Wealth management session 2

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Introduction to Mutual funds in the Wealth management course

Introduction to Mutual funds in the Wealth management course

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  • 1. Welcome to the Wealth management course
    S G Raja Sekharan
  • 2. Mutual funds
  • 3. WHAT IS MUTUAL FUND?
    A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities like stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals
  • 4. WHAT IS MUTUAL FUND?
    The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective
    The income earned through these investments and the capital appreciation realized are shared by its unit holders(investors) in proportion to the number of units owned by them
  • 5. Why invest in a MUTUAL FUND?
    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
  • 6. ADVANTAGES OF MUTUAL FUNDS
    Affordable
    Professional Management
    Diversification
    Liquidity
    Tax benefits
    Well regulated and low cost
    Transparency
    Flexibility
    Choice of schemes
  • 7. DISADVANTAGES OF INVESTING THROUGH MF
    NO TAILOR-MADE PORTFOLIO
  • 8. Mutual Fund Operation Flow Chart
  • 9. HISTORY OF MF IN INDIA
    MF INDUSTRY STARTED IN INDIA IN 1963 WITH FORMATION OF UTI
    DIFFERENT PAHSES :
    PHASE -1(UTI)
    PHASE-2 (ENTRY OF PUBLIC SECTOR MFs)
    PAHSE-3 (ENTRY OF PRIVATE MFs)
    PHASE-4 (UNDER SEBI REGULATION)
  • 10. PHASE-1 (1963 -1987) -
    ESTABLISHMENT OF UTI IN 1963
    LAUNCH OF FIRST SCHEME US-64
    FOLLOWED BY ULIP IN 1971,CGGF(1986), MASTERSHARE(1987)
    UTI WAS THE ONLY PLAYER IN THE MARKET WITH MONOPOLY POWER
    HUGE MOBILIZATION OF FUNDS
  • 11. PHASE-2 (1987 -1993) -
    ESTABLISHMENT OF SBI-MF---THE FIRST NON-UTI MF THAT STARTED IN 1987
    FOLLOWED BY CANBANK-MF, LIC-MF,BOI-MF
    CHANGE IN THE MIND SET OF THE INVESTORS
    UTI STILL THE UNDISPUTED LEADER OF THE MARKET
    THERE WERE NO PRIVATE SECTOR PLAYERS AT THIS STAGE
  • 12. PHASE-3(1993 -1996) -
    ENTRY OF THE PRIVATE SECTOR FUNDS IN 1993
    JV OF FOREIGN FUND MANANGEMENT COMPANIES WITH INDIAN PROMOTERS
    MORE COMPETITIVE PRODUCT INNOVATION, INVESTMENT MANAGEMENT TECHNIQUES, INVESTORS SERVICING TECHNIQUES CAME INTO INDIA
    INVESTORS STARTED BECOME SELECTIVE
  • 13. PHASE-4 ( 1996 onwards )
    SEBI- THE REGULATORY AUTHORITY SEBI MF REGULATION 1996
    UTI CAME UNDER SEBI REGULATION VOLUNTARILY
    GOVT.’S STEPS FOR INVESTORS’ PROTECTION
  • 14. TYPES OF Mutual funds – by structure
    Open ended -theses schemes do not have a fixed maturity period –they are available for subscription and repurchase on a continuous basis
    Close ended –these have a stipulated maturity period of 5-7 years – they are open to subscription only during the period of launch. They can be bought and sold in stock exchanges where they are listed. Exit routes are also provided by the fund through repurchase at specific points of time.
  • 15. TYPES OF Mutual funds – by investment objectives
    Growth equity schemes –they provide capital appreciation over medium to long term – they carry risk of equity exposure.
    Income /Debt schemes –these aim at providing regular income to the investors by investing in debt instruments like bonds, corporate debentures, govt securities, money market instruments etc.
    Balanced funds –these provide a mix of regular income and capital appreciation –these invest in a mix of equity and debt instruments
  • 16. TYPES OF Mutual funds – by investment objectives
    Money market /liquid schemes –these provide easy liquidity, preservation of capital and moderate income – they invest in safe short instruments such as treasury bills, inter bank call money, commercial paper etc – they give returns of about 5-8% per year
    Gilt funds – they invest in govt securities only and have no default risk –they return about 3-5% p.a.
  • 17. TYPES OF Mutual funds – other classifications
    Index funds -they replicate specific indices – like BSE sensex. They invest in securities in the same weightage as the index
    Tax saving schemes – these schemes give tax rebates under specific provisions of IT act eg Equity linked tax saving scheme, Pension schemes etc – these are growth oriented and predominantly invest in equities
  • 18. TYPES OF Mutual funds – other classifications
    Commodity funds – there are funds today that invest in Gold as a commodity and closely mirror the rate of gold.
    Real estate funds –Real estate funds are those that invest their corpus in real estate projects and provide returns to investors based on appreciation of the asset over a period of 5-8 years. There are also few real estate funds that provide regular quarterly returns based on leasing out of the real estate properties
  • 19. TYPES OF Mutual funds – other classifications
    Load funds and No load funds – load funds charge an entry and exit fee –the No load funds do not charge any entry and exit fees
  • 20.
  • 21.
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  • 24.
  • 25. TYPES OF EQUITY FUNDS
    AGGRESSIVE GROWTH FUNDS:Investment in less researched or speculative/non-blue chip stocks
