Human Life Cycle
10- 20 yrs
Age- 22 yrs
Post Retirement Years
Age- 60 yrs
Individual Investor: Life Stages
Young Independent Young Married
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
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
Tax @ 30%
Returns – net of tax/ inflation is poor hedge against inflation
Equities produce highest long-term returns
Equities – the most attractive
Bank FD Equities
Source : CLSA
Cumulative annualised returns (1980 - 2004)
EQUITIES-RISKY & VOLATALIE
BSE SENSEX IN LAST TWO YEARS
How To Invest In Equities
• Direct Equity
» High risk, high return category.
» Needs a lot of time & expertise.
» Substantial initial capital required.
• Mutual Funds
– One-Time Investment
– 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
• 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.
• 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
MUTUAL FUND DATA April
Asset Under Management
as on Apr 30
as on Mar 31
Total Private Sector
Private Sector & Joint Venture :
• Governed by SEBI (Mutual Fund) Regulation 1996
– All MFs registered with it, constituted as trusts ( under Indian Trusts
• 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
– 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
– 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
Entry Load/Front-End Load (0-2.25%)
Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher than
Re-Purchase Price/ Bid Price
The commission or charge paid when an investor exits from a mutual fund. Imposed to discourage
May reduce to zero as holding period increases.
Sale Price/ Offer Price
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%)
Net Asset Value
No. of Units Outstanding on Valuation date
Price at which close-ended scheme repurchases its units
Price at which open-ended scheme
TYPES OF MUTUAL FUNDS
Types of Mutual Fund 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 (3-10 months)
– Liquid/Money Market (including gilt) – Short-term Money Market
– Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)
• Other Schemes
– Tax Saving Schemes
– Special Schemes
• Funds based on Size of the Companies
• Large cap funds:Funds that invest in
companies whose total market cap is above
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
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 costeffective 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
• 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)
Before declaration of dividend / bonus
After declaration of dividend / bonus
• 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)
What is a Systematic Investment Plan?
An investment plan to invest a
fixed amount regularly at a
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
• Forced saving
• 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
When the price is highest,
you buy the least number of units
When the price is lowest,
you buy the highest number of units
Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04
Start Early : SIP
Rs. 1000 invested per month @15% p.a. till the age of 60 yrs
Wealth at 60
A gap of 5 only years can result in a lot of difference in wealth creation !
Diversified equity funds
Equity-linked savings schemes
Sector funds like Auto, Health Care, FMCG etc
Dividend Yield Funds
Others (Exchange traded, Theme, Contra etc)
Investing in Equity Funds
– 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
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)
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 (NowRel 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
• 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
– Younger= Riskier
• Selecting the right fund/s
– Based on scheme’s investment philosophy
– Long-term, appetite for risk, beat inflation– equity funds best
• TRAPS TO AVOID
– IPO Blur
• Begin with existing schemes (proven track record) and then new schemes
– Avoid Market Timing
• 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
Buying Mutual Funds
Contacting the Asset Management Company directly
– Web Site
– Request for agent
– Locate one on AMFI site
– Bajaj Capital etc.
• Online Trading Account
– ICICI Direct
– 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
• It merges into another fund.
• Change in management style or a change in the
objective of the fund.