Understanding Mutual

Funds
 Saving – An Indian Religion
INDIA
24.3%

France
11.1%

Indians
Germany
10.7% are
amongst
Japan the
6.3%
highest
savers
nosi r a p mo C A

UK
5.5% in the
USA
1.4%
world!
dl ohes uo H
Physical Assets
Financial Assets

Where do we invest our savings….

Gold: Has essentially ornamental value;
comes really handy only when currencies
crash; requires high emotional detachment to
sell. India loves Gold
Real Estate: Highly variable growth
prospects; Requires high investment; patterns
of booms and slumps are tough to figure out;
too many documentation hassles

W here do we save….

Physical Assets
 Financial Assets
Relative Return Liquidity
Risk
Equity High High Variable
Shares
PPF Low Medium Very Low
AAA Bonds Low Medium Low
Other Bonds Medium- Medium – Low
High High
Bank FD Low Low Low to
Medium
Savings A/c Low Low High
 Your Investment Menu Card
Instrument Tax Benefit Return Duration

EPF √ 8.50% Long Term

PPF √ 8% Long Term
NSC √ 8% Long Term
FD’s – Banks & Post √ 5.70 to 8.50% Short Term
Office

Senoir Citizen Savings √ 9% Long Term

Scheme
Mutual Funds √ Market Linked Long Term & Short
Term
ULIP √ Market Linked Long Term
NPS √ Market Linked Long Term
Direct Equity √ Market Linked Long Term
Gold √ Market Linked Short Term
Real Estate √ Market Linked Long Term
 Cumulative Annualized Returns (1985-2006)

Equity 17.9

G Sec 11.3

Bank FD 10.4

Gold 7.2

Inflation 6.8

0 5 10 15 20
In
%

Which Asset delivers ?

Equities are the clear winner..
Source: CLSA
Comparison : Mutual Funds vis-à-vis other asset classes
Inflation….
Actually deflates our savings..
 Inflation
Rate
5.05%*
Inflation -
Your
ENEMY!
Rs. 10,000 today
will
be worth … Rs. 7,817
after
5 years… Rs. 6,110
after
10 years… Rs. 3,733
after
20 years… Rs. 2,281

Understanding Inflation
after
30 years

* 1 year average of inflation rates (Nov 2007),

RBI
Challenges involved investing directly in Capital Market

 Time
 Expertise
 Lack of Information
 Portfolio
 Volatility
What is a Mutual Fund?
 A vehicle for investing in stocks and bonds.

 Not an alternative investment option to stocks and bonds.

 It pools the money of several investors and invests this in

stocks, bonds, money market instruments and other types
of securities.

 owner of a mutual fund unit gets a proportional share of

the fund’s gains, losses, income and expenses.

A vehicle for investing in

stocks and bonds
 How Mutual Fund works?
A vehicle for investing in portfolio of stocks and bonds
 Structure of Mutual Fund

Custodian keeps safe custody of the investments (related documents of securities invested).
Each mutual fund has a
specific stated objective
 Fund’s objective is laid out in the fund's
prospectus, which is the legal document that
contains information about the fund
 Its history, its officers and its performance.
Some popular objectives of a
mutual fund are -

Fund Objective What the fund will invest in

Equity (Growth) - Only in stocks
Debt (Income) - Only in fixed-income securities
MoneyMarket - In short-term money market
instruments
(including government securities)
Balanced - Partly in stocks and partly in
fixed- income securities,
('balance' in returns and risk)
 The company that puts together a mutual fund is called an
AMC .

 AMC may have several mutual fund schemes .

 AMC hires a professional money manager, who buys and

sells securities in line with the fund's stated objective.

Managed by an Asset
Management Company (AMC)
 Mutual fund regulations require that the fund’s
objectives are clearly spelt out in the prospectus.

 Every mutual fund has a board of directors that

is supposed to represent the shareholders'
interests, rather than the AMC’s.

All AMCs Regulated by SEBI, Funds

governed by Board of Directors
The Basics of Mutual Funds.
NAV is the total asset value (net of
expenses) per unit of the fund and is
calculated by the AMC at the end of every
business day.

NAV=MARKET VALUE OF THE ASSESTS /

TOTAL NO. OF UNITS

Net Asset Value or NAV

The value of all the securities in the
portfolio in calculated daily. From this, all
expenses are deducted and the resultant
value divided by the number of units in
the fund is the fund’s NAV.

How is NAV calculated?

