sponsors. ‡ The Trust-the mutual fund may be managed by a Board of Trustees. ‡ Protector of unit holders interests. .a body of individuals or a Trust Company.

‡ Ensure that. ‡ Have the right to dismiss the AMC.Trustees Rights of Trustees: ‡ Approve each of the schemes floated by the AMC. ‡ The right to request any necessary information from the AMC. . any shortfall in net worth of the AMC is made up. ‡ May take corrective action if they believe that the conduct of the fund's business is not in accordance with SEBI Regulations.

‡ Review the investor complaints received and the redressal of the same by the AMC. ‡ Ensure that the fund's transactions are in accordance with the Trust Deed.Trustees Obligations of the Trustees: ‡ Enter into an investment management agreement with the AMC. a report on the fund's activities ‡ Ensure that no change in the fundamental attributes of any scheme or the trust or any other change which would affect the interest of unit holders is happens without informing the unit holders. . ‡ Furnish to SEBI on a half-yearly basis.

‡ Has to be approved and registered with SEBI. ‡ Acts in interest of the unit-holders and reports to the trustees. ‡ At least 50% of directors on the board are independent of the sponsor or the trustees. ‡ Will float and manage the different investment schemes in the name of Trust and in accordance with SEBI regulations. .Asset Management Company ‡ Acts as an invest manager of the Trust under the Board Supervision and direction of the Trustees.

 Make the required disclosures to the investors in areas such as calculation of NAV and repurchase price.  Will not purchase or sell securities through any broker. which is average of 5% or more of the aggregate purchases and sale of securities made by the mutual fund in all its schemes.  Must maintain a net worth of at least Rs.Asset Management Company Obligation of Asset Management Company:  Float investment schemes only after receiving prior approval from the Trustees and SEBI. .  Send quarterly reports to Trustees. 10 crores at all times.  AMC cannot act as a trustee of any other mutual fund.  Do not undertake any other activity conflicting with managing the fund.

.Structure of Mutual Funds Custodian ‡ Has the responsibility of physical handling and safe keeping of the securities. ‡ Should be independent of the sponsors and registered with SEBI. Depositories ‡ Indian capital markets are moving away from physical certificates for securities to µdematerialized¶ form with a Depository. ‡ Will hold the dematerialized security holdings of the Mutual Fund.

Distribution Channels .

Is a broker between the fund and the investor and acts on behalf of the principal. Agents .Distribution Channels Mutual Funds are primary vehicles for large collective investments.It has several employees or sub-broker under it. Distribution Companies . . working on the principle of pooling funds.He is not exclusive to the fund and also sells other financial services. This in a way helps him to act as a financial advisor.Is a company which sells mutual funds on behalf of the fund. . Agents and distributors are a vital link between the mutual funds and investors. . A substantial portion of the investments happen at the retail level.It manages distribution for several funds and receives commission for its services. .

They work on commission basis. Direct Marketing .This channel is normally used to mobilise funds from high net worth individuals and institutional investors.Distribution Channels Banks and NBFCs .Several banks. particularly private and foreign banks are involved in a fund distribution by providing similar services like that of distribution companies.Mutual funds sell their own products through their sales officers and employees of the AMC. . . .

.Excess distribution charges have to be borne by the AMC.As per SEBI regulations. .Sales Practices Agent Commissions . 1996 all initial expenses including brokerage charges paid to agents cannot exceed 6% of resources raised under the scheme. .No rules prescribed for governing the maximum or minimum commissions payable by a fund to its agents. .A no-load fund is authorised to charge the schemes with the commissions paid to agents as part of the regular management and marketing expenses allowed by SEBI.

Accounting and Taxation .

In mutual funds it is not treated as a liability.e NAV = (Market value of investments + Receivables + Other Accrued Income + Other assets ± Accrued Expenses ± Other Payables ± Other liabilities) / ( No. of Units Outstanding as at the NAV date) . Investments made on behalf of the investors are reflected on the assets side of the balance sheet. There are liabilities of short-term nature.Accounting Calculating Net Asset Value Unit Capital is the investor¶s subscriptions. Fund¶s Net Asset = Asset ± Liabilities Net Asset Value = Net Assets of the scheme / No. of Outstanding Units i.

