Mutual Funds

Human Life Cycle

Phase I Phase II Phase III

Child’s Marriage

Child’s Education

Housing

Child birth
Marriage

22 yrs 38 yrs 10- 20 yrs

Education Earning Years Post Retirement Years

Age- 22 yrs Age- 60 yrs

 Individual Investor: Life Stages
Earnings
Consumption
Savings

22 27 40 60
Young Independent Young Married Middle Age Retirement

All individuals have a finite period to save for their investment goals
 Value of Money over time
Impact of inflation on monthly Value of Rs. 100,000 over time
expenses of Rs. 30,000 today

100,000

79,599
78,353

62,368

48,102
38,288 37,689
30,000

Today 5 years 15 years 20 years Today 5 years 15 years 20 years

At inflation of 5%
Investors need to beat inflation
 OPTIONS FOR INVESTING
• Deposit in Bank – SB, FD’s, Locker ;)
• Loan a Friend/Relative on Interest
• Property Investments
• Invest Gold, Silver..
• Investment in Capital Markets -
- Direct - Equity Share Markets
- Debt & Bonds Market
- Indirect - Mutual Funds
 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 scheme’s 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
Organization of a Mutual Fund
 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, newspapers
– Half-yearly results, annual reports
– Select Benchmark depending on scheme and compare
 Terminologies …
• 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.

• 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 FUNDS
Type of
Mutual Fund
Schemes

Special
Investment
Structure Schemes
Objective

Open Ended Industry Specific

Growth Funds
Funds Schemes
Close Ended Index
Income Funds
Funds Schemes
Sectoral
Interval Funds Balanced Funds
Schemes
Money Market
Funds
 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
 SPECIAL SCHEMES-EXAMPLE
• 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
 10 REASONS TO INVEST IN
MUTUAL FUNDS
• 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.
 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)

 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
• Regular
• 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
• Automated
• 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
10 9 .3 5
9 .4 0 9 .10
9 8 .7 5 8 .9 3
8 .12 8 .0 1 8 .3 1
8 7 .5 7 6 .9 3 7 .6 0

7 6 .4 6

6
5 When the price is highest,
you buy the least number of units
4 106.39
154.75
units
units

3 When the price is lowest,

you buy the highest number of units
2
J a n -0 4 F e b -0 4 M a r-0 4 A p r-0 4 M a y -0 4 J u n -0 4 J u l-0 4 A u g -0 4 S e p -0 4 O c t -0 4 N o v -0 4 D e c -0 4
 Start Early : SIP
Rs. 1000 invested per month @15% p.a. till the age of 60 yrs
160 148.61

140

120

100

80 70.10

60

40 32.84

20 15.16
4.20 3.60 3.00 6.77
2.40 1.80 1.20 2.79
-
25 30 35 40 45 50

Investment Wealth at 60

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
• 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 Funds

• Liquidity: Savings account wins

– b/w a savings account and a fixed deposit, no ATM (Now-
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 (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 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
– 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 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
 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.
• 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 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
• 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.
 SEBI REGULATION
• First, for New Fund Offers (NFOs): They
will only be open for 15 days. (ELSS
funds though will continue to stay open for
up to 90 days) It will save investors from a
prolonged NFO period and being
harangued by advisors and
advertisements. The motivation behind the
rule seems to be simple – if you can invest
anytime, why keep NFO period long?
• NFOs can only be invested at the close
of the NFO period. Earlier, Mutual funds
would keep an NFO open for 30 days, and
the minute they received their first cheque,
the money would be directly invested in
the market; creating a skewed accounting
for those that entered later since they get
a fixed NFO price.
• The market regulator has corrected this by
extending Application Supported by Blocked
Amount (ASBA) to mutual funds.
• By the ASBA process (Application Supported
by Blocked Amount) one can continue to earn
interest in the bank account until the NFO closes
(remember there is usually no rejection or
“oversubscription” in a mutual fund NFO) which
means that the cheque goes for clearing after
the NFO has closed irrespective of when it was
sent. The fund manager will be able to invest
once the NFO closes.
•  
• Dividends can now only be paid out of
actually realized gains. Impact: it will
reduce both the quantum of dividends
announced, and the measures used by
MFs to gather investor money using
dividend as a carrot to entice new
investors.
• Equity Mutual funds have been asked to play a
more active role in corporate governance of
the companies they invest in. This will help
mutual funds become more active and not just
that, they must reveal, in their annual reports
from next year, what they did in each “vote”.
SEBI has now made it mandatory for funds to
disclose whether they voted for or against
moves (suggested by companies in which they
have invested) such as mergers, demergers,
corporate governance issues, appointment and
removal of directors. MFs have to disclose it on
their website as well as annual reports.
• Equity Funds were allowed to charge 1%
more as management fees if the funds
were “no-load”; but since SEBI has
banned entry loads, this extra 1% has
also been removed.
• SEBI has also asked Mutual Funds to
reveal all commission paid to it’s
sponsor or associate companies,
employees and their relatives.
• Regarding the Fund-of-Fund (FOF) – The
market regulator has stated that information
documents that Asset Management Companies
(AMCs) have been entering into revenue sharing
arrangements with offshore funds in respect of
investments made on behalf of Fund of Fund
schemes create conflict of interest. Henceforth,
AMCs shall not enter into any revenue sharing
arrangement with the underlying funds in any
manner and shall not receive any revenue by
whatever means/head from the underlying fund.
• These guidelines set by the SEBI will lead
to greater transparency for the common
investor. SEBI formulates policies and
regulates the mutual funds to protect the
interest of the investors. With these
guidelines falling in place it would create
better trust and transparency and an
investable environment that would attract
investors with greater faith and
confidence. A welcome & refreshing move!