Mutual Fund Kash

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  • A regular mutual fund invests in stocks, bonds and fixed income securities depending on its objective. Hence the investor gets an opportunity to participate in these market-linked instruments while utilizing the fund manager's expertise. Fund of funds further extends this concept wherein a mutual fund invests in units of other mutual fund schemes. So what is motive behind having a FoF? The answer is - ?Diversification?. Fund of funds takes diversification to a new level.
  • Contra with Contra… and not contra with SEBI -mandatory for funds to have a benchmark– lets say Sensex… fund should beat Sensex if the Sensex drops by 10% over a period of two months and during that time, the fund's NAV drops by only 6%, then the fund is said to have outperformed the benchmark. Report submitted to SEBI every 6 months
  • Mutual Fund Kash

    1. 1. KASH Management Services Pvt Ltd
    2. 2. Investment NAV Retail Investors Portfolio Dividend Exit Load Risk Management Factsheets Fund Manager Repurchase Price Return Open Ended AUMs Close Ended Portfolio Growth Professional Management Sale Price Tax Saving Redemption Entry Load Asset Allocation Investment Objective
    3. 3. Snapshot…. Mutual Fund
    4. 4. Why did Mutual Funds come into existence?
    5. 5. Why did Mutual Funds come into existence? An old Axiom : “It is not wise to put all eggs into one basket” ……… was probably in the minds of those who formed the first mutual fund.
    6. 6. Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    7. 7. Flow Cycle of a Mutual Fund Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Fund Schemes schemes Mutual Funds Aspects of Mutual structure of History of Regulatory Classification Risk-return Portfolio Risk Investments Mutual Fund Management Management Checklists Comparison Process AUM Warning Tracking movements in Signals Mutual Funds Expenses India Penetration of What Mutual Mutual Funds Funds are not?
    8. 8. Flow Cycle of a Mutual Fund
    9. 9. Flow Cycle of a Mutual Fund Mutual Funds defined….a flow cycle
    10. 10. Flow Cycle explained…• A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.• The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.• The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.• Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
    11. 11. Important Characteristics of Mutual Funds• The ownership is in the hands of the investors who have pooled in their funds.• It is managed by a team of investment professionals and other service providers.• The pool of funds is invested in a portfolio of marketable investments.• The investors share is denominated by ‘units’ whose value is called as Net Asset Value (NAV) which changes everyday.• The investment portfolio is created according to the stated investment objectives of the fund.
    12. 12. Advantages of Mutual Funds to Investors • Portfolio diversification • Professional Management • Reduction in Risk • Reduction in Transaction costs • Liquidity • Convenience and Flexibility • Safety – Well regulated by SEBI
    13. 13. Disadvantages of Mutual Funds to Investors • No control over the costs. Regulators limit the expenses of Mutual Funds. Fees are paid as percentage of the value of investment. • No tailor made portfolios. • Managing a portfolio of funds. ( Investor has to hold a portfolio for funds for different objectives ).
    14. 14. A mutual fund is not 1.A portfolio of stocks, bonds and other securities 2.A company that manages investment portfolios 3.A pool of funds used to purchase securities on behalf of investors 4.A collective investment vehicleThe Mutual fund is constituted as A trust A private limited company An asset management company A trustee companyMutual fund can benefit from economics of scale because of Portfolio diversification Risk reduction Large volume of trades None of the above
    15. 15. A mutual fund is not A portfolio of stocks, bonds and other securities A company that manages investment portfolios A collective investment vehicle A pool of funds used to purchase securities on behalf of investors Skip
    16. 16. Correct Answer: A pool of funds used toA mutual fund is not purchase securities on behalf of investors A portfolio of stocks, bonds and other securities A company that manages investment portfolios A collective investment vehicle A pool of funds used to purchase securities on behalf of investors Next
    17. 17. A mutual fund is not Correct Answer: A pool of funds used to A portfolio of stocks, bonds and other securities on behalf of purchase securities investors A company that manages investment portfolios A collective investment vehicle A pool of funds used to purchase securities on behalf of investors Next
    18. 18. A mutual fund is not A portfolio of stocks, bonds and other securities Correct Answer: A pool of funds used to A company that manages investment securities on behalf of purchase portfolios investors A collective investment vehicle A pool of funds used to purchase securities on behalf of investors Next
    19. 19. A mutual fund is not A portfolio of stocks, bonds and other securities A company that manages investment portfolios Correct Answer: A pool of funds used to purchase securities on behalf of A collective investment vehicleinvestors A pool of funds used to purchase securities on behalf of investors Next
    20. 20. Diff. b/w MF and Direct Investment… Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Fund Schemes schemes Mutual Funds Aspects of Mutual structure of History of Regulatory Classification Risk-return Portfolio Risk Investments Mutual Fund Management Management Checklists Comparison Process AUM Warning Tracking movements in Signals Mutual Funds Expenses India Penetration of What Mutual Mutual Funds Funds are not?