 Number of units sold or purchased.  Other assets and liabilities. .  Dividend and income earned on the assets.  Capital Appreciation in the underlying value of the stocks held in the portfolio.Accounting The factors affecting the NAV are as following:  Capital Gains or Losses on the sale or purchase of the Investment securities.

‡ Some closed end funds (Monthly Income Schemes) that are not listed on stock exchange may publish it monthlyquarterly. ‡ NAV of all schemes must be calculated and published at least weekly.Accounting SEBI regulations for NAV ‡ The day on which NAV is calculated by a fund is called valuation date. . ‡ This is applicable to both open-end and closed-end fund.

The difference between the repurchase price and the sale price of the units shall not exceed 7% of the sale price. .Accounting SEBI Guidelines for Pricing of Units:    The mutual fund shall ensure that the re-purchase price is not lower than 93% of the NAV. Repurchase price of closed end scheme shall not be lower than 95% of the NAV. The sale price is not higher than 107% of the NAV.

As per SEBI guidelines. unrealized appreciation cannot be distributed by a fund. b) Unrealized gains or losses. .Accounting Since investments held by a mutual fund in its portfolio are to be marked to the market. the NAV includes two components: a) Realized gains or losses. whereas the realized gain can be distributed.

Accounting Investment Management Fees and Advisory Fees:    1. 100 crores. A no load scheme can charge an additional management fee up to 1% of weekly average net assets outstanding in the accounting year.100 crores of weekly average net assets outstanding in the accounting year.25% of the first Rs. . 1% weekly average net assets in excess of Rs.

100 crores of average weekly net assets  2. the above percentages are required to be lower by 0.On the first Rs.5% .Accounting Total expenses charged by the AMC to a scheme. excluding issue or redemption expenses but including investment management and advisory fees have following limits:  2.On the next Rs.On the balance of average weekly net assets  For bond funds.25% . 300 crores of average weekly net assets  2% . 300 crores of average weekly net assets  75% .On the next Rs.25% .

a tax of 11%. The Impact on the Fund and the Investor  Due to the tax payment by the fund.  Income distributed to unit holders by a closed-end or debt fund has to pay a distribution tax of 10% plus surcharge of 1% I. the NAV and the value of the investor¶s investment will come down. .  The tax bears no relationship to the investor¶s tax bracket.Taxation Taxation in the Hands of the Fund  Income earned by any mutual fund registered with SEBI or set up by a public sector bank/Financial Institution or authorised by RBI is exempt from tax.  The fund cannot avoid tax even if the investor chooses to reinvest the distribution back into the fund.e. This tax is also applicable to distributions made by open-end funds which have less than 50% allocation to equity.  This tax makes the income schemes less attractive than growth schemes.

000. investments up to Rs.000 in an equity linked saving scheme (ELSS) qualifies for tax rebate of 20%.  In case of µInfrastructure Bonds. 10.  Investment up to Rs. . 60.Taxation Taxation in the Hands of the Investor Tax Rebate available on Subscriptions to Mutual Funds (In accordance with Section 88 of Income Tax Act)  Investments up to Rs.000 is eligible for 20% tax rebate. 70.  Total investment eligible for tax rebate cannot exceed Rs.000 in units of any specified mutual fund qualifies for tax rebate to the extent of 20% of such investment. 60.

. .Taxation Taxation in the Hands of the Investor Dividend Tax : The tax paid by the investor on receiving dividends from a mutual fund.  There is no dividend tax deduction from NAV in all funds which are openend and with over 50% allocation of investment to equities.All closed end funds including equity.2% is deducted from the NAV by the fund in the following cases: .All open end funds with less than 50% allocation in equity.  Tax of 10. There is no dividend tax to be paid at the investor¶s end.

