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Mutual Funds

Human Life Cycle

Phase I Phase II
Childs Marriage Childs Education Housing Child birth Marriage 22 yrs 38 yrs 10- 20 yrs

Phase III

Education Age- 22 yrs

Earning Years

Post Retirement Years Age- 60 yrs

Individual Investor: Life Stages

Earnings Consumption Savings

22 27 Young Independent Young Married

40 Middle Age

60 Retirement

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

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


5 years

15 years

20 years


5 years

15 years

20 years

At inflation of 5%

Investors need to beat inflation


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
4. 44% 4. 44% 4. 44% 4. 44% 4. 44%

4. 44% 4. 44% 4. 44% 0.0 0% 4. 44% 4. 44%

0.0 0%

4. 44%

Rates of Return? Returns Net of tax? Wont Inflation eat into the return?

4. 44% 4. 44% 4. 44% 4. 44%

4. 44%

4. 44%

4. 44%

4. 44%

B a n k FD
I n f l a t io n

C o m p a n y FD
Tax @ 4 4 %

RBI Bond

Co Bo nds
Ne t R e tu r n s

Returns net of tax/ inflation is poor hedge against inflation

Why Equities
Equities produce highest long-term returns
Equities the most attractive asset class
10.64% 7.47% 7.12% 10.27%




G Secs

Bank FD Equities

Source : CLSA
Cumulative annualised returns (1980 - 2004)



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


MUTUAL FUND DATA April 30th, 2009

Category Sales Redemption Asset Under Management
Existing schemes Total Total as on Apr 30 , 2009 as on Mar 31 , 2009 Inflow/ Outflow


Bank Sponsored Institutions Private Sector & Joint Venture :

118793 55866

118793 55866

87357 48898

93839 26115

81013 23092

12826 3023

Indian Predominantly Foreign

239486 23329

239605 23329

184342 19571

172701 23843

153432 22857

19269 986

Predominantly Indian







Total Private Sector







Grand Total (B+C+D)







Organization of a Mutual Fund

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
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

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 Open Ended Funds Close Ended Funds Interval Funds Investment Objective Special Schemes

Growth Funds Income Funds Balanced Funds Money Market Funds

Industry Specific Schemes Index Schemes Sectoral Schemes

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

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


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.

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

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)

Growth NAV Units Value (Rs) NAV Units Value (Rs) Dividend received in cash Additional units 20 100 2,000 20 100 2000 -

Dividend payout 20 100 Rs 2,000 19 100 1900 Rs 100

Dividend reinvestment 20 100 Rs 2,000 19 105.2631 2000 -

Bonus 20 100 Rs 2,000 18.1818 110 2000 -

After declaration of dividend / bonus



Systematic Investment Plan (SIP)

Investment strategies

Invest a fixed sum every month. (6 months to 10 yearsthrough 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
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

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

44 4 4 4 4 4 4 4 4
4 44 . 4 44 . 8. 88 4 44 . 4 44 . 4 44 . 4 44 . 4 44 . 4 44 . 4 44 . 4 44 . 4 44 .

When the price is highest, you buy the least number of units
106.39 units 154.75 units

When the price is lowest, you buy the highest number of units

J a n - 4 F e b - 4 M a4 - 4 A p 4- 4 M a4 - 4 J u n - 4 J u 4 4 A u g - 4 S e p - 4 O c 4- 4 N o 4 - 4 D e 4- 4 4 4 r r y 4 l4 4 t v c

Investing at Peak SIP is the way

Simple plotting of closing price of BSE Sensex for the first of every month. The time period considered here is from 1/1/1990 to 02/12/2005 Source: Credence Analytics

Start Early : SIP

44 4 44 4 44 4 44 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 44 . 4 44 . 4 4. 4 44 44 . 4 8 8. 8 8 44 . 4 44 . 4 44 . 4 44 8 . 8 8 . 4 4 4 4. 4 44

Rs. 1000 invested per month @15% p.a. till the age of 60 yrs

4 44 4. 4

Inves tm ent W ealth at 4 4

A gap of 5 only years can result in a lot of difference in wealth creation !

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)


Investing in Equity Funds

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)

Extra Cash in savings A/c?? Consider Cash Funds Liquidity: Savings account wins

Tired of your savings account?

b/w a savings account and a fixed deposit, no ATM (NowRel 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

Draw up your asset allocation

Investing Checklist

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.

The right asset allocation

Portfolio Decision

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

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

Locate one on AMFI site

Financial planners
Bajaj Capital etc.

Insurance agents Banks

Net-Banking Phone-Banking


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.