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MUTUAL FUND

Presented By Priya Arora

In March2010, the Indian mutual fund industry has 40 players. The number of public sector players has reduced from 11 to 5. The public sector has gradually receded into the background, passing on a large chunk of market share to private sector players.

Mutual fund industry and structure

The Indian mutual fund industry follows structure
Fund Sponsor

Trustees

Asset Management Company

Agent Custodian

Any person or corporate body that establishes the Fund and registers it with SEBI. with significant experience in the financial sector and a certain minimum net worth y Fund Sponsor . y SEBI will grant a permission to start a mutual fund only to a person of integrity.

after which point.Once SEBI is satisfied with the credentials and eligibility of the proposed Sponsors. y Trust and Trustees . Contracts are entered into in the name of the Trustees. the Sponsors then establish a Trust under the Indian Trust Act 1882. y Once the Trust is created. y Trustees are the individuals authorized to act on behalf of the Trust. it is registered with SEBI. this Trust is known as the mutual fund.

Acts in interest of the unit-holders and reports to 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. At least 50% of directors on the board are independent of the sponsor or the trustees. Has to be approved and registered with SEBI.

y Registrar and Transfer Agents (RTAs) maintain the investor¶s (unit holder¶s) records. Transfer Agents . reducing the burden on the AMCs.

y ‡

Has the responsibility of physical handling and safe keeping of the securities. Should be independent of the sponsors and registered with SEBI.

Custodian

Mutual fund is a investment tool that allows to invest in the equities, bonds and other securities y It pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities. y owner of a mutual fund unit gets a proportional share of the fund¶s gains, losses, income and expenses.
y

What is Mutual Fund?

Passed back to

Investors

Pool Their money with
Fund manager

Returns

Generates Invest in
Securities

Mutual Fund Operation Flow Chart

Closedend Funds Asset Class Investment Philosophy Geographic Regions Classification .MF Tenor Open-end Vs.

‡ Unit capital of the fund is not fixed but variable.Open-end Fund ‡ Available for sale and repurchase at all times based on the net asset value (NAV) per unit. ‡ Fund size and its total investment go up if more new subscriptions come in than redemptions and vice-versa. Closed-end Funds Closed- . OpenOpen-end Vs.

Some funds offer repurchase after a fixed period.Closed-end Fund ‡ One time sale of fixed number of units. ‡ Listed on stock exchange and investors can buy or sell units through the exchange. Closed-end Funds Closed- . ‡ Investors are not allowed to buy or redeem the units directly from the funds. OpenOpen-end Vs.

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

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

platinum. silver.y These funds invest in physical assets such as gold. commodities and real estate. Gold Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs) fall within the category of real asset funds. Real asset funds . oil.

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

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

Diversified Equity Funds y Sector Funds y Index Funds y Exchange Traded Funds (ETFs) y Fund of Funds (FOF) y Fixed Maturity Plan (FMP) y Investment Philosophy .

Country or Region Funds y These funds invest in securities (equity and/or debt) of a specific country or region with an underlying belief that the chosen country or region is expected to deliver superior performance. Geographic Regions .which in turn will be favorable for the securities of that country.

Offshore Funds y These funds mobilise money from investors for the purpose of investment within as well as y outside their home country. y Geographic Regions .

Benefits of Investing Through Mutual Funds .

Fund managers are responsible for implementing a consistent investment strategy . y Fund managers monitor market and economic trends and analyze securities y Professional Money Management .

Mutual funds offer investors an opportunity to diversify across assets. y Diversification .y Diversification is one of the best ways to reduce risk.

Receive the current market value on their investments within a short time period (normally three.to five-days). y Liquidity .y Investors can sell their mutual fund units on any business day.

Affordability .y The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes.

y Investors can pick up the scheme depending upon the risk /return profile. Flexibility and variety .

Function within the strict regulation designed to protect the interest of the investors Regulation .y y All the MF are registered with the SEBI.

Options Available to the Investor .

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 .Mutual Funds Vs.

Mutual Funds Vs. 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 .

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

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

There are various funds to suit investor needs. The truth is as an investor you should always pay attention to your mutual funds and continuously monitor them. .Facts about Mutual Funds 5. both as a long term investment vehicle or as a very short term cash management vehicle.

Path to knowledge & Wealth creation from Mutual Funds .

the calculation of which is based on the current market price of all the assets that the mutual fund owns. The investor buys the units at a price (i. NAV).y when an investor invests in a mutual fund.e. The reason for such a µmis-pricing¶ could be that investors evaluate the company¶s future profitability and suitably pay a higher or lower price as compared to its book value. y y Invest in the mutual fund. not its NAV . he invests at its existing NAV. the stock price of a company is usually different from its intrinsic worth The stock price could be higher (premium) or lower (discount) as compared to the book value of the company. In case of the stock market investing however.

y .there is no correlation between the NAV and the performance of the mutual fund. y This makes an investment decision based on the NAV potentially misguiding.

own risk profile y the fund house¶s management style y the mutual fund¶s performance. y As an investor. you need to consider factors such .

So. it is important for investors to select a fund that takes on risk in line with their own risk appetite. while others follow the value style of investment (conservatively managed funds).y some equity funds adhere to the growth style of investment (aggressively managed funds). own risk profile .

individualistic style y team-based investment y Fund management style .