 Demystifying NAV – Net Asset Value
While selecting a fund, the NAV shouldn’t be the criteria, A low NAV
need not mean that it’s a good buy ...
Mutual Fund
Scheme Name NAV's on Growth
Jan 1st 2009 Oct 21st 2009
A 23.55 38.97 65.5%
B 7.44 12.04 61.8%
C 19.86 30.23 52.2%
D 21.70 31.57 45.5%
E 12.10 16.56 36.9%

In the above example during the period under consideration the best
growths have been recorded by the funds with the “lowest” (Scheme B Rs
7.44) and the “highest” (Scheme A- Rs 23.55) NAVs respectively.
On the other hand the least growth has been recorded by (Scheme E), a
fund with a low NAV.
Clearly the data suggests that there is no correlation between the NAV size
and the returns.
 Some AMCs have sales charges, or loads, on
their funds (entry load and/or exit load) to
compensate for distribution costs.

 Funds without a sales charge are called no-load

funds.

Load
 Open-ended Funds : can enter and exit the
fund scheme at its NAV.

 Close-Ended Funds: Redemption can take place

only after the period of the scheme is over.
Close-ended funds are listed on the stock
exchanges

Open- and Close-Ended

Funds
 Dividend Payout
◦ Investors can partially cash in on the returns
earned by the Fund through the dividends it
declares
 Dividend Re-investment
◦ The dividends declared are ploughed back into the
Fund at the prevailing NAV, fetching more units to
the investors
 Growth
◦ The returns earned by the Fund are retained and
reflected as an appreciation in the Fund’s NAV

Repayment Options
 How do I make money from a mutual fund?
1. Capital appreciation:
As the value of securities in the fund increases, the fund's unit price will
also increase. You can make a profit by selling the units at a price higher
than at which you bought

2. Coupon / Dividend Income:

Fund will earn interest income from the bonds it holds or will have
dividend income from the shares

3. Income Distribution:
The fund passes on the profits it has earned in the form of dividends
 Two key documents that highlight the fund's
strategy and performance are 1) the prospectus
(legal document) and the shareholder reports
(normally quarterly).

Important documents
Benefits of Investing
Through Mutual Funds
 Fund managers are responsible for implementing
a consistent investment strategy .
 Fund managers monitor market and economic
trends and analyze securities

Professional Money
Management
 Diversification is one of the best ways to reduce
risk.

 Mutual funds offer investors an opportunity to

diversify across assets.

Diversification
 Investorscan sell their mutual fund units on any
business day.

 Receive the current market value on their

investments within a short time period (normally
three- to five-days).

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

 Affordability
 Convenience of periodic purchase plans,
automatic withdrawal plans and the automatic
reinvestment of interest and dividends.
 Reports and statements .

 Convenienc
e
 Pick
from conservative, blue-chip stock funds,
Sectoral funds,

 Fundsthat aim to provide income with modest

growth

 Those that take big risks in the search for returns.

 You
can even buy balanced funds, or those that
combine stocks and bonds in the same fund.

Flexibility and variety

100% Income Tax exemption on all
Mutual Fund dividends .

Deduction upto 1 lakh available u/s

80(c) under investment in ELSS
funds as of FY2005-2006.

Tax benefits on Investment

in Mutual Funds
COSTS CONTROL NOT IN THE HANDS
OF AN INVESTOR.

NO CUSTOMISED PORTFOLIOS.

DIFFICULTY IN SELECTING A
SUITABLE SCHEME.

DISADVANTAGES
 Mutual Fund- How to invest in Mutual Funds
Selection Process- 3 step process
Step 3 Select the
Step 2 Choose the right ideal mix of schemes
mutual fund.
1. The track record of Investing in just 1
performance over the last scheme may not
few years in relation to themeet all your
appropriate Benchmark and investment needs.
Step 1 Identify your similar funds in the same You may consider
investment needs category investing in a
combination of
1. What are my investment 2. How well the mutual fund schemes to achieve
objectives and needs? is organized to provide your specific goals.
efficient, prompt and
personalized service.
2. How much risk am I
willing to take? 3. Degree of transparency as
reflected in frequency an d
3. What are my cash flow
quality of their
requirements?
communications.
 Mutual Fund- Which one to buy?
Based on your goals and
Your Investment
risk tolerance
goal

Capital Capital
Generate Income
Preservation Appreciation

S avings B ank A ccount Fixed Deposits Real E state

P PF Post of fice M onthly Income Scheme Gold
Mutual Funds

Cash Funds Debt Funds Equity Funds

Mutual Fund: How to buy?

Identify ‘What to Buy’

Banks,
Financial Svc.
Cos.,
Brokers,
Individual
Agents
Mutual Fund: How to redeem?
INVEST EARLY INVEST
REGULARLY

Happy Investing
Lump sum investments

Systematic Investment Plan

2 Ways of Investing into Mutual Funds