Taxation in the Hands of the Investor Capital Gains on Sale of Units: Capital Gains tax is charged when something is sold at profit. If the investor sells his units and earns ³Capital Gains´, the investor is subject to the Capital Gains Tax. If the units are held for less than 12 months, they will be treated as short term capital gain. Otherwise,t hey are called long term capital gains. For short term, capital gains = Sale consideration ± (Cost of Acquisition + Cost of Improvements + Cost of Transfer) The tax charged depends on the income bracket of the investor. For long term capital gains, the investor gets the benefit of µIndexation¶ by which his purchase price is marked up by an inflation index. Cost of acquisition or improvement = actual cost of acquisition or improvement * cost of inflation index for year of transfer/cost of inflation index for year of acquisition or improvement. The tax charged is either 10% or (20% - rate of inflation).

In-dept classification of Mutual Funds

Mutual Fund Types
‡ Broad fund types by Nature of Investments: Mutual funds may invest in equities, bonds or fixed income securities, or short-term money market securities. So, we have Equity, Bond and Money Market Funds. ‡ Broad fund types by Investment Objective: Investors and hence mutual funds pursue different objectives while investing. - Growth funds invest for medium to long term capital appreciation. - Income funds invest to generate regular income and preservation of capital with little emphasis on capital appreciation. -Value funds invest in equities that are considered under-valued today, whose value will be unlocked in future. ‡ Broad fund types by Risk Profile: Fund¶s portfolio and its investment objective imply different risk levels. Equity funds have a greater risk of capital loss than a debt fund. Money Market funds are exposed to lesser risk than Bond funds.

issued by entities across all industries and sectors.Debt Funds Diversified Debt Funds: ‡ Invests in all available types of debt securities. Specialized and Offshore debt funds. ‡ May earn higher returns though at the cost of higher risk. ‡ Have a higher risk as compared to diversified debt funds. Focused Debt Funds: ‡ Have a narrow focus with less diversification in its investments. ‡ Derives benefit of risk reduction through risk diversification. . ‡ Include Sector. High Yield Debt Funds: ‡ Invest in debt instruments that are not backed by tangible assets and considered ³below investment grade´.

Debt Funds
Assured Return Funds- An Indian Variant: ‡ Assured Return or Guaranteed Monthly Income Plans are essentially Debt/Income funds. ‡ Returns are indicated in advance for all the future years of the closed-end funds. ‡ Any shortfall is borne by the sponsors or managers. ‡ Market regulator, SEBI has been discouraging fund managers from offering assured return schemes. If offered, explicit guarantee is required from a guarantor whose name is specified in advance in the offer document of the scheme.

Equity Funds
Aggressive Growth Funds ‡ Objective is to earn very high returns for the investor. ‡ Target is maximum capital appreciation. ‡ Invest in less researched or speculative shares and may adopt speculative investment strategies. ‡ High volatility and risk as compared to other funds. Growth Funds: ‡ Objective is capital appreciation over a long time, 7 - 10 years span. ‡ Invest in companies whose earnings are expected to rise at an above average rate. ‡ These companies will be considered to have growth potential, but not entirely unproven and speculative. ‡ Less volatile than aggressive growth funds.

Equity Funds
Specialty Funds ‡ Thematic funds that have a theme for investments. ‡ Narrow portfolio orientation and invest only in companies that meet pre-defined criteria. ‡ Diversification is limited to one type of investment. ‡ More volatile than diversified funds. ‡ Specialty funds are further sub-categorized based on their investments. Diversified Equity Funds: ‡ Invest only in equities except for a very small portion in liquid money market securities. ‡ It is not focused on any one or few sectors or shares. ‡ Reduce the sector or stock specific risks through diversification. ‡ Lower risks than growth funds.

it may be aggressive-growth or growth type or even value fund. Small-Cap Equity Funds: ‡ Invest in shares of companies with relatively low market capitalization that that of big blue chip companies. . ‡ Higher level of company or sector specific risk than diversified funds. Offshore Funds: ‡ Invest in equities in one or more foreign countries. ‡ More volatile than other funds as smaller companies are not very liquid. Pharmaceuticals or FMCG. ‡ In terms of investment style.Equity (Specialty) Funds Sector Funds: ‡ Portfolios consists of investments in only in one industry or sector of the market such as IT. ‡ Sensitive to foreign exchange rate risk and economic conditions of the countries they invest in.