It is imperative for investors to evaluate a mutual fund on parameters related to risk like Standard Deviation and Sharpe Ratio as also its NAV appreciation. y The best deal for an investor will come from a mutual fund that has higher NAV appreciation and Sharpe Ratio and lower Standard Deviation y Mutual fund performance .

y Past performance is not everything .SEBI has made it mandatory for fund houses to state this disclaimer explicitly. y Despite these disclaimers. whenever they mention the past performance of a scheme. investors do continue to get lured by the catchy advertisement which boasts about the scheme¶s past performance.

it must be evaluated based on the risk-return criterion.e. evaluating the investment option across any one of the two i.there are certain critical points that the past performance numbers in isolation do not tell you y risk the investor has been exposed to y Before making any investment. risk or return on a stand-alone basis will not provide the necessary assessment Past performance is not everything .

y You should compare an investment (be it a mutual fund. among others) with its comparable peer group while assessing whether or not you should invest in it. unit-linked insurance plan± ULIP. fixed deposit.It does not take into consideration the performance of its peers. y Past performance is not everything .

Past performance fails to highlight the investment processes and approach.It does not tell you whether the past performance is the result of:  i) good fortune/luck  ii) a star fund manager  iii) a team-based investment approach y past performance is no guarantee of future performance y Past performance is not everything .

We all want to buy at the lows and sell at the highs. ideally one should enter the market when it is at lower levels and exit when it is at higher levels. to do so is almost impossible. y Don¶t time your mutual fund investments .Take a SIP . y But. And yes. No one can predict where the markets are heading tomorrow.

Take a SIP . y Don¶t time your mutual fund investments . An effective and a hassle-free way of investing regularly is through the SIP (Systematic Investment Plan) route.you should invest regularly for the purpose of meeting your long-term investment objectives. you don¶t have to worry about timing the market since you are investing a fixed amount at regular intervals (like a month or quarter. for instance). y With SIPs.

the more sun or corpus you will have 5 good reasons for investing regularly through SIPs .o Light on the wallet: The investor who can¶t afford to invest a huge amount can simply take the SIP route. o Makes market timing irrelevant: whether in bull or bear o Power of compounding: earlier you begin your SIPs.

In an SIP. your average cost of investing comes down since you will go through all phases of the market. bull or bear.y Lowers the average cost: People who invest through SIPs capture the lows as well as the highs of the market. .

Performance Fund Management Costs How to select a mutual fund .

Portfolio Turnover Portfolio Concentration Risk-adjusted return: RisK Returns Time period PERFORMANCE Com priso ns .

y Fund Management .It important that the team managing the fund should have considerable experience in dealing with market ups and downs. y Remember: Fund houses should be process-driven and not 'star' fund manager driven.

overheads etc ‡ An exit load is charged to investors when they sell units of a mutual fund within a particular tenure . management salary.Expense Ratio Exit Load Cost ‡ Annual expenses involved in running the mutual fund include administrative costs.

y y y Building a mutual fund portfolio is not a very simple task since many of these funds seem to be saying (as dictated by the investment objective) and doing (in terms of investments) totally different things. process of building a mutual fund into two steps. Step 1: Process of elimination How to build a mutual fund portfolio .

Go for both ± well-managed growth style and value style equity funds Balanced fund will help in bringing in stability in the portfolio Selection process must purely be based on research and analysis .Step 1: Process of elimination Refrain from investing in a sector/thematic mutual fund Do a peer comparison evaluate a funds performance over the long-term Step 2: Process of selection Have a mix of both large cap as well as mid cap funds.

How mutual funds can be used for financial planning Mutual funds allow the financial planner to align the investment goals on the mantra of DIVERSIFIC ATION PATIENCE SUCCESS .

Diversification y Portfolio Strategy y Rebalancing y Tax efficiency y .

10 pointers to investing in mutual funds A fund sponsor with integrity An experienced fund manager The correct fund category The correct fund by nature A suitable investment philosophy Investor service and transparency The tax implications The load Fund performance Fees and charges .

annual reports.Rights and Obligations of investors are In case of dividend declaration. the AMC must dispatch the redemption proceeds within 10 working days of the request. Investors have a right to be informed about changes in the fundamental attributes of a scheme. Investors can approach the investor relations officer for grievance redressal . Fundamental attributes include type of scheme. etc. investment management agreement. investment objectives and policies and terms of issue. offer documents. Investors can obtain relevant information from the trustees and inspect documents like trust deed. investors have a right to receive the dividend within 30 days of declaration On redemption request by investors. They must receive audited annual reports within 6 months from the financial year end.

SEBI ordered mutual funds not to disclose the indicative portfolio or indicative yield of their newly launched Fixed Maturity Plans (FMPs) Abolition of entry load SEBI also stepped in to provide mutual fund investors transparency. by making distributors disclose commissions (upfront and trail) to the investor. Reforms in the year 2009 .

Reforms in the year 2009 .Online mutual fund trading platform was launched by the exchanges (BSE and NSE) SEBI allowed mutual fund investors to change their mutual fund distributors without obtaining a No Objection Certificate (NOC) from their earlier distributor.

The potential for growth will come from inherent strengths and sustained interest by foreign and domestic funds as well as the common investor. many new players are likely to enter the mutual fund space. thus leading to an increase in the product offering to mutual fund investors. we believe.The year 2010. Year 2010 for the Mutual Fund Industry . making every initiative proinvestor. Also. would continue to bring in reforms in the mutual fund industry.