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Mutual Funds Mutual Funds

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

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

Mutual Fund ? ? • Form of trust that pools the funds of a 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. • Advantages of a MF – Professional Management – Diversification – Flexibility in choice - selection, redemption – Low costs – Transparency

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

Organization of a Mutual Fund Organization of a Mutual Fund

Regulations • Governed by SEBI (Mutual Fund) Regulation 1996 – All MFs registered with 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

Terminologies Demystified… • Asset Allocation – Diversifying investments in different assets such as stocks, 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 fund’s 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… • NAV – Market value of assets of scheme minus its liabilities. Terminologies Contd… • NAV – Market value of assets of scheme minus its liabilities. • Per unit NAV = Net Asset Value No. of Units Outstanding on Valuation date • 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

Types of Mutual Fund Schemes • By Structure – Open-Ended – anytime enter/exit – 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

Risks • Historical analysis – Return is remembered, Risk forgotten • Risk = Potential 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)

Investment strategies • Systematic Investment Plan (SIP) – Invest a fixed sum every month. 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 Withdrawal Plan (SWP)

Before declaration of dividend / bonus Growth Dividend payout Dividend reinvestment Bonus NAV 20 Before declaration of dividend / bonus Growth Dividend payout Dividend reinvestment Bonus NAV 20 20 Units 100 100 Value (Rs) 2, 000 Rs 2, 000 After declaration of dividend / bonus NAV 20 19 19 18. 1818 Units 100 105. 2631 110 Value (Rs) 2000 1900 2000 Dividend received in cash - Rs 100 - - Additional units - - 5. 2631 10

Equity Funds • • Diversified equity funds Index funds Opportunity funds Mid-cap funds Equity-linked 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 • Errors – Invest in only top performing funds – 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, 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)

Tired of your savings account? • Extra Cash in savings A/c? ? Consider Cash 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 (Now- Rel 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

Investing Checklist • Draw up your asset allocation – Financial goals & Time frame 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, 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 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.

Portfolio Decision • The right asset allocation – Age = % in debt instruments Portfolio Decision • The right asset allocation – Age = % in debt instruments – Reality= different financial position, different allocation – Younger= Riskier • Selecting the right fund/s – Based on scheme’s investment philosophy – Long-term, appetite for risk, beat inflation– equity funds best • TRAPS TO AVOID – 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 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 – Buying Mutual Funds • Contacting the Asset Management Company directly – Web Site – Request for agent • Agents/Brokers – Locate on AMFI site • Financial planners – Bajaj Capital etc. • • Insurance agents Banks – Net-Banking – Phone-Banking – ATMs • Online Trading Account – ICICI Direct – Motilal Oswal, Indiabulls- Send agents

Keeping Track… • Filling up an application form and writing out a cheque= end 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. 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.

Websites • http: //news. moneycontrol. com/mf/glossary. php • http: //www. investopedia. com/university/mutualfunds/default. asp • Websites • http: //news. moneycontrol. com/mf/glossary. php • http: //www. investopedia. com/university/mutualfunds/default. asp • http: //www. valueresearchonline. com • http: //www. amfiindia. com/ • http: //www. sbimf. com/portal/static/calculator/Risk. Assess. Cal 1. asp • http: //www. mutualfundsindia. com/resourcecentre. asp