Equity Income Funds: ‡ Objective is to give high level of current income along with some steady capital appreciation. ‡ Invest in shares of companies with high dividend yields and do not fluctuate as much as other shares. ‡ Generally.Equity Funds Equity Linked Savings Schemes . such funds would be Diversified Equity Funds. ‡ There are no specific restrictions on the investment objectives for the fund managers. Ex . . ‡ Less volatile and risky than other equity Indian Variant: ‡ Investment in these schemes entitles the investor to claim an income tax rebate.Power/Utility sector. ‡ Usually has a lock-in period of 3 years before the end of which funds cannot be withdrawn.

. ‡ Sensitive to overall market risk. ‡ Invests in shares that constitute the index and in the same proportion.Equity Funds Equity Index Funds: ‡ The objective is to match the performance of the stock market by tracking an index that represents the overall market. ‡ Have lower risk as compared to Growth Funds and take a long term approach. ‡ Example: Templeton India Growth fund that has shares of Cement/Aluminum and other cyclical industries. ‡ Example: UTI Nifty Fund Value Funds: ‡ Invest in fundamentally sound companies whose shares are currently under-priced in the market. ‡ Often invested in cyclical industries.

Asset Allocation Funds: ‡ Follow variable asset allocation policy. ‡ Asset allocation funds that follow more flexible allocation policies are like aggressive growth or speculative funds. ‡ Portfolio is a mix between companies with good dividend paying records and those with potential for capital appreciation.Hybrid Funds Growth & Income Funds: ‡ Strike a balance between capital appreciation and income for the investor. . money market or even non-financial assets) ‡ Asset allocation funds that follow more stable allocation policies are like balanced funds. ‡ Less risky than growth funds but more risky than income funds. debt. ‡ Move in an out of an asset class (equity.


Investment Plans Automatic Re-investment Plans Allows the investor to re-invest in additional units the amount of dividends or other distributions made by the fund instead of receiving it in cash. .  Mode of investment could be through direct debit to investor¶s salary or bank account.  Investment takes place at ex-dividend NAV.  Such funds help in µrupee cost averaging¶. a modified version of AIP allows the investor flexibility in terms of amount and frequency of investment. Enables him to save in a disciplined and phased manner. Automatic Investment Plans  Allows the investor to invest a fixed sum periodically.  Voluntary Accumulation Plan.  The investors reap the benefit of compounding his investments.

Systematic Transfer Plans  Allow the investor to transfer on a periodic basis from one scheme to another within the same fund family.  The amount withdrawn is treated as redemption of units at the applicable NAV as specified in the Offer Document.  A transfer will be treated as redemption of units from one scheme and investment of units in another scheme. .Investment Plans Systematic Withdrawal Plans  Allow systematic withdrawals from his fund investment on a periodic basis.  SWPs are different from MIPs.  Such redemption and investment will be at applicable NAV as mentioned in the Offer Document. SWPs allows investors to get back the principal amount invested while MIP¶s will only pay the income part on regular basis.  The investor must withdraw a specific minimum amount and also maintain a minimum balance in his fund account.

Measuring and Evaluating Mutual Fund Performance .

.He needs the basic knowledge of fund evaluation to judge the performance of the fund. The Advisor¶s Perspective -The potential investors would expect the advisor to give them a proper advise on which funds have good performance.In order to compare different funds. .Why Measure Fund Performance The Investor Perspective -To make intelligent decisions on whether he should continue with the investment or not. . the advisor must have the correct knowledge and appropriate measures of evaluating the fund performance.

Easily understood and applied to any type of fund.most commonly used by investors to evaluate fund performance and most commonly published by fund managers. .Different Performance Measures Change in NAV . . NAV Change in absolute terms: (NAV at the end of period) ± (NAV at the beginning of period) NAV Change in percentage terms: (Absolute change in NAV/NAV at the beginning of period) * 100 Annualised NAV Change: {[(Absolute Change in NAV/NAV at the beginning)/months covered]*12}*100 . current market conditions and alternative investment returns.Should be interpreted in light of the investment objective of the fund.Long term growth fund or infrastructure fund will give low returns in the initial years. .

