Mutual Funds

Vishal Aggarwal MBA Class of 2007

• Me - no expert • Not Comprehensive • Majority from websites and some practical experience

Contents Mutual Fund Defined Brief History Organization of Mutual Fund Regulations Terminologies Demystified Types of Schemes Investment Strategies Buying a Mutual Fund Mutual Funds Comparision Warning Signals Risk Behavior Equity Funds Selecting a Mutual Funds Keeping Track Reference Websites .

selection.Mutual Fund ?? • Form of trust that pools the funds of a whole lot of investors to make more money by investing in an array of financial instruments. redemption Low costs Transparency . • Advantages of a MF – – – – – Professional Management Diversification Flexibility in choice .


Private Sector – Kothari Pioneer ( later merged with Franklin Templeton).Public Sector banks. Canbank. Morgan Stanley. J P Morgan. Insurance Companies – SBI. George Soros and Capital International . GIC • 1993. PNB LIC.Brief History • 1964-UTI • 1987.

Organization of a Mutual Fund Adobe A crobat 7.0 Document .

constituted as trusts ( under Indian Trusts Act.Very detailed guidelines for disclosures in offer document. annual reports – Select Benchmark depending on scheme and compare . – NAV to be declared everyday for open-ended. offer period. AMFI. newspapers – Half-yearly results. investment guidelines etc. 1956 • SEBI.Regulations • Governed by SEBI (Mutual Fund) Regulation 1996 – All MFs registered with it. every week for closed ended – Disclose on website. 1882) • Bank operated MFs supervised by RBI too • AMC registered as Companies registered under Companies Act.

• • Dividend – Profits given to the investor from time to time. . how to invest etc. expenses summary. risk factors. This causes the NAV to rise.Terminologies Demystified… • Asset Allocation – Diversifying investments in different assets such as stocks. in line with fund’s objective. bonds. Adobe A crobat 7. • Fund Manager – The individual responsible for making portfolio decision for a mutual fund. real estate.0 Document Growth – Profits ploughed back into scheme. • Fund Offer Document – Document with investment objectives. cash in order to optimize risk.

processing • Exit Load/Back.25-2.End Load (0. • Sale Price/ Offer Price – Price you pay to invest in a scheme. 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 . May include a sales load. To cover costs for selling. Imposed to discourage withdrawals May reduce to zero as holding period increases. of Units Outstanding on Valuation date Per unit NAV Entry Load/Front-End Load (0-2.Terminologies Contd… • • • NAV – Market value of assets of scheme minus its liabilities.25%) – – The commission charged at the time of buying the fund. (In this case. = Net Asset Value No.25%) – – The commission or charge paid when an investor exits from a mutual fund.

) – Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years) • Other Schemes – Tax Saving Schemes – Special Schemes • ULIP Adobe A crobat 7. • 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. redemption after period of scheme is over.Types of Mutual Fund Schemes • By Structure – Open-Ended – anytime enter/exit – Close-Ended Schemes – listed on exchange.0 Document .


Risks • Historical analysis – Return is remembered. Risk forgotten • Risk = Potential for Harm • Market Risk • Non-Market Risk • Credit Rate Risk • MF Risk = Volatility (fluctuation of NAV) – Standard Deviation – Websites give star rating ( basis = risk-adjusted return) .

• Systematic Withdrawal Plan (SWP) . Average cost price tends to fall below the average NAV.Investment strategies • Systematic Investment Plan (SIP) – 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. • Systematic Transfer Plan (STP) – Invest in debt oriented fund and give instructions to transfer a fixed sum. and more units when the share prices are low. to an equity scheme of the same mutual fund. at a fixed interval.

000 20 100 2000 20 100 Rs 2.2631 2000 20 100 Rs 2.000 19 105.000 19 100 1900 20 100 Rs 2.2631 10 .Before declaration of dividend / bonus Growth Dividend payout Dividend reinvestment Bonus NAV Units Value (Rs) NAV Units Value (Rs) 20 100 2.000 18.1818 110 2000 After declaration of dividend / bonus Dividend received in cash Additional units - Rs 100 - - - - 5.

Equity Funds • • • • • • • • Diversified equity funds Index funds Opportunity funds Mid-cap funds Equity-linked savings schemes Sector funds like Auto. Contra etc) . Health Care. Theme. FMCG etc Dividend Yield Funds Others (Exchange traded.

may all be mid-cap funds) – Have variety of funds like diversified funds. • Look at performance of various funds with similar objectives for at least 3-5 years (managed well and provides consistent returns) .Investing in Equity Funds • Errors – Invest in only top performing funds – These cannot go wrong – Replicate past performance in future • Appropriate way – Right Mix of equity MFs (Top 3-4 funds. – makes sense to begin with a diversified fund – Gradual exposure to sector and specialty funds. mid-cap funds and sector funds – in right proportion.

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 .Tired of your savings account? • Extra Cash in savings A/c?? Consider Cash Funds • Liquidity: Savings account wins – b/w a savings account and a fixed deposit. no ATM (NowRel Regular Savings Fund) • Safety: Savings account wins – All mutual funds are subject to market risks • Returns: Cash funds win – Upto about 17.


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) . downside risk protection. tax benefits offered.Investing Checklist • Draw up your asset allocation – Financial goals & Time frame (Are you investing for retirement? A child’s 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. dividend payout policy.

but not too much • Invest integral part of your savings and wealth-building plan. 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. choose the S-I-P – MF. review portfolio regularly • Look for `load' costs – Management fees.Checklist Contd… • Think hard about investing in sector funds – For relatively aggressive investors – Close touch with developments in sector. 25 Crores • Diversify. .

beat inflation– equity funds best • TRAPS TO AVOID – IPO Blur • Begin with existing schemes (proven track record) and then new schemes – Avoid Market Timing . different allocation – Younger= Riskier • Selecting the right fund/s – Based on scheme’s investment philosophy – Long-term. appetite for risk.Portfolio Decision • The right asset allocation – Age = % in debt instruments – Reality= different financial position.

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 – for 5 years. Debt.for 6 months • Market conditions – Proved its mettle in bear market .

Send agents . Insurance agents Banks – Net-Banking – Phone-Banking – ATMs • Online Trading Account – ICICI Direct – Motilal Oswal.Buying Mutual Funds • • • • • Contacting the Asset Management Company directly – Web Site – Request for agent Agents/Brokers – Locate one on AMFI site Financial planners – Bajaj Capital etc. Indiabulls.

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 Adobe A crobat 7.0 Document Adobe A crobat 7.0 Document .

• It merges into another fund. • Change in management style or a change in the objective of the fund. Fund's expense ratios climb Beta. . a technical measure of risk.Warning Signals • • • • • Fund's management changes Performance slips compared to similar funds. also climbs. Independent rating services reduce their ratings of the fund.

com/resourcecentre.Websites • http://news.sbimf.asp • http://www.mutualfundsindia.php • • • • http://www.

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