basics of mutual funds

Mutual FundsWhat, Why and How

What is a Mutual Fund?

Mutual Fund- Know now

Mutual Funds pool money from many small investors with similar (one could say mutual)objectives, to achieve Economies of Scale and Diversification in the investment of these funds.

This can result in higher returns at lower risk

Graphically speaking...

MFStep 1 : Make investments

Investor community

Step 5: Returns provided to investors

Earnings to the Fund House/ Distributor

Step 4: Expenses deducted

from the returns

Various Assets

Mutual Fund- Know now

Where is the money invested

Your money is invested in various securities depending on the objectives of the scheme you choose.

STOCKS BONDS MONEY MARLKET

Mutual Fund- Investment

What are the types of mutual funds ..(1)

Open end schemes: You can invest or redeem in these schemes at any time Closed end schemes: You can invest during the initial issue period and your money is locked in for a stipulated period (ranging from 2 to 15 years)


Based on the investment objective

Growth schemes: Invest in shares of companies. Have the potential to deliver better returns over the long term as compared to other mutual fund schemes

Mutual Fund- Types


Types of growth funds

Diversified Funds Sector Funds Index Funds


Income schemes: Invest in fixed income securities such as bonds issued by corporate and other government agenciesGilt Funds invest exclusively in government securities for added safety

Mutual Fund- Types


Balanced schemes: Invest in both shares and bonds, thereby receiving income that can moderate the effects of price fluctuations due to stocks

Money market schemes: Invest in short term instruments such as certificates of deposits and short term bonds

Mutual Fund- Types

Other types of schemes

Need based schemes

Tax-Saving schemes Equity Linked Savings Schemes Pension Schemes

Future needs schemes Childrens Savings Plans Retirement benefit schemes

Mutual Fund- Other Schemes

The risk return trade-off..

Risk

Investment horizon

Liquid Fund

Debt Funds

Balanced FundsRatio of Debt : Equity

Growth FundsIndex, Active diversified

Sector funds

Risk and Investment

Investment Pyramid

Capital PreservationRisk: Low to MediumPeriod: Less than 1 year

IncomeRisk: Medium to LowPeriod: 1 to 3 years

Capital GrowthRisk: Medium to HighPeriod: 3 to 5 years

Investor Portfolio Composition

GrowthFunds

Stocks

Income/Bond FundsCompany Fixed Deposits

BondsDebentures

Money Market FundsShort-term Deposits /Government Paper

Risk and Investment

Why invest in a mutual fund?..(1)

Professional Management: Experience and resources to thoroughly analyze the economy/markets to spot good investment opportunities


Diversification:Reduces the risk to which you would've been exposed by investing in a single stock/bond Invests in a broad cross section of industries or companies - negative performance of one security will not have as much of an impact on the fund

Why Mutual fund?


Liquidity & Convenience:

You will be able to get your money back within a short period as compared to other securities

Very little paperwork Helps avoid problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies

Why Mutual fund?


Tax Efficiency:

Some mutual fund schemes offer tax benefits under Section 80(C ) .Dividends declared under mutual fund schemes are tax free in the hands of the investor*Mutual funds offer favorable post tax returns

Subject to Dividend Distribution tax in Non Equity Funds

Why Mutual fund?

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

Income Distribution: The fund passes on the profits it has earned in the form of dividends

How you make money in Mutual fund?

How to choose the right scheme

Determine your financial goals and your time horizon

Determine your tolerance for risk Study the objectives of the funds available and match them with your need

The right scheme

How to choose the right fund house

Look for:

Professional management Performance track record Quality of service Choice of schemes

The right Fund house

How to make the winning mutual fund investment(1)Start EarlySave regularlyUse a portfolio approach spread your investments across sectors

and asset classesSee that your portfolio contains both short term and long term investments

The winning combination

How to make the winning mutual fund investment(2)

Monitor your investment portfolio periodically in light of market changes and changes in your life

Stay calm, steady and disciplined keep your goals firmly in sight do not get carried away by emotions or temporary market fluctuations

Basics of Systematic Investing & Asset Allocation

Systematic Investing

What is Systematic Investing?

The term systematic investing, applies to the process of investing regularly i.e. at fixed intervals, say, monthly or quarterly.


Why should one systematically invest? When chasing a financial goal, the simplest form of planning is to invest regularly

Most of us calculate our earnings, expenses and savings monthly. The easiest way to plan our investments, therefore, is on a monthly basis

Why don't most people save regularly?

1. Lack of awareness/ concern/ planning for financial goals2. No money left after monthly expenses3. Hassle of keeping track of investments4. Unaware of power of compounding

Systematic Investing- Basic Issues

FV = PV (1 + r)n

FV = Future ValuePV = Present Valuer = Rate of Return/ Coupon Raten = No. of compounding periods

The mother of all equations


FV = PV (1 + r)nEnhancing Future Value

The more you save, makes a

difference

The sooner you start, makes a

difference

PV nr

The more you earn, makes a

difference


The more you save, makes a differenceThe Power of Compounding

The above example is just for the explanation purpose.