. Total Return is: [(Distributions + Change in NAV)/NAV at the beginning of the period]* 100 .It takes into account the dividends paid in the interim period and is suitable for all types of funds.Its limitation is that it ignores the fact that distributed dividends also get reinvested if received during the year.Different Performance Measures No. Total Return Method . . The correct measure here is Total Return Method. percentage NAV change cannot give a correct picture as it does not take into account the interim dividends paid.It must be interpreted in the light of market conditions and investment objective of the fund.

Appropriate for measuring performance of accumulation plans.Is a measure of cumulative wealth accumulation and is the same as ROI.Different Performance Measures Return on Investment or Total Return with Dividends Reinvested at NAV -The shortcoming of Total return is overcome by computing the Total Return with reinvestment of dividends in the fund at the NAV on the date of distribution. . monthly/quarterly income income schemes debt funds that distribute interim dividends. . ROI or Total Return with Reinvestment is: {(Units Held + div/ex-dNAV) * endNAV ± begin NAV} /begin NAV * 100 .

.When Cumulative Returns are received at the end of a long period.Children¶s Gift Fund and Rajalakshmi of UTI are based on cumulative returns. . A = Maturity value of the investment. Formula for conversion: A = P*(1+R/100)N where P = principal invested. Annualised Average Compound Rate of Return must be calculated from the cumulative figure. . R = annualised compound rate in percentage.Absolute NAV¶s do not give a complete picture. N = Period of investment in years.Different Performance Measures Cumulative Aggregate vs. Consistent performance with respect to Total Return and compounded annual return is of importance. Average Annualised Returns . .Comparisons between two such schemes is possible only after the Cumulative Returns are converted into Average Annualised Returns.

it is imperative to use the performance data over the same periods of time as returns over different periods vary due to different market conditions. Compare the Same Time Periods . . the more reliable would be the conclusions about the funds record.Measuring Fund Performance Following things should also be considered while comparing fund performance: Use long-term performance data ± The longer the period covered by fund performance data.

.Money market funds are an exception due to their short term horizon.Measuring Fund Performance Less than One Year Periods .if the fund performance data relates to a period of less than one year.Adjustments have to be made in case loads are paid. Returns since Inception -SEBI requires returns to be compared since the inception of a scheme using Rs. . 10 as the base amount. it should not be annualised. .

Past and estimated expense figures and ratios are disclosed in the Offer Document. .5% between two funds can make lot of difference. .It is defined as the ratio of total expenses to average net assets of the fund. . . .Expense Ratio The Expense Ratio . average account size and portfolio composition.Fluctuations in the ratio across periods require that an average over three to five years be used to judge a fund¶s performance.Funds with small corpus size will have higher expense ratio. expense ratio becomes important and difference of even 0.Indicator of fund¶s efficiency and cost effectiveness. . Also it should be evaluated in the light of the fund size.If a fund¶s income levels or returns are small say a debt fund with 10% return.

Income Ratio The Income Ratio .Defined as its net investment income divided by its net assets for the period. but only with expense ratio and total return.Cannot be used in isolation. particularly debt funds and not suitable for funds looking for capital appreciation.Useful for measuring income oriented funds. . . .

A 100% turnover implies that the manager replaced his entire portfolio during the period in question.Measures the buying and selling done by a fund. . .Most useful while evaluating equity and balance funds.Portfolio Turnover Rate Portfolio Turnover Rate .Higher T/o does not necessarily mean greater efficiency and must be seen in relation to the total return to the investor. lets say one year. . .A 50% turnover implies that the manager replaced his entire portfolio in 2 years. but not appropriate for equity funds with a value-based long term investment philosophy. .

.Fund Size & Cash Holdings Fund Size .Allows cushion against decline in market prices of shares or bonds. . Cash Holdings -A large cash holding allows the fund to strengthen its position in preferred securities without liquidating others.Small fund are easier to manoeuvre and can achieve their objectives easily. .Large funds benefit from economies of scale.

