Human Life Cycle Education Earning Years Post Retirement Years Phase I Phase II Phase III Age- 22 yrs Age- 60 yrs Marriage Child birth Child’s Education Child’s Marriage Housing 22 yrs 38 yrs 10- 20 yrs
Individual Investor: Life Stages 60 Retirement 40 Middle Age 27 Young Married 22 Young Independent Earnings Consumption Savings All individuals have a finite period to save for their investment goals
Value of Money over time Impact of inflation on monthly expenses of Rs. 30,000 today Value of Rs. 100,000 over time At inflation of 5% Investors need to beat inflation 30,000 38,288 62,368 79,599 Today 5 years 15 years 20 years 100,000 78,353 48,102 37,689 Today 5 years 15 years 20 years
OPTIONS FOR INVESTING
Deposit in Bank – SB, RD, FD’s, Locker ;)
Loan a Friend/Relative on Interest
Invest in Bullion - Gold, Silver..
Investment in Capital Markets - - Direct - Equity Share Markets - Debt & Bonds Market - Indirect - Mutual Funds
So what are my alternatives?
Fixed Interest Products –
Rates of Return?
Returns – Net of tax?
Won’t Inflation eat into the return?
Returns – net of tax/ inflation is poor hedge against inflation
Why Equities 7.47% 7.12% 10.64% 10.27% 18.25% Inflation Gold G Secs Bank FD Equities Source : CLSA Cumulative annualised returns (1980 - 2004) Equities – the most attractive asset class Equities produce highest long-term returns
EQUITIES-RISKY & VOLATALIE
BSE SENSEX IN LAST TWO YEARS
How To Invest In Equities
High risk, high return category.
Needs a lot of time & expertise.
Substantial initial capital required.
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.
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
GROWTH IN ASSETS UNDER MANAGEMENT
MUTUAL FUND DATA April 30th, 2009 54807 460557 515364 538520 688353 688234 Grand Total (B+C+D) 38958 356452 395410 402265 513694 513575 Total Private Sector D 18703 180163 198866 198352 250760 250760 Predominantly Indian 986 22857 23843 19571 23329 23329 Predominantly Foreign 19269 153432 172701 184342 239605 239486 Indian Private Sector & Joint Venture : 3023 23092 26115 48898 55866 55866 Institutions C 12826 81013 93839 87357 118793 118793 Bank Sponsored B Inflow/ Outflow as on Mar 31 , 2009 as on Apr 30 , 2009 Total Total Existing schemes Asset Under Management Redemption Sales Category
Organization of a Mutual Fund
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
Diversifying investments in different assets such as stocks, bonds, real estate, cash in order to optimize risk.
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.
Profits given to the investor from time to time.
Profits ploughed back into scheme. This causes the NAV to rise.
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
Price at which open-ended scheme
TYPES OF MUTUAL FUNDS Type of Mutual Fund Schemes Structure Investment Objective Special Schemes Open Ended Funds Close Ended Funds Interval Funds Growth Funds Income Funds Balanced Funds Money Market Funds Industry Specific Schemes Index Schemes Sectoral Schemes
Types of Mutual Fund Schemes
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)
Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)
Tax Saving Schemes
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.
All dividends declared by debt / equity oriented schemes are tax free in the hands of the investor
Dividend distribution tax @ 14.1625% for individuals and 22.66% for corporates under debt oriented schemes
No DDT under equity schemes
Long term capital gain in equity schemes – exempt from tax
Indexation benefit available for long term non equity schemes
Equity short term capital gain @10%
STCG in Debt funds – Rates applicable for the investor
Deduction of Rs. 1 lac under section 80C
Return is remembered, Risk forgotten
Risk = Potential for Harm
Credit Rate Risk
MF Risk = Volatility (fluctuation of NAV)
Websites give star rating ( basis = risk-adjusted return)
10 5.2631 - - Additional units - - Rs 100 - Dividend received in cash 2000 2000 1900 2000 Value (Rs) 110 105.2631 100 100 Units 18.1818 19 19 20 NAV After declaration of dividend / bonus Rs 2,000 Rs 2,000 Rs 2,000 2,000 Value (Rs) 100 100 100 100 Units 20 20 20 20 NAV Bonus Dividend reinvestment Dividend payout Growth Before declaration of dividend / bonus
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
Investments happen every month unfailingly
Power Of Compounding
Rupee Cost Averaging
Helps you overpower the temptation to spend fully
Helps you build for the future
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 106.39 units 154.75 units When the price is highest, you buy the least number of units When the price is lowest, you buy the highest number of units
Simple plotting of closing price of BSE Sensex for the first of every month. The time period considered here is from 1/1/1990 to 02/12/2005 Source: Credence Analytics Investing at Peak – SIP is the way
Start Early : SIP A gap of 5 only years can result in a lot of difference in wealth creation ! Rs. 1000 invested per month @15% p.a. till the age of 60 yrs
Diversified equity funds
Equity-linked savings schemes
Sector funds like Auto, Health Care, FMCG etc
Dividend Yield Funds
Others (Exchange traded, Theme, Contra etc)
Invest in only top performing funds
These cannot go wrong
Replicate past performance in future
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)
Investing in Equity Funds
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 on expense ratio
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)
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.
The right asset allocation
Age = % in debt instruments
Reality= different financial position, different allocation
Selecting the right fund/s
Based on scheme’s investment philosophy
Long-term, appetite for risk, beat inflation– equity funds best
TRAPS TO AVOID
Begin with existing schemes (proven track record) and then new schemes
Avoid Market Timing
% difference of NAV
Diversified Equity with Sector Funds– NO
Fund's returns compared to its benchmark
Equal to time for which you plan to invest
Equity- compare for 5 years, Debt- for 6 months
Proved its mettle in bear market
Buying Mutual Funds
Contacting the Asset Management Company directly
Request for agent
Locate one on AMFI site
Bajaj Capital etc.
Online Trading Account
Motilal Oswal, Indiabulls- Send agents
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
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.