    21. 21. Diff. b/w MF and Direct Investment…• Diversification is the key to success in equity investments. A diversified portfolio serves to minimize risks. An individual investor may not have the capital to build a diversified portfolio.• Professional Management by mutual funds ensure that the best avenues are tapped with the aid of comprehensive information and detailed research.• Liquidity of mutual funds is high as you have daily repurchase options for open- end funds.• Transaction costs are lower in mutual funds as compared to direct investment due to economies of scale.• Convenience is high for mutual funds as they sell through service networks, banks and other distributors. Many funds allow investors the flexibility to switch between schemes within a family of funds.• Blue Chip portfolio available to investors for as low as Rs. 500/-.• High Service Standards maintained by mutual funds for unit administration.• Transparency – High degree of transparency is maintained by the funds.
    22. 22. Balance sheet of a Bank and Mutual Fund Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Fund Schemes schemes Mutual Funds Aspects of Mutual structure of History of Regulatory Classification Risk-return Portfolio Risk Investments Mutual Fund Management Management Checklists Comparison Process AUM Warning Tracking movements in Signals Mutual Funds Expenses India Penetration of What Mutual Mutual Funds Funds are not?
    23. 23. Balance sheet of a Bank and Mutual Fund Difference between Bank and Mutual Fund Mutual Fund Balance Sheet Bank Balance Sheet Liabilities Assets Liabilities Assets
    24. 24. Balance sheet of a Bank and Mutual Fund Difference between Bank and Mutual Fund Mutual Fund Balance Sheet Bank Balance Sheet Liabilities Assets Liabilities Assets Unit Capital Investment in Share Capital Loans and Financial  Deposits Advances Securities
    25. 25. Organizational Structure of Mutual Fund Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Fund Schemes schemes Mutual Funds Aspects of Mutual structure of History of Regulatory Classification Risk-return Portfolio Risk Investments Mutual Fund Management Management Checklists Comparison Process AUM Warning Tracking movements in Signals Mutual Funds Expenses India Penetration of What Mutual Mutual Funds Funds are not?
    26. 26. Organizational Structure of Mutual Fund
    27. 27. Organizational Structure of Mutual Fund
    28. 28. How are Mutual Fund Structrured • In India Mutual fund is the form of a Public Trust created under the Indian trust Act. 1882. • In India, Mutual funds are organized as trusts. The trust is either managed by a Board of Trustees, or by a trustee company. • The trustees hold the unit holders money in a fiduciary capacity. (Money belongs to unit holders) • In legal sense, the investors are the beneficial owners of investments. • There must be at least 4 members in the Board of Trustees • At least 2/3 of the members of the board of trustees must be independent. • Trustee of one mutual fund can not be a trustee of another mutual fund.
    29. 29. Organizational Structure of Mutual Fund AMC Savings Trust Investments Units Unit holders Returns Registrar Trust SEBI Custodian AMC
    30. 30. Constituents of Mutual Fund
    31. 31. Constituents of Mutual Fund Sponsor • Akin to the Promoter of the company, • Contribution of minimum 40% of net worth of AMC, • Posses sound financial record over five years period, • Establishes the Fund, • Gets it registered with the SEBI, • Forms a trust, & appoints Board of trustee. Trustees • Holds assets on behalf of unit holders in trust, • Trustees are caretaker of unit holders money, • Two third of the trustees shall be independent persons (not associated with the sponsor), • Trustees ensure that the system, processes & personnel are in place, • Resolves unit holders GRIEVANCES, • Appoint AMC & Custodian, & ensure that all activities are accordance with the SEBI regulation.