.A funds performance can be judged in relation to investor¶s expectations. BSE-30 will be a benchmark for diversified equity fund and BSE IT index for tech funds. . it is important for the investor to define his expectations in relation to certain ³guideposts´.For instance. While an advisor needs to look at the absolute measures of performance.These guideposts or indicators of performance can be thought of as benchmarks against which a fund¶s performance ought to be measured. . he needs to select the right benchmark to evaluate a fund¶s performance.Benchmarking Importance of Benchmarking .However. so that he can compare the measured performance figures against the selected benchmark. .

2. The fund¶s stated Investment Objective. 2. . Thus. 3.Benchmarking Basis for choosing an Appropriate Performance Benchmark The appropriate benchmark has to be selected by reference to: 1. There are three types of benchmarks that can be used to evaluate a fund¶s performance: 1. The Asset Class it invests in. Relative to other mutual funds. Relative to the market as a whole. an equity fund has to be judged by from an appropriate benchmark from the equity market and so on. Relative to other comparable financial products or investments options open to the investor.

in the same proportion as the stocks¶ weight in the index.The tracking error arises from the practical difficulties faced by the fund manager in trying to remain in line with the weight that the stocks enjoy in the index.Benchmarking relative to market Equity Funds ‡ Index Funds.For index funds. . the benchmark is clear and pre-specified by the fund manager in advance. called the Base Index. .´ .a base index: . .An index funds actual return may be better or worse by what is called the ³tracking error. ‡ Tracking Error: . he can expect to get the same return as on the Index Fund invests in all of the stocks included in the index calculation.If an investor were to chose an equity index fund.

Benchmark will be the relative Sectoral Index. Sector Funds: . . . the choice of a correct equity index as a benchmark also depends upon the investment objective of the fund. In other words. For example. .Benchmarking relative to market ‡ Active Equity Funds: .An actively managed fund expects to beat the index. .The appropriate index to be used to evaluate a broad-based equity fund should be decided on the basis of the size and the composition of the fund¶s portfolio. a broader market index like BSE 100 or 200 or NSE 100 may be used to benchmark rather than S&P NIFTY or BSE 30.Using appropriate market index.An investor in Infotech or Pharma Sector funds can expect the same return as the relative sectoral indices. a small cap fund has to be compared with a small cap index. ‡ .If the fund has a large portfolio.

NSE¶s ³mibid/mibor´ rates that reflect interbank call money money market interest rates can also be used as a benchmark.I-SEC¶s I-BEX is most commonly used by some analysts.Using appropriate debt market index. . Money Market Funds: . ‡ . . . only the Government Sector sub-segment of the broad based index has to be used.Benchmarking relative to market ‡ Debt Funds: .Money market funds due to their short term nature are benchmarked against the government funds of appropriate maturities.P.A broad based bond fund or debt fund should be benchmarked with broad based debt index whereas a narrower Government Securities Fund.Morgan¶s T-Bill index is used by analysts.Closed-end funds with clear maturity can be compared with bank deposits.J. . .

 Portfolio Compositions .Benchmarking relative to other MFs While comparing two funds. . it is extremely important to ensure that the comparisons are meaningful and meet the following criteria:  The Investment Objectives and Risk Profiles .For example an equity fund cannot be compared with a debt fund.Of two funds being compared must be same.Funds of equal size should be compared.  Credit Quality and Average Maturity . .  Fund Size . . for example a security with investments in AAA is not same as AA-. .High returns fund investing in high risk-prone securities cannot be compared with a scheme that invests in low risk securities.Of the funds compared must be similar.The credit ratings of the investments have to be comparable.A fund with maturity of 3 yrs is not same as the fund with 6yrs.

Benchmarking relative to other MFs Expense Ratio . ‡ Only annualised compound returns are comparable. Even when two funds of similar characteristics are compared. their returns must be calculated on the following comparable basis: ‡ Compare the returns over the same period only. ‡ Only after-tax returns of two different schemes should be compared. I. data must be available for long enough periods. .e.Expense ratios effect fund¶s performance.