    GROWTH FUNDS: Investment in stocks with above average growth prospects over 3-5 years.Ex:Tech Stock
    SPECIALITY FUNDS: Sector, Offshore, Small-cap equity, Option income funds
    DIVERSIFIED EQUITY FUNDS: ELSS.
    EQUITY INDEX FUNDS
    VALUE FUNDS: Invest in fundamentally sound companies with low P/E ratio.
    EQUITY INCOME FUND: Invest in sectors where low fluctuation in stock price and high dividend is expected.
  • 26. Ground rules for investing
    Have a long term investment plan – early in life, you can have a higher exposure to equities or equity based MF’s
    Keep a small amount liquid /debt funds for contingencies or planned expenses over 2/3 years
    Spend time in educating yourself in investment areas
    Ignore hot tips, hot stocks etc
    Start early
    Invest regularly –look at Systematic investment plans offered by Mutual funds
    Buy and hold
  • 27. What to look for before investing in a MF
    Compare the performance between the same types of funds
    Risk assesment - most of the well known funds are rated - Value research ratings and Money control.com’s ratings are fairly comprehensive
    Go with funds that have a large corpus of funds – these are mostly safer than the ones with low corpus
    Management - look at the fund manager’s record and go with fund managers who have a good past performance record
  • 28. Build Wealth through Systematic Investment Plan
  • 29. A Systematic Investment Plan (SIP) is an option that allows you to invest a fixed sum at periodic intervals on specific dates.
    A Systematic Investment Plan works for you in three ways:-
    It helps you to save regularly and thus inculcates a sense of discipline
    It harnesses the power of compounding
    It is the best possible way you to reign in impulsive buys-and-sells that otherwise one is gripped by in times of market volatility. - Rupee cost averaging
    You are free to choose any amount (minimum Rs 500 and in multiples of Re 1/-) and any date as per your convenience.
  • 30. OFFER DOCUMENT
  • 31. Offer Document (OD)
    A legal document
    issued by AMC or Sponsor
    OD describes the product
    Very important document from the perspective of prospective investor
    Primary vehicle for investment decision
  • 32. Contents of theOffer Document
    Summary information
    Definitions
    Risk Factors
    Legal and Regulatory Compliance
    Financial Information
    Constitution of the Mutual Fund
    Investment objectives and policies
    Management of the Fund
    Offer Related information
  • 33. Who can invest in MF’s in India
  • 34. Residents : Resident Individuals, Indian Companies, Indian Trusts/ Charitable Institutions, Banks / NBFCs, Insurance Companies, Provident funds
    Non Residents : NRIs
    Foreign Entities: FIIs registered with SEBI
  • 35. Accounting and NAV calculation
  • 36. Net Asset Value (NAV)
    Investors’ subscriptions are not accounted as liabilities or deposits but as Unit Capital
    Investments made on behalf of the investors are reflected on the assets side.
    Liabilities also form part of the balance sheet
    NAV is asset minus liabilities and divided by total number of outstanding units.
    AV = Assets - Liabilities
    NAV = Net assets value of the scheme /Number of units outstanding
    Market value of investments + receivables + accrued income + other assets -accrued expenses-payables- liabilities
    No.of units outstanding on NAV date
  • 37. Daily NAV for open-end schemes
    Weekly NAV for close-end schemes
    A fund’s NAV is affected by
    Purchase and sale of investment securities
    Valuation of all investment securities held
    Other assets and liabilities
    Units sold or redeemed
    Valuation of investment securities must be at their market prices.
  • 38. Legal and Regulatory Environment
  • 39. Organization of a Mutual Fund
  • 40. LEGAL STRUCTURE
    IN INDIA
    ISSUE OF OPEN AND CLOSE END FUNDS IN SAME LEGAL STRUCTURE
    FOLLOW THE SEBI REGULATION
    TRUST FORM
    SPONSOR: ESTABLISHES THE MUTUAL FUND
    Must contribute 40% of the net worth of the AMC
    Need to have sound financial track record
    Appoint trustees
  • 41. Regulators in India
    SEBI
    SEBI regulates MFs
    All MFs have to be registered with SEBI
    RBI
    Bank-owned MFs are under RBI and SEBI
    Ownership of AMC by the bank
    Guarantees issued by the bank as sponsor
    Permission to access inter-bank call money market
  • 42. AMFI
    Promote the interests of the mutual funds and unit-holders
    Set ethical, commercial, and professional standards in the industry
    Increase the public awareness of MF industry
  • 43. Investors Obligations / Complaint Redressal
    Investors should:
    Read Offer Document
    Understand Risk factors
    Monitor Investments
    Ask for information required
    “Monitoring is entirely your responsibility”
    SEBI intervention
    For issue of due diligence certificate for new scheme by compliance officer
    Companies Act cannot protect investors as fund investors are neither shareholders in the AMC nor depositors
  • 44. Thank you