    32. 32. Constituents of Mutual Fund Custodian • Holds the fund’s securities in safekeeping, • Settles securities transaction for the fund, • Collects interest & dividends paid on securities, • Records information on corporate actions. Asset Management Company • Floats schemes & manages according to SEBI, • Can not undertake any other business activity, other than portfolio mgmt services, • 75% of unit holders can jointly terminate appointment of AMC, • At least 50% of independent directors, • Chairman of AMC can not be a trustee of any MF. Distributor / Agents • Sell units on the behalf of the fund, • It can be bank, NBFCs, individuals.
    33. 33. Constituents of Mutual Fund Banker • Facilitates financial transactions, • Provides remittance facilities. Registrar & Transfer Agent • Maintains records of unit holders’ accounts & transactions • Disburses & receives funds from unit holder transactions, • Prepares & distributes a/c settlements, • Tax information, handles unit holder communication, • Provides unit holder transaction services. Broker • Broker/Dealer is an individual or institution that acts as a principal in securities transaction. • Take the orders to the exchanges / ECNs for execution and trade for their own account and risk. • When buying from a broker acting as a dealer, a customer receives securities from that firms inventory. Since most brokerage firms operate both as a broker and as a Principal (dealer), the term broker/dealer is commonly used.
    34. 34. • Who is the primary guardian of unit holders’ funds/assets – The AMC – The Trustees – The Registrars – The custodians• Transfer Agents of a mutual fund are not responsible for – Issuing and redeeming units of the mutual fund – Updating investor records – Preparing transfer documents – Investing the funds in securities markets• The Custodian of a mutual fund: – Is appointed for safekeeping of securities – Need not be an entity independent of the sponsors – Not required to be receive deliveries with SEBI• Does not give or receive deliveries of physical securities• The Mutual fund is constituted as – A trust – A private limited company – An asset management company – A trustee company• Which of the following cannot be distributors of a mutual fund – Sponsor – Associate of sponsor – Associate of AMC – Employees of AMC
    35. 35. Classification of Mutual Fund Schemes Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual schemes Fund Schemes Portfolio Risk Investments Mutual Fund Management Management Checklists Comparison Process AUM Warning Tracking movements in Signals Mutual Funds Expenses India Penetration of What Mutual Mutual Funds Funds are not?
    36. 36. Classification of Mutual Fund Schemes AMFI Classification of MF Schemes Fund schemes Portfolio objectives Growth & Income High Risk & High Return Balanced Moderate Risk & Return Liquid & Money Market Fixed Return Gilt Zero Risk ELSS Tax Saving Fund of funds Additional diversification ETFs Market Driven Each category is classified into more sub-categories.
    37. 37. Classification of Mutual Fund Schemes Classification of MF 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, Gilt Funds – primarily in G-Sec – Liquid/Money Market – Short-term Money Market (CPs, CDs, Treasury Bills) – Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years) • Other Schemes – Tax Saving Schemes such as ELSS – Special Schemes (ETFs, foreign funds) • Risk – Sectoral funds are most risky; money market funds are least risky • Tenor – Equity funds require a long investment horizon; liquid funds are for the short term liquidity needs
    38. 38. Classification of Mutual Fund SchemesBy Structure Open-ended plans • Open-ended plans do not have a fixed maturity period. • Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. • These schemes have unlimited capitalization, there is no cap on the amount one can buy from the fund and the unit capital can keep growing. • These funds are not generally listed on any exchange. • Open-ended plans are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. • Any time entry option: An open-ended fund allows one to enter the fund at any time and even to invest at regular
    39. 39. Classification of Mutual Fund SchemesBy Structure…. contd Close-ended plans • Close-ended plans have fixed maturity periods. • Investors can buy into these funds during the period when these funds are open in the initial issue. • Such schemes cannot issue new units except in case of bonus or rights issue. • After the initial issue, investor can buy or sell units of the scheme on the stock exchanges where they are listed. • The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors’ expectations and other market factors intervals.