 Only instruments of similar investment characteristics and with returns and calculated over the same periods should be used for meaningful comparisons.Benchmarking relative to other Financial Products  An investor will compare the mutual fund performance with other investment products like bank deposits. . NSC¶s Indira Vikas Patra etc.

Evaluating the AMC While every fund is exposed to market risks.  The reliability and track record of the sponsors. good funds should at least match major market indices.  Team of managers with successful records as against fund that are managed by one individual.  Turns out a more consistent performance rather than a one time high and otherwise volatile performance record.  Do not indulge in excessive trading that generates high transaction costs and in turn reduce the NAV/risk of loss.  Performance record against competing managers running similar funds. . An AMC or the fund managers must be evaluated on the following criteria:  Operate with long-term perspective.

Tracking MF Performance To track fund performance. cash flow. unrealized appreciation/depreciation at year end and changes in net assets. appropriate indices etc. It also includes a listing of the fund¶s portfolio holdings at market value. statement of revenue and expenses. ‡ Financial Press: Daily newspapers like Economic Times provide daily NAV figures for open-end schemes and share prices of closed-end schemes. the first step is to find the relevant information on NAV. . expenses. There are also weekly supplements like Smart Investor of Business Standard and Investor Guide of Economic Times also give enough information for evaluation. The common sources of information are: ‡ Mutual Fund¶s Annual and Periodic Reports include data on the fund¶s financial performance which are indicators for expense ratios and total return.

. ‡ Newsletters: Many MFs.Tracking MF Performance ‡ Fund Tracking agencies like Credence and Value Research are sources for MF performance data and evaluation. banks and non-banking firms catering to retail investors publish their own newsletters. ‡ Prospectus: SEBI regulations requires sponsors to disclose performance data relating to schemes being managed by them.

greater the growth of capital. . . 2.08)  Interest generated in the second year would be 86.An advisor must enable the investor to understand the benefits of compounding.Higher the frequency of compounding. Kapoor invests Rs.Power of Compounding Investing for Long Term ± the power of compounding . resulting in a total of Rs.08)  And so on till the interest keeps growing each year.600 at the end of 10 .000+ 80)*.4 [(1.08] instead of 80  Interest in the third year would be 93[(1000 + 80+ 86.Invest for the long term and let your money grow on a compound basis. this is how the money grows:  Interest generated in the first year would be Rs.4) * . Example: If MR. 1000 @ 10% interest rate for 10 years and the amount is compounded annually.000*. 80 (1.

.The disadvantage of this method is that it does not tell the investor when to buy and sell a fund. c) Value Averaging . . b) Rupee Cost Averaging . .It is advisable to invest regularly in small amounts rather than investing a lump sum at one go.Strategy to Maximize Returns a) Buy and Hold .Investor keeps the target value of investment constant.Long term investments does not necessarily mean buy and hold without adjusting the portfolio.A regular investor is always a winner. . .Continuous tracking needs to be for keeping the right funds. .He accordingly keeps changing the investment amount either by increasing or decreasing the same.Most common strategy adopted by investors and the most common mistake.

10/Rs. 8/Rs. Sudhakar is investing Rs.50 Check whether rupee cost averaging method will prove beneficial to Mrs. . Following are the details: Date January February March Amount Invested 1000 1000 1000 NAV R. Sudhakar. Mrs.Rupee Cost Averaging Scenario 24. 1000 every month for 3 months in ABC mutual fund. 12.

12.50)/3 = Rs. we can say that rupee-cost-averaging is beneficial to Investors. Date January February March Amount Invested 1000 1000 1000 NAV R.50 Units Purchased 100 125 80 Average cost per unit under the plan = 3000/305 = Rs. 8/Rs. 10/Rs. 10. .84 Average NAV = (10 + 8 + 12. 9.17 Average of the three NAV¶s is higher than the figure achieved through rupee-cost averaging. So.Rupee Cost Averaging Solution 24.

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