The power of compounding

Growth rate of 7% p.a.Total Amount

SavedValue after 25

yearsAmount saved per month

5,000 1,500,000 4,073,986

3,000 900,000 2,444,391

1,500 450,000 1,222,196

1,000 300,000 814,797

The sooner you start, makes a difference

The Power of CompoundingThe power of compounding

Rs. 1000 invested p.m. @8% CAGR Total Amount

SavedValue at the

age of 60Starting Age

25 420,000 2,309,175

30 360,000 1,500,295

35 300,000 957,367

40 240,000 592,947

The Power of Compounding


The more you earn, makes a difference

The power of compounding

Rs. 1000 invested pm Value after 10 years

Value after 25 yearsGrowth Rate

8% 184,166 957,36710% 206,552 1,337,89015% 278,657 3,284,07420% 382,364 8,626,708

The Power of Compounding


Savings is for Future Goals

Save for future

The Arithmetic of Financing Life

Objective Years to go Current Cost Future Cost

Build a house 5 25 lacs 32 lacs

Sons MBA 10 5 lacs 7.5 lacs

Daughters marriage

15 5 lacs 12 lacs

Retirement Fund 25 40 lacs 100 lacs

Life objective- cost structure

Making Volatility Work for you

Rupee Cost Averaging

Average Sales Price of Units : Rs. 12 ( i.e. Rs. 48/4 months)Average Purchase Cost of Units : Rs 11.61 ( i.e. Rs. 4000/344.444 units)

Volatility- Cost averaging

Month Amount Invested (Rs.)

Sale Price (Rs.) No. of Units Purchased

1 1000 12 83.333

2 1000 15 66.667

3 1000 9 111.111

4 1000 12 83.333

TOTAL 4000 48 344.444

SENSEX - and Sensibilities

Scheme Date NAV Date NAV CAGR(In%)

Franklin India Bluechip 5/31/1996 15.65 7/30/2003 30.39 10.12

Franklin India Prima Fund 5/31/1996 13.21 7/30/2003 45.75 19.47

HDFC Equity Fund 5/31/1996 7.19 7/30/2003 32.214 23.9

Reliance Growth 5/31/1996 11.14 7/31/2003 43.75 22.1

Reliacne Vision 5/31/1996 11.23 7/31/2003 37.58 19.03

HDFC Top 200 5/31/1996 7/30/2003 24.433

Sensex 5/31/1996 3724 7/30/2003 3780 0.01

S & P Nifty 5/31/1996 1089 7/30/2003 1183 0.02

CNX Midcap 5/31/1996 N.A. 7/30/2003 1402

Time Matters not Timing

No. ParticularsInvestment on 14-Feb-2000

Value as on

21-Sep-2001

Value as on

23-Nov-2004

Absolute Growth

SENSEX 5924.32 2600.12 6009.86 1.44%

1 HDFC Equity Fund 1,00,000 51,179 2,12,360 112 %

2 Franklin Blue Chip 1,00,000 66,222 2,02,540 102 %

3 Reliance Vision Fund 1,00,000 41,240 2,55,610 155 %

4 HDFC Prudence Fund 1,00,000 71,651 2,35,370 135 %

5 Tata Pure Equity 1,00,000 43,927 1,82,630 82 %

6 Franklin India Prima 1,00,000 45,550 2,56,670 156 %

7 HDFC Top 200 1,00,000 46,002 1,69,780 69 %

8 Pru ICICI Power 1,00,000 45,433 2,21,220 121 %

9 Reliance Growth 1,00,000 26,818 2,21,750 121 %

Time Matters not Timing

Unmatched ConvenienceMinimum investment of Rs.500 on a monthly or quarterly basis Choice of post-dated cheques or direct debit with selected banks Cheques payable anywhere in India accepted Statement of account provided with each transaction

Its easy- convenient

Note: Some of the above facilities are available with investments in select funds and/ or at select centres. Please refer to offer document for specific details.

What is Asset Allocation?

Its about diversifying ones portfolio among asset classes such as bonds, stocks, real estate, or cash.

Its referred to in terms of the target percentages for each asset class. For example, a portfolio could have a mix of 60 percent stocks, 30 percent bonds and 10 percent cash.

Its the financial representation of an investors personality: the ideal asset allocation is one that best balances an investors profile and objectives

Asset allocation- find the right combination

Brinson, Hood and Beebower : Determinants of Portfolio Performance, 1986, 1991: Asset Allocation helps explain over 93% of a portfolios performance.

Significance Relative to ReturnSignificance of Asset Allocation


Suggesting the Right Allocation

Profile the client for ability and willingness to take riskMatch with clients objectivesIron out mismatches, if any


Periodic Review

Making Asset Allocation WorkReview of objective - EXAMPLE

Years to goal Equity Allocation %

TODAY 10 70%

After 5 yrs 5 60%

After 7 yrs 3 40%

After 9 yrs 1 10%

A periodic review of objectives can ensure an investor is not left at the mercy of the equity markets when he needs his money


THANK YOU

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Mutual FundsWhat is a Mutual Fund? Graphically speaking...Where is the money investedWhat are the types of mutual funds ..(1)What are the types of mutual funds ..(3)What are the types of mutual funds ..(5)Other types of schemes The risk return trade-off..Investment PyramidWhy invest in a mutual fund?..(1) Why invest in a mutual fund?..(3) Why invest in a mutual fund?..(4) How do I make money from a mutual fund?..(1) How to choose the right scheme How to choose the right fund house How to make the winning mutual fund investment(1)Basics of Systematic Investing & Asset AllocationSystematic InvestingWhat is Systematic Investing?Why don't most people save regularly? The mother of all equationsEnhancing Future ValueThe more you save, makes a differenceThe sooner you start, makes a differenceThe more you earn, makes a differenceSavings is for Future GoalsThe Arithmetic of Financing LifeMaking Volatility Work for youSlide Number 29Slide Number 30Slide Number 31Unmatched ConvenienceWhat is Asset Allocation?Significance Relative to ReturnSuggesting the Right AllocationPeriodic ReviewSlide Number 37

basics of mutual funds

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types of mutual funds

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types of growth funds

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