    40. 40. Classification of Mutual Fund SchemesBy Nature of Investment • Equity Funds are those that invest in shares or equity of companies. • Bond Funds invest in fixed income instruments issued by government or corporate entities • Hybrid Funds that invest in a combination of both stocks and bonds • Money Market/Liquid Funds that invest in money market instruments • Commodity Funds that invest in various commodities • Real Estate Funds that invest in properties, land and building etc.
    41. 41. Classification of Mutual Fund SchemesTypes of Funds - By Investment ObjectiveEquity Debt Money MarketEquity Funds Fixed Income Money MarketIndex Funds Funds Mutual FundsSector Funds GILT Funds Balanced Funds Liquid Funds
    42. 42. Classification of Mutual Fund SchemesOther Schemes • 3 year lock in period • Minimum investment of 90% in equity markets at all times • So ELSS investment automatically leads to investment in equity shares. • Open or closed ended. • Eligible under Section 80 C upto Rs.1 lakh allowed • Dividends are tax free. • Benefit of Long term Capital gain taxation.
    43. 43. • Of the following fund types, the highest risk is associated with – Balanced Funds – Gilt Funds – Equity Growth Funds – Debt Funds• A close ended mutual fund has a fixed – NAV – Fund Size – Rate of Return – Number of Distributors• Equity Linked Savings Scheme does not have which of the following features? – It entitles the unit holder to tax rebate – The investment is locked in for 3 years – A minimum stated level of investments is made in equity and equity related instruments – None of the above• Gilt funds invest in – IT sector – AAA securities – Money market securities – Government bonds• When comparing a fund’s performance with that of its peer group, the following cannot be compared – Two debt funds with 5 year maturities – A broad-based equity fund with an IT Sector Fund – A bond fund with bond index – A government securities fund with a government security
    44. 44. Risk-return structure of schemes Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual schemes Fund Schemes Portfolio Risk Investments Mutual Fund Management Management Checklists Comparison Process AUM Warning Tracking movements in Signals Mutual Funds Expenses India Penetration of What Mutual Mutual Funds Funds are not?
    45. 45. Performance Measurement of Mutual Funds
    46. 46. Computing Mutual Fund’s Net Asset Value For investors, the performance of their investment depends on what happens to the fund’s per unit value, or net asset value (NAV) NAV = Market Value of Assets – Liabilities Number of Shares Outstanding
    47. 47. Calculating a Mutual Fund’s Net Asset Value Net Asset Value (NAV) • Definition: Total value of the mutual fund’s stocks, bonds, cash, and other assets minus any liabilities such as accrued fees, divided by the number of shares outstanding Example: Stocks $35,000,000 Bonds $15,000,000 Cash $3,000,000 Total value of assets $53,000,000 Liabilities ($800,000) Net worth $52,200,000 Outstanding shares 15 million NAV = $52,200,000/15,000,000 = $3.48
    48. 48. Calculating a Mutual Fund’s Net Asset Value Example • An open ended fund was purchased when its NAV was Rs. 22. One year later, its NAV was Rs. 24. The annualised percent NAV change is ______ • Answer • % change in NAV = ( 24 -22) *100 = 9.09% » 22
    49. 49. Calculating a Mutual Fund’s Net Asset Value • Purchase price Rs. 22 per Unit • NAV at year end Rs. 23 per Unit • Interim Div. Rs. 3 • Ex.-Div. NAV Rs. 21 • Total Return=? • Assume investment of Rs. 10000 • Step 1: Initial Units alloted =10000/22=454.55 • Step 2:Total Div.=454.55*3=1363.65 • Step 3: Additional Units=1363.65/21=64.94 • Step 4:Total Units=454.55+64.94=519.49 • Step 5:Withdral Amt. =519.49*23=11947.17 • Gain =11947.17-10000=1947.17 • Gain of 1947.17 on the investment of Rs. 10000 • So that on the investment of Rs. 100 gain is 19.47 • Ans:19.47%
