Etica Wealth Management Pvt Ltd - Investment Planning


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Investment Planning basically deals with the Investment compponent of your Financial Plan. It talks about Goal based planning. It compares Risk & Return of all invesment products available in India. It talks a great deal about investments in Equity, Debt, Gold and Real Estate. It also talks about Basic principles of investing.

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Etica Wealth Management Pvt Ltd - Investment Planning

  1. 1. 28-05-2012“AN INVESTMENT IN KNOWLEDGE PAYS THE BEST INTEREST" - Benjamin Franklin PROFILE OF AN AVERAGE RETAIL INVESTOR Knowledge about investment options is rather vague “You work hard for Rely on Agents / CA’s / Relatives / Friends Does not seek advise from professional investment advisorsyour money. But does Generally not clear about Risk & Returns Have developed comfort in Fixed Deposits / Government Savings your money work Expectation from Equity are unrealistic Nation of Savers, but not Investorsequally hard for you?” Presentation on Financial Planning ÉTICA WEALTH MANAGEMENT PVT LTD 1
  2. 2. 28-05-2012GAJENDRA KOTHARI, CFA, CAIA, ICFA FEW HOUSEKEEPING REQUESTS…MD & CEO, Etica Wealth Management Pvt Ltd. Not a Sales talkVice-Vice-President & Head – Products (PMS division), UTI AMC Ltd. Would request you to participate enthusiastically8 yrs of work experience in the Financial Services IndustryChartered Financial Analyst (CFA) from CFA Institute, USA No offence to any particular individualChartered Alternative Investment Analyst (CAIA) from CAIA, MassachusettsInternational Certificate in Financial Advice (ICFA), London, UK Mobile SilentEarlier roles - Institutional Sales (London – 3 yrs), Institutional Sales (Mumbai – 2yrs), Retail Sales (Mumbai – 2 years)Speaker at various investor forums on various personal finance topicsA COMMAN MAN’S CONCERN LIFE STAGES How can I grow and protect my financial wealth? Each individual is unique; so are his needs and wants; also, through out life, unique; wants; How can I pay and manage my debt / liabilities (Good / Bad / Ugly) (EMIs)? an individual’s needs and wants keep changing. changing. How much should I save to be able to pay for my children’s education? Therefore, financial planning process must first assess an individual at what How can I maximize the tax benefits which can be availed of? in. stage of life he / she is in. How can I save enough to be able to retire comfortably and maintain the Life stage is not a mechanical process based on some ‘age’ criteria but current lifestyle? based on a number of milestones How can I meet emergency requirements / contingencies? These milestones could be completion of formal education, first job and How can I maximize what my heirs will inherit? subsequent major job changes, major life events like marriage, birth of child, acquisition of major assets, education of children, marriages, separation, death etcLIFE STAGES - MILESTONES Dependent till early 20s - Education & skill acquisition 20s Career beginners, enjoyers in 20 to 30 - first job / joining business, first vehicle, marriage & first child Career advancers in 30s - Young family, children in school, house purchase 30s Peak earners, achievers 40s - children in college, more savings and less 40s debts Pre retirees, empty nesters 50s - grown children, re-arrange financials in 50s re- preparation for retirement / starting on own etc Retired 60s - settled children, debts cleared, estate planning.. 60s planning.. 2
