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Mutual Funds

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Disclaimer

Me - no expert

Not Comprehensive

Majority from websites and some practical

experience

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Contents

Keeping Track

Buying a Mutual Fund Selecting a Mutual Funds

Equity FundsInvestment Strategies

Risk BehaviorTypes of Schemes

Organization of Mutual Fund Terminologies Demystified

Brief History

Reference Websites

Mutual Fund Defined

Regulations

Mutual Funds Comparision

Warning Signals

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Mutual Fund ??

Form of trust that pools the funds of a wholelot of investors to make more money byinvesting in an array of financial instruments.

Advantages of a MF Professional Management

Diversification

Flexibility in choice - selection, redemption

Low costs

Transparency

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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

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Organization of a Mutual Fund

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Regulations

Governed by SEBI (Mutual Fund) Regulation 1996

All MFs registered with it, constituted as trusts ( underIndian Trusts Act, 1882)

Bank operated MFs supervised by RBI too

AMC registered as Companies registered underCompanies 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

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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 funds 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.

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Terminologies Contd

NAV Market value of assets of scheme minus its liabilities.

Per unit NAV = Net Asset ValueNo. 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

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Types of Mutual Fund Schemes

By Structure Open-Endedanytime enter/exit

Close-Ended Schemeslisted on exchange, redemption after period ofscheme is over.

By Investment Objective

Equity (Growth)only in StocksLong 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/HybridStocks + Fixed Income Securities (1-3 years)

Other Schemes Tax Saving Schemes

Special Schemes

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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)

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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 tofall below the average NAV.

Systematic Transfer Plan (STP)

Invest in debt oriented fund and give instructions to transfera fixed sum, at a fixed interval, to an equity scheme of thesame mutual fund.

Systematic Withdrawal Plan (SWP)

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Before declaration of dividend / bonus

Growth Dividendpayout

Dividendreinvestment

Bonus

NAV 20 20 20 20Units 100 100 100 100

Value (Rs) 2,000 Rs 2,000 Rs 2,000 Rs 2,000

After declaration of dividend / bonus

NAV 20 19 19 18.1818

Units 100 100 105.2631 110

Value (Rs) 2000 1900 2000 2000

Dividendreceived incash

- Rs 100 - -

Additionalunits

- - 5.2631 10

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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)

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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

fundsin 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 forat least 3-5 years (managed well and provides consistent returns)

Investing in Equity Funds

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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 onexpense ratio

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Investing Checklist

Draw up your asset allocation Financial goals & Time frame (Are you investing for retirement? A

childs 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)

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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.

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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 schemes investment philosophy

Long-term, appetite for risk, beat inflationequity funds best

TRAPS TO AVOID

IPO Blur Begin with existing schemes (proven track record) and then new schemes

Avoid Market Timing

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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

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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

http://students.iitk.ac.in/bclub/lectures/ABN%20emailer.jpg

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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

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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.

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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/RiskAssess/RiskAssessCal1.asp

http://www.mutualfundsindia.com/resourcecentre.asp

http://www.mutualfundsindia.com/resourcecentre.asphttp://www.mutualfundsindia.com/resourcecentre.asp