    50. 50. Investing in NFO Its new (Old wine in a new bottle, participate in India’s growth potential) Its at Rs 10 i.e its cheaper than a existing fund whose NAV is Rs.110 My neighbour is buying it My distributor / agent has strongly recommended it. I can make good profit in the short term Actually there is no difference/benefit an individual has by investing in an existing Mutual fund or New Fund Offering
    51. 51. Investing in NFO.. exapmle
    52. 52. Mutual Fund Investment Modes Systematic Investment Plan (SIP)  Invest a fixed sum every month. (6 months to 10 yearsthrough 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)
    53. 53. Mutual Fund Investment Modes SIP Calculation
    54. 54. Risk-return structure Risk –Return of different schemes
    55. 55. Risk-return structure Risk –Return on Types of Funds
    56. 56. • The amount required to buy 100 units of a scheme having an entry load of 1.5% and NAV of Rs. 20 is: – Rs. 2000 – Rs. 2015 – Rs. 1985 – Rs. 2030• A fund’s investments at market value total Rs. 700 crores, Total liabilities stand at Rs. 50 lacs and the number of units outstanding is 28 Crores. What is the NAV? – Rs. 30.19 – Rs. 24.98 – Rs. 32.15 – Rs. 40.49• An Investor buys one unit of a fund at an NAV of Rs. 20. He receives a dividend of Rs. 3 when the NAV is Rs. 21. The unit is redeemed at an NAV of Rs. 22. Total Return is• a. 25.71% – Rs. 27.51%• 21.27%• Rs. 21.75%• A funds NAV is affected by – Purchase and sale of investment securities – Valuation of all investment securities held – Units sold or redeemed – All of the above – If the NAV of an open-ended fund was Rs. 16 at the beginning of the year and Rs.22 after 13 months, the annualized change in NAV is – 6.0% – 34.6% – 40.6% – 37.5%
    57. 57. History of Mutual Funds Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual schemes Fund Schemes Portfolio Risk Investments Mutual Fund Management Management Checklists Comparison Process AUM Warning Tracking movements in Signals Mutual Funds Expenses India Penetration of What Mutual Mutual Funds Funds are not?
    58. 58. History of Mutual Funds Global • First started in 1924 • Nearly 8,300 mutual funds available today • More mutual funds in existence today than stocks listed on NYSE and AMEX combined • Nearly half of all U.S. households own mutual funds INDIA UTI sole player in the industry, created by an Act of Parliament ,19631963 – 1987 UTI launches first product Unit Scheme 1964 In 1987 Public Sector Banks and FIs got permission to set up MF.1987 - 1993 SBI mutual fund was the first non -UTI mutual fund In 1993, Mutual Fund Industry was open to private players.1993 - 1996 SEBIs first set of regulations for the industry formulated in 1993 Significant innovations, mostly initiated by private players Implementation of new SEBI regulations led to rapid growth Bank mutual funds were recast as per SEBI guidelines1996 - 1999 UTI came under voluntary SEBI supervision. Dividends made tax free in 1999. Rapid growth, significant increase in corpus of private players1999 - 2000 Tax break offered created arbitrage opportunities Bond funds and liquid funds registered highest growth
    59. 59. History of Mutual Funds
    60. 60. History of Mutual Funds Phases of Mutual Fund Industry in India 1964 1987 1993 2009  ?
    61. 61. History of Mutual Funds Fig 1.1: Total Net Assets Fig 1.2: Global MF Assets by Fund Type
    62. 62. Importance points • IN USA, a MF is constituted as an investment company and an investor buys the share of the fund. • In USA, all mutual funds are open ended. • In USA, funds are also classified as Tax Exempt and Non Tax Exempt Funds • In India, classified as Open – Closed ended, Load and No Load Funds. • Mutual Fund is NOT a company, it can be called as a portfolio of stocks, bonds and other securities or it can be called as pool of funds used to purchase securities on behalf of investors or a collective investment vehicle.
    63. 63. • After UTI, the first mutual funds were started by a. Private sector banks b. Public sector banks c. Financial institutionsd. Non-banking Finance Companies• The private sector was granted permission to enter the mutual fund industry in a. 1992 b. 1993 c. 1998 d. 1995• In US all Mutual Funds are classified as a) Close Ended b) Open Ended c) Both
    64. 64. Regulatory Aspects Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual Fund Management Management Checklists Comparison Process AUM Warning Tracking movements in Signals Mutual Funds Expenses India Penetration of What Mutual Mutual Funds Funds are not?
    65. 65. Regulatory Aspects Regulatory Aspects Regulations - India • 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
    66. 66. Regulatory Aspects Regulations - US • SEC- Securities Exchange Commission is the regulatory body of security industry including Mutual Fund. • The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. • The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.
    67. 67. Regulatory Aspects Regulations - US Mutual funds are regulated by four primary laws: – Securities Act of 1933: specifies disclosure requirements – Securities Exchange Act of 1934: details antifraud rules – Investment Company Act of 1940: requires registration and minimal operating standards – Investment Advisors Act of 1940: regulates fund advisors Mutual funds are the only companies in the U.S.that are required by law to have independent directors, as follows (2001 SEC rules) – Independent directors must constitute a majority of the board – Independent directors select and nominate other independent directors – Legal counsel to the independent directors must also be independent
    68. 68. Compliance with SEBI’s Requirements • Sebi has categorised obligations of Trust into General Due Diligence and Specific Due Diligence. • General Due Diligence – Due care in appointing AMC Directors, observing irregularities in functioning. The purpose is to ensure that trust properties are protected by competent persons and agencies. Ensuring that appointed constituents are duly regd. With SEBI. • Specific Due Diligence – Trustees must appoint independent auditors and obtain periodic audit reports. To obtain Compliance Test reports from the AMC once every 2 months. To prescribe a Code of Ethics for Trustees and AMC personnel.
    69. 69. Compliance with SEBI’s Requirements• Only SEBI registered AMC can be appointed as investment managers of mutual funds• AMC must have a minimum net worth of Rs. 10 Cr., at all times• An AMC cannot be an AMC or Trustee, of another Mutual Fund• AMC’ s cannot indulge in any other business, other than that of asset management• At least half of the members of the Board of an AMC, have to be independent• The 4th Schedule of SEBI regulations spells out rights and obligations of both trustees and AMC’s
    70. 70. Mutual Fund AMC appointment • The trustees, on the advice of the sponsors usually appoint the AMC • The AMC is usually a private limited co., in which the sponsors and their associates or JV partners ,are shareholders • The AMC has to be a SEBI registered entity, with a minimum net worth of Rs. 10 Cr. • The trustees sign an investment management agreement with the AMC, which spells out the functions of the AMC
    71. 71. How are Indian mutual funds organized? • Though the trust is the mutual fund, the AMC is its operational face • The AMC is the first functionary to be appointed and is involved in the appointment of all other functionaries • The AMC structures the mutual fund products, markets them and mobilises the funds, manages the funds and services the investors • All the functionaries are required to report to the trustees who lay down the ground rules and monitor their working
    72. 72. What are the restrictions on the AMC? • AMC’ s cannot launch a scheme without the prior approval of the trustees • AMC’ s have to provide full details of investments by employees and Board members in all cases where the investment exceeds Rs.1 Lakh • AMC’ s cannot take up any activity that is in conflict with the activities of the mutual fund
    73. 73. Portfolio Management ProcessFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    74. 74. Portfolio Management ProcessPortfolio Management Process
    75. 75. Risk ManagementFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    76. 76. Risk ManagementRisk Management Function Risk category Risk factors Volatility in performance, portfolio concentration, Fund management Interest rate movement, liquidity risk & credit risk. Deal error, settlement problem, NAV & fund pricing Operations error, inaccurate financial reporting, fraud. Customer Error in deal processing, fraud .Marketing & distribution New product development, selling & distribution Other business risk Critical knowledge loss, skills shortage, third party•Disaster recovery & business contingency plans. risk•Insurance against third party loss (R&TA), arising from error & omission.