  3. 3. 28-05-2012WE ALL HAVE DREAMS… Investing can help you realize your goals in life!Buying your Providing a good Having a happyDream House future for Children Retired lifeWHAT IS FINANCIAL PLANNING ? FINANCIAL PLANNING PROCESS Financial planning is the process of successfully meeting financial needs of life through the proper management of finances. finances. “Big picture approach” planning. It is more than just investment or tax or estate or retirement planning. It is all these and more. It is an integrated and multi-disciplinary approach more. multi- balancing and fine tuning each of these components. components. It is also NOT an one time & one size fit all exercise recognizing each individual’s goals, desires, needs, experiences and expectations are different It is your roadmap to Financial Health, & Sustainable Wealth creation and to achieve Financial Freedom. Freedom.WHY YOU NEED FINANCIAL PLANNING? PROBLEMS OF RANDOM INVESTMENT Wrong selection - flavor of the month. Life without Financial planning is like Unplanned Vacation. Vacation. Wrong timing - mostly near top. Short term investment. If you wish to achieve your financial goals successfully & peacefully you must plan your financial life. life. Inadequate investment. 3
  4. 4. 28-05-2012WHY IS IT IMPORTANT, THE INDIA CONTEXT WHO NEEDS FINANCIAL PLANNING? Few major socio economic changes which make personal financial planning Whatever may be level of your income or assets, you more critical in the Indian context need financial planning. planning. Absence of any kind of social security for vast majority of people Increased longevity due to improved medical care AND ever increasing It is myth that only rich people need financial medical costs planning. planning. Rapidly decreasing career span; retirement (voluntary or otherwise) age is span; falling Gradually (dramatically?) reducing joint / extended family system More market driven and globalized Indian economy; more choices and more economy; risksCURRENT STATUS & GOAL SETTING FINANCIAL GOALS - EXAMPLES Mandatory Goals: Find out the net saving available for investment. investment. Children education Children marriage – Not major in the USA Retirement Planning. Wealth accumulated till today. today. Purchase of residential premises. Purchase of vehicle. Short term Goals 1- : 1-2 years. What is your intention of investment (goal setting)? Medium term goals 3- : 3-5 years. Optional Goals: Long term goals 5- : 5-10 years. Up gradation of Residence. Distant goals 15- : 15-20 years. Simply put, How much money you need? & When you need the Luxury Car. money? (Time horizon) Purchase of Luxury items at Home. Vacation Abroad. Charity - Religious or Social. Specific financial goals are vital to financial planning. planning. Inheritance - Estate planning. Early Retirement - Financial freedom.BE SMART BEST PRACTICES goals. Set measurable goals. Understand the effect your financial decisions have on other financial issues. issues. periodically. Revaluate your financial plan periodically. Start now. Do not assume that financial planning is for when you are older. now. older. Start with what you have got. Do not assume that financial planning is for the got. wealthy. wealthy. charge. process. Take charge. You should be in control of the financial planning process. Look at the bigger picture. Financial planning is more than retirement planning or tax picture. planning. planning. investing. Do not confuse financial planning with investing. Do not wait for a money crisis to begin financial planning. planning. 4
  5. 5. 28-05-2012WHAT IS COMPREHENSIVE FINANCIAL PLANNING ? COMPONENTS OF FINANCIAL PLANNING ProtectionComprehensive financial planning uses an integrated Life Insuranceapproach to monitor all aspects of someone’s financial Health insurance Home, Motor Insurancesituation: - Insurance & Risk Planning Savings - Retirement Planning Emergency requirements - Goal Based Investment Planning Short Term Goals - Vacation Planning - Tax Planning - Estate Planning Growth Retirement Planning Children Education House Purchase Investment PlanningSAVING AND INVESTMENT WHY INVESTMENT PLANNING Everyone needs to save for a rainy day. Once you have saved day. Investment Planning is important because it helps you to derive enough to take care of emergencies, you should start thinking investments. the maximum benefit from your investments. about investing and to make your money grow. grow. Your success as an investor depends upon your ability to Investment planning focuses on identifying effective investment choose the right investment options. This, in turn, depends on options. strategies according to an investor’s risk appetite and financial goals. your requirements, needs and goals. goals. goals. Investment Planning also helps you to decide upon the right There is a wide variety of investment options, including strategy. investment strategy. Besides your individual requirement, your Equities, Bonds, Gold, Mutual funds, Bank Deposits, Real investment strategy would also depend upon your age, Estate, Commodities and Derivatives. appetite. personal circumstances and your risk appetite. 5
  6. 6. 28-05-2012 BASICS OF INVESTMENT PLANNINGLET TIME AND COMPOUNDING WORK FOR YOU... Cost of Delay can be Devastating !!!Growth Rate assumed at 15%STARTING EARLY & INVESTING REGULARLY Source: Sundaram BNP Paribas AMC 6
  7. 7. 28-05-2012POWER OF COMPOUNDING? POWER OF COMPOUNDING?Which option will you chose from below? How much will you get at the end of month?1. Receiving Rs 1,00,00,000.00 1. Rs 30,00,00,000.002. Receiving double the money than previous day i.e Rs 2. Rs 1,07,37,41,823.00 1,2,4,8,16,32……so on for a month 7
  8. 8. 28-05-2012 IS THERE ANY SOLUTION TO OVERCOME THIS PROBLEM?EVEN LOW INFLATION WILL TREBLE COST OF LIVING ARE YOU PREPARED FOR THIS !!! A Loaf of Bread 1 Liter Milk 1 Kg Apples Year Amount Year Amount Year Amount 2000 Rs. 10 2000 Rs. 25 2000 Rs. 25 2010 Rs. 16 2010 Rs. 40 2010 Rs. 80 2020* Rs. 26 2020* Rs. 65 2020* Rs. 130 2030* Rs. 42 2030* Rs. 106 2030* Rs. 212 Inflation rate assumed is 4.5% per annum in line with RBI’s comfort range. Inflation rate assumed is 4.5% per annum in line with RBI’s comfort range. Source: Sundaram BNP Paribas AMCLIFESTYLE INFLATION – A TIME BOMB WEALTH CREATION IN DIFFERENT ASSET CLASSES5 years back Today % increaseOrdinary Shoes – Rs 500 Red Tape shoes – Rs 3000 500%Titan Watch – Rs 1500 Tommy Hilfilger – Rs 7500 400%Restaurant – Rs 1000 Fine Dining – Rs 5000 400%Medicine – Rs 500 No Limit ----School fees – Rs 5000 DPS fees – Rs 1,00,000 1800%Didn’t exist I Pod – Rs 15,000 ----Normal mobile – Rs 3,000 I-phone – Rs 30,000 900%Scooter / MC – Rs 50,000 Sedan Car – Rs 8,00,000 1500%2 BHK 3 BHK with SP, Club etc No ComparisonMarriage, Foreign vacation & more……. Today not investing in Equity is RiskyInflation X Multiply by 5 members - !!!!!!!!!!! Figures as of April 2010 Rs 1000-a-month invested in Equity is an investment made in SensexMaid - Washing Machine, Driver - Tata Nano Source: Sundaram BNP Paribas AMCcNarayana Murthy Driver 8
  9. 9. 28-05-2012WHO’S THE BEST ??? ALL THAT GLITTERS IS NOT GOLD!!!Asset Class 1 Year 3 Year 5 Year 10 Year 15 Year 20 Year 30 YearSilver 115.54% 29.77% 48.49% 24.24% 13.63% 12.11% 3.79%Gold 36.82% 14.46% 38.25% 13.98% 9.06% 6.97% 0.35%Sensex 10.94% 7.52% 11.51% 18.36% 12.40% 15.10% 17.04%Bonds 6.00% 8.00% 8.00% 10.00% 12.00% - - Figures as of March 31, 2011COMPARISON OF GOLD FUND WITH OTHER GOLD INSTRUMENTS COMPARISON OF GOLD FUND WITH OTHER GOLD INSTRUMENTSASSET ALLOCATION IS THE KEY 9
  10. 10. 28-05-2012TIME MATTERS, NOT TIMING Source: Sundaram BNP Paribas AMC 10
  11. 11. 28-05-2012ARE YOU CONFUSED???INVESTMENT OPTIONS BANK DEPOSITS Deposits in scheduled banks are regulated by RBI and guarantee provided by Deposit Insurance and Credit Guarantee Corporation (DICGC) - upto Rs 100,000 per depositor per bank. There is no ceiling on interest rates payable on deposits in savings account (currently minimum is 4% calculated daily) Interest rate on Fixed deposits varies with term of deposit. Bank deposits enjoy high liquidity. Withdraw prematurely a portion or whole of FD’s, with interest rate corresponding to periods of deposit with some penalty. Also we have flexi accounts (FDs with ATM facility) Loans can be raised against bank depositsReal Returns(-) = Returns (9%) - Tax (20%) - Inflation (8-9%)SBI – FIXED DEPOSIT RATES POST OFFICE MONTHLY INCOME SCHEME Provide regular monthly income Specially suited for retired employees / Senior Citizens Rate of interest 8.50% Interest is taxable at the applicable slab rate Maturity Period - Five Years. No Bonus on Maturity w.e.f. 01.12.2011. Auto credit facility to SB Account Type of Account Minimum Limit Maximum Limit Single INR 1500 INR 4.5 lakhs Joint INR 1500 INR 9.0 lakhs 11
  12. 12. 28-05-2012NATIONAL SAVING CERTIFICATES (VIII AND IX ISSUE) Scheme specially designed for Government employees, Businessmen and other salaried classes. Trust and HUF cannot invest. No maximum limit for investment. No Tax deduction at source Certificates can be kept as collateral security to get loan from banks Investment up to INR 1,00,000/- per annum qualifies for IT Rebate under section 80C of Income Tax Act. Maturity period 5 years and 10 years Rate of interest 8.60% for 5 years and 8.90% for 10 years. Minimum INR. 100/- No maximum limit available in denominations of INR. 100/-, 500/-, 1000/-, 5000/- & INR. 10,000/-SENIOR CITIZEN SAVING SCHEME COMPANY DEPOSITS The account may be opened in individual capacity or jointly with spouse. Companies solicit fixed deposits from public The account may be opened by an individual: Fixed deposits mobilized by manufacturing companies regulated by Who has attained age of 60 years Who has attained the age 55 years or more but less than 60 years and has retired under Company law board (deposit term is 1 to 3 years) a Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme on the date of Fixed deposits mobilized by finance companies regulated by RBI (deposit opening of the account within three months from the date of retirement. No age limit for the retired personnel of Defence services provided they fulfill other specified term is 25 months to 5 years) conditions. Interest rates on company deposits are higher than bank fixed deposits The individual may open one or more account in the multiple of INR1000/- subject to a maximum INR1000/- lakh. limit of INR15 lakh. No tax benefit for depositors on company deposits Premature closure of account is permitted - After one year but before 2 years on deduction of 1 ½ % of the deposit. After 2 years but before date of maturity on deduction of 1% of the deposit. No TDS upto Rs. 5000 interest income in a financial year Interest @ 9.30% per annum (compounded Quarterly, Payable 31st March, 30th June, 30th Sept and Risk is also high compared to Bank Deposits 31st December.) The investment under this scheme qualify for the benefit of Section 80C of the Income Tax Act, 1961 HDFC Deposits, Mahindra Finance, TATA Motors, Muthoot Finance from 1.4.2007PUBLIC PROVIDENT FUND (PPF) EMPLOYEE PROVIDENT FUND Employer and employee contributes certain minimum amount on monthly basis to Ideal investment option for both salaried as well as self employed classes. the provident fund account Non-Resident Indians (NRIs) are not eligible Employee can choose to contribute additional amounts Investment up to INR. 1,00,000 p.a. qualifies for IT Rebate under Sec 80 C of IT Act. Contribution by employer is fully tax exempt (from the view of employee), contribution 15 year investment scheme, can be extended by 5 years. by employee is given 80C tax benefit. Minimum amount Rs. 500/- per year, Maximum amount Rs. 1,00,000/- per year. Contributions earn an compound interest rate of 8.5% which is totally exempt from EEE status: No tax on interest and on withdrawal. taxes. Interest is accumulated in the account and not paid to employee. Present Interest rate is 8.80% p.a. The rate will now vary every Financial Year. Employee can take loan against provident fund subject to conditions Loan facility available from 3rd financial year upto 5th financial year. Contribution: 12% of Basic + DA Withdrawal permitted from 6th financial year Pension Fund : 8.33% Free from court attachment. Provident Fund : 3.67% Employee Deposit Linked Insurance : 0.5% 12
  13. 13. 28-05-2012EPF ALLOCATION PSU BONDS Public sector undertaking issue debentures known as PSU bonds PSU bonds can be tax free or taxable PSUs can set the interest rate on these bonds subject to limit fixed by Ministry of Finance Tax free bonds can be issued by prior approval of MoF No deduction of TDS, transferable by endorsement, no stamp duty on transfer, traded on stock exchanges NABARD, NHAI, RECTAX FREE BONDS NON-CONVERTIBLE DEBENTURES (NCDS) Tax-free bond target for infrastructure projects at Rs 60,000 Similar to promissory notes, debentures are used to raise long term debt by crore companies Companies – NHAI, IRFC, IIFCL, HUDCO, SIDBI When debentures are offered to retail investors, a trustee is setup for protecting the Interest income is tax free interest of debenture holders Interest rate (adjust as per 10 year G-Sec) Company has obligation to pay interest and principal to debenture holders at Tenure – 10 years and 15 years specified times Very suitable for people in highest tax bracket Typically debentures are secured by a charge on immovable properties Safe investment Companies are free to select the coupon rate and redemption period Debentures can carry call or put features Debentures may have a convertible clauseDO YOU HAVE ANY ANSWER ? REAL ESTATE Very illiquid investment Do you think these investments are safe? Requires very high amount of corpus. You need to be a super HNI to invest in real estate properties. The day you have parted with your money, you have Requires a much longer time horizon compared to Equity investment taken risk Home work required in Real Estate is very high (Due diligence on builders / lengthy documentation / Clear title etc ). At times, it takes a year to decide and close the European countries defaulting ??? investment while Equity investment can be done in just a few mouse clicks Corruption / Scams / Swiss Accounts Not comparable (i.e the return on one property cannot be compared to another property) and also there is no authentic data available. On the other hand, Equity Remember UTI-64 fiasco…. investment data is very much comparable and has a long term track record. Bank Fixed Deposits Guarantee – Rs 1 lakh Transaction costs (Stamp Duty, Broker fees, Legal Charges etc) on Real Estate is very high compared to Equity investment. LIC Guarantee – Talks are going on to remove When it comes to Taxation, Equity investment scores quite favourably compared sovereign guarantee to Real Estate investment) Transparency missing / Unaccounted money Politicians influence 13
  14. 14. 28-05-2012 EQUITY VS REAL ESTATE BSE Sensex Return from Jan 01, 1980 – Oct 03, 2011 – 16.72% annually (with considering dividend reinvestment) Flat in Samudra Mahal Worli was sold at Rs 700 per sq ft in the 70’s and was last transacted at Rs 107,000 per sq ft – Rate of Return p.a – 12.79% (without considering transaction costs and maintenance charges) Sensex is up 136 times while the flat in Samudra Mahal is up 46 times (more than 3 times) I buy on the assumption that they could close the market the next day and not reopen it for ten years – Warren Buffet ROLLING RETURN OF SENSEX Date Dec-79 Dec-80 Sensex 118.76 148.25 1 Year 24.83 2 Years 3 Years 5 Years 10 Years 15 Years SENSEX RETURNS - 17.06% P.A Dec-81 227.72 53.61 38.47 Dec-82 235.83 3.56 26.13 40.92 Dec-83 252.92 7.25 5.39 30.62 Dec-84 271.87 7.49 7.37 9.26 18.02 Dec-85 527.36 93.98 44.40 49.54 28.89 Dec-86 524.45 -0.55 38.89 44.00 18.16 Dec-87 442.17 -15.69 -8.43 27.53 13.40 Dec-88 666.26 50.68 12.71 12.40 21.38 Dec-89 778.64 16.87 32.70 21.85 23.42 20.69 Dec-90 1048.29 34.63 25.44 53.97 14.73 21.60 Dec-91 1908.85 82.09 56.57 69.26 29.48 23.69 Dec-92 2615.37 37.01 57.95 83.27 42.69 27.20 Dec-93 3346.06 27.94 32.40 78.66 38.10 29.47 Dec-94 3926.9 17.36 22.53 43.43 38.21 30.61 26.27 Dec-95 3110.49 -20.79 -3.58 9.06 24.30 19.42 22.50 Dec-96 3085.2 -0.81 -11.36 -3.98 10.08 19.39 18.98 Dec-97 3658.98 18.60 8.46 -3.47 6.95 23.53 20.06 Dec-98 3055.41 -16.50 -0.48 -0.89 -1.80 16.45 18.07 Dec-99 5005.82 63.83 16.97 27.38 4.97 20.45 21.43 Dec-00 3972.12 -20.65 14.02 4.19 5.01 14.25 14.41 Dec-01 3262.33 -17.87 -19.27 3.33 1.12 5.51 12.96 Dec-02 3377.28 3.52 -7.79 -17.86 -1.59 2.59 14.52 Dec-03 5838.96 72.89 33.78 21.24 13.83 5.73 15.57 Dec-04 6602.69 13.08 39.82 42.26 5.69 5.33 15.32 Dec-05 9397.93 42.33 26.87 66.81 18.80 11.69 15.75 Dec-06 13786.91 46.70 44.50 53.66 33.41 16.15 14.09 Dec-07 20286.99 47.15 46.92 75.29 43.13 18.68 14.63 Dec-08 9647.31 -52.45 -16.35 1.32 10.56 12.18 7.31 Dec-09 17464.81 81.03 -7.22 12.55 21.48 13.31 10.46 Dec-10 20509.09 17.43 45.80 0.36 16.89 17.84 13.40 Yearly Rolling Returns 31 30 29 27 22 17 Positive Returns 23 22 25 25 22 17 Negative Returns 8 8 4 2 0 0SMALL VS MID VS LARGE AXIS BANK - 47.45% P.A 14
  15. 15. 28-05-2012SBI BANK - 27.06% P.A BHARTI AIRTEL - 37.07% P.A " A SBI Fixed Deposit doubles your money in 10 years. Had you invested the same money in SBI stock, it would have given you 1800% returns"BHEL - 21.61% P.A ONGC - 13.83% P.AINFOSYS - 57.36% P.A MUTUAL FUND AS AN INVESTMENT VEHICLE 15
  16. 16. 28-05-2012INDEX MUTUAL FUND OPERATION FLOW CHART1. Mutual Fund Concept2. Organization of a Mutual Fund3. Advantages / Disadvantages of Mutual Funds4. Types of Mutual Fund Schemes5. Mutual Fund Investment Strategies6. Mutual Funds Vs. Direct Equity Investments7. Worldwide MF Industry8. Mutual Funds - Performance9. Mutual Fund Investment Blunders10. Mutual Funds TaxationCONCEPT MUTUAL FUNDS = PACKAGED ATTA A Mutual Fund is a trust that pools the savings of a number of investors who goal. share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. securities. The income earned through these investments and the capital appreciation or realized are shared by its unit holders in proportion to the number of units them. 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 cost. basket of securities at a relatively low cost.FUND STRUCTURE SBI MUTUAL FUND Fund Sponsor Mutual Fund Trust SBI Mutual Fund Sponsor State Bank of India Trustees Trustee SBI Mutual Fund Trustee Company Private Limited AMC SBI Funds Management Private Limited Custodian HDFC Bank Limited, Mumbai Asset Management Company Citibank N.A., Mumbai Stock Holding Corporation of India Ltd., Mumbai Bank of Nova Scotia (custodian for Gold) RTA Computer Age Management Services Pvt. Ltd R&T Agent Custodian 16
  17. 17. 28-05-2012 ADVANTAGES OF MUTUAL FUNDS Professional Management Diversification Potential Higher Return Vs other Avenues Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulatedDISADVANTAGES OF MUTUAL FUNDS REALITY CHECK…. Management fees In a country with a population of close to 120 crores, we at best Exit Costs have about 1 crore investors – less than 1% ! (even that is Potential poor performance suspect) Complicated tax reporting issues 4-5 crore mutual funds investors a myth; these are folios that Potential market risk with all investments belong to about 60-70 lakh active unique investors Aggressive or unethical sales personnel / practices - 90% of the reason why investors stay away from Mutual Households’ investments in capital market have fallen from a Funds high 23.3% of gross financial savings in 1991-92 to a meagre 2.6% in 2008-09!HOUSEHOLD SAVINGS - WHERE’S THE MONEY PARKED? DECLINING INVESTMENTS IN CAPITAL MARKET INVESTMENTS / SAVINGS OF THE HOUSEHOLD SECTOR (GROSS) IN CAPITAL MARKET (Per cent) # Preliminary P Provisional Source: SEBI HANDBOOK OF STATISTICS ON THE INDIAN SECURITIES MARKET 2009 17
  18. 18. 28-05-2012THANKS TO MR C B BHAVE MUTUAL FUNDS AUM Mr U K Sinha, SEBI ChairmanAMC WISE AUMTYPES OF SCHEMES By Structure Open Ended Schemes Close Ended Schemes By Investment Objectives Growth Schemes Income Schemes Balanced Schemes Money Market Schemes Other Schemes Tax Saving Schemes Special Schemes Index Schemes Sector Specific Schemes ETFs (including gold ETFs) Fund of Funds 18
  19. 19. 28-05-2012RISK-RETURN TRADEOFF EQUITY Siamese Twins Scoreboard – Hybrid & Debt schemes MF ASSETS BREAK UPMF ASSETS BREAK UP MF RETAIL ASSETS BREAK UP 19
  20. 20. 28-05-2012 HOW DO MUTUAL FUNDS HELP YOU ? LIQUID FUNDS VS SAVINGS DEPOSITS Savings / Current Account Liquid / Ultra Short Term Funds SAVINGS ACCOUNT Returns on investments range between 0 - Returns on investments range between 8 - SHORT TERM DEBT FUNDS 6% 9% currently Interest Taxable If you opt for a dividend option the dividend is tax free in the hands of the investor 1 day – 1 yr 1 day – 1 yr Returns are fixed Returns are very much predictable Mutual Banks FIXED DEPOSITSCURRENT ACCOUNT LIQUID FUNDS FMPS Same day withdrawal 1 day notice Funds Current A/c Saving A/c Liquid Fund Amount - Rs 1,00,000 Rs 1,00,000 Rs 1,00,000 Interest - 0% 4% Return - 8.5% Time - 1 month 1 month 1 month RECURRING DEPOSITS SIPS Pre-tax – Rs 0 Pre-tax – Rs 333 Pre-tax – Rs 708 Post-tax – Rs 0 Post-tax – Rs 333 Post-tax – Rs 616 Difference – Rs 616 Difference – Rs 283LIQUID FUNDS VS SAVINGS DEPOSITS SEBI COMMENT ON LIQUID FUNDS “It amazes me the least risk product in the country, which is liquid funds, is not sold to retail investors” Vaidyanathan, K N Vaidyanathan, Former ED, SEBI Current A/c Saving A/c Liquid Fund Amount - Rs 1,00,000 Rs 1,00,000 Rs 1,00,000 Interest - 0% 4% Return - 8.5% Time - 1 month 1 month 1 month Pre-tax – Rs 0 Pre-tax – Rs 333 Pre-tax – Rs 708 Post-tax – Rs 0 Post-tax – Rs 333 Post-tax – Rs 616 Difference – Rs 616 Difference – Rs 283 20
  21. 21. 28-05-2012 Tax-free Return of 7.3% Transact on the Go……FMPS VS FIXED DEPOSITS FMPS GAINING GROUND FMP – TAX @ FMP – TAX @ TAX on FD’s__________________ 20 % With 10 % Without @ 30.9% @ 20.6% @ 10.3% Indexation IndexationInvestment 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000AmountReturn 9.60% 9.60% 9.60% 9.60% 9.60%Maturity Value 1,09,600 1,09,600 1,09,600 1,09,600 1,09,600Gain 9,600 9,600 9,600 9,600 9,600Inflation Rate 8% NA NA NA NAof indexationCost after 1,08,000 NA NA NA NAinflationCapital Gain 1,600 9,600 NA NA NATax Rate 20.60% 10.30% 30.9% 20.6% 10.3%Tax 329.6 988.8 2966.4 1977.6 988.8Post Tax Gains 9,270 8,611 6,634 7,622 8,611Post Tax 9.27% 8.61% 6.63% 7.62% 8.61%ReturnsMUTUAL FUND INVESTMENT STRATEGIES DIRECT EQUITY VS MUTUAL FUNDS Choose in funds consistent with your objectives, constraints, and Diversification tax situation Invest. Don’t speculate. (Stock market is not a casino) Professional Management Be regular Transaction costs Own funds in different asset classes Convenience / No demat account required Do your homework or hire wise experts to help you. Blue Chip portfolio for as low as Rs. 500 Monitor your investments at a regular interval. Remember, no investment High Service Standards is forever. Transparency Don’t panic. 21
  22. 22. 28-05-2012WORLDWIDE MUTUAL FUND ASSETS US LEADS THE WORLD MUTUAL FUND MARKET Worldwide MF Assets in Rs 1,097,00,000 crs (31st Dec’10) India MF Assets in Rs. 7,00,538 crs (31st Mar’11) 0.63% of the worldwide MF assets 1 