    77. 77. Investment ChecklistsFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    78. 78. Investing Checklist Investment Checklists • 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)
    79. 79. Investing Checklist Investment Checklists • 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.
    80. 80. Mutual Fund ComparisonFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    81. 81. Mutual Fund Comparison Mutual Fund Comparison Mutual Fund Comparison • Absolute returns – % difference of NAV – Diversified Equity with Sector Funds– No • Benchmark returns – SEBI directs – Funds 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
    82. 82. ExpensesFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    83. 83. Mutual Fund Comparison Expenses Expenses of Mutual Fund Accounted for in FUND RETURN Not included in FUND RETURN Management fee* Front end sales load Group fee* Back end sales load Performance fee* Transaction fee Administrative fee* Redemption fee Brokerage costs Account maintenance fee Interest costs Bid ask spreads • An asterisk * indicates fee which is included in a fund’s expense ratio. • As per SEBI Rule, expense ratio should be 2.5% for equity & 2.25% for debt fund of fund value.
    84. 84. Mutual fund fees & expenses? • Two types of loads in Mutual Fund  Front end load – Fees that is charged at the time of investing in a mutual fund. Front-end loads reduce the amount of your investment. For example, lets say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund  Back end load – Fees charged at the time of redeeming out of a mutual fund.For example, the above $950 grows to $5000 in 2 years. There is back end load of 5%. Hence $ 250 will be deducted from the total amount and the investor will receive $4750. There are some other fees which Mutual fund charges to the investor. Although these fees are only a few percentage points a year and seem like a minor expense, they create a serious drain on the performance over a period of years. 84 Limited Access
    85. 85. Mutual fund fees & expenses.. Contd • Contingent deferred sales charge A mutual fund may charge sales charges that are reduced at certain time intervals. For example, the fund may charge 6% of the sale price the first year after the shares are bought. Each year thereafter the fee would be reduced by 1% until no fee would be charged. This is an incentive for investors to leave their money in the fund. • Management fees Mutual funds may charge fees to cover expenses such as advertising, brokers costs and toll-free telephone lines. These are 12b-1 fees, regulated by law. • Transfer fees A fee is charged each time the investor transfers money within the company . 85 Limited Access
    86. 86. What are Initial Issue Expenses Expenses that are incurred in the launch of the fund are called as initial issue expenses. ∙ The costs of registration and fund formation ∙ Legal and advisory expenses ∙ Costs of launching the scheme ∙ Advertisement and promotion expenses ∙ Distribution costs ∙ Commissions to selling agents SEBI imposes a ceiling of 6% on these expenses.
    87. 87. What are Initial Issue Expenses…contdCan the Fund be launched without bearing any initial issueexpenses ?∙ Yes∙ Such funds are called as no load funds∙ AMCs can charge an investment management fee, which is 1% higher than the statutory limit, in this case.
    88. 88. Update on Initial Issue Expenses Latest changes on Initial Issue Expenses • IIE will be permitted for closed ended schemes only and such scheme will not charge Entry load • IN CES, IIE shall be amortized on a weekly basis over the period of scheme. • IN OES, the sales, marketing and other expenses of sales should be met from the entry load and not IIE
    89. 89. Mutual Fund ExpensesCan the AMC charge all the expenses that it incurs, to theincome of the fund ?• No. There are two levels of restrictions• At the first level only certain kinds of expenses, that are identified as having been incurred for the conduct of the business of the fund, can be charged to the fund.• The second level of regulation refers to the limit on the total expenses, that can be charged to the fund Following is the maxmum limit on the expenses For net assets up tp Rs. 100 Cr 2.50% For the next Rs 300 Cr. Of net assets 2.25% For the next Rs 300 Cr. Of net assets 2% For the remaining net assets 1.75% On debt funds the limits on expenses are lower by 0.25%
    90. 90. Mutual Fund Expenses What are the fees charged by the AMC ? The fees are regulated by SEBI as follows: • For the first Rs.100 Cr. Of net assets: 1.25% • For the net assets exceeding Rs. 100 Crore: 1.00% • If the AMC does not charge any of the initial issue expenses to the fund, it can charge the scheme a management fee, that is 1% higher than the above rates
    91. 91. Mutual fund fees & expenses• Two types of loads in Mutual Fund Front end load – Fees that is charged at the time of investing in a mutual fund. Front-end loads reduce the amount of your investment. For example, lets say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund Back end load – Fees charged at the time of redeeming out of a mutual fund.For example, the above $950 grows to $5000 in 2 years. There is back end load of 5%. Hence $ 250 will be deducted from the total amount and the investor will receive $4750. There are some other fees which Mutual fund charges to the investor. Although these fees are only a few percentage points a year and seem like a minor expense, they create a serious drain on the performance over a period of years.91 Limited Access
    92. 92. Mutual fund fees & expenses continued….• Contingent deferred sales charge A mutual fund may charge sales charges that are reduced at certain time intervals. For example, the fund may charge 6% of the sale price the first year after the shares are bought. Each year thereafter the fee would be reduced by 1% until no fee would be charged. This is an incentive for investors to leave their money in the fund.• Management fees Mutual funds may charge fees to cover expenses such as advertising, brokers costs and toll-free telephone lines. These are 12b-1 fees, regulated by law.• Transfer fees A fee is charged each time the investor transfers money within the92 Limited Access
    93. 93. Tracking Mutual FundsFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    94. 94. Tracking Mutual Funds 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 such as www.valueresearchonline.com, www.mutualfundsindia.com, www.morningstar.in, www.lipperweb.com et al. – Newspapers – Professional advisor
    95. 95. Warning SignalsFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    96. 96. Warning Signals Warning Signals• Funds management changes;• Performance slips compared to similar funds;• Funds 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.
    97. 97. AUM movements in IndiaFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    98. 98. AUM movements in India Movement of AUMs in different categories over a period of time Stock Funds have become a mainstream product. Liquid Plus Funds and FMPs have seen aggressive inflows due to regulatorychanges. New asset classes like ETFs and FoFs have emerged.
    99. 99. AUM movements in IndiaIndian Asset Management Industry - Growth in AssetsTotal Assets Under Management as on March 2009 – Rs 493286 croresTotal No. of players - 36
    100. 100. Penetration of Mutual FundsFlow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    101. 101. Penetration of Mutual Funds Penetration vis-à-vis Other Financial ProductsNote: Penetration of Mutual Funds is still low as compared to Banks andInsurance Companies.
    102. 102. What Mutual Funds are not?Flow Cycle of a Diff. b/w MF Balance sheet Organizational Mutual Fund and Direct of a Bank and Structure of a Investment Mutual Fund Mutual Fund Regulatory History of Risk-return Classification Aspects Mutual Funds structure of of Mutual in India schemes Fund Schemes Portfolio Risk Investments Mutual FundManagement Management Checklists Comparison Process AUM Warning Trackingmovements in Signals Mutual Funds Expenses IndiaPenetration of What MutualMutual Funds Funds are not?
    103. 103. What Mutual Fund are not • MFs are not ‘get rich quick investments’ • MFs are not ‘risk free investment’ • MFs are not ‘assured return investment’ • MFs are not ‘a universal solution to all investment needs’
    104. 104. Myths about Mutual Funds •Mutual Funds invest only in shares. • Mutual Funds are prone to very high risks/actively traded. • Mutual Funds are very new in the financial market. • Mutual Funds are not reliable and people rarely invest in them. • The good thing about Mutual Funds is that you don’t have to pay attention to them.
    105. 105. Factors to be considered before choosing a Mutual Fund Track record / experience of the fund house  Stability of the investment team / adherence to an investment process  Consistent performance of the fund across market cycles  Disclosure and service levels offered by the fund house  Relative performance among its peer group (across time periods)  Investment style (whether it suits your risk profile)  Look for Expense Ratio, Exit load etc
    106. 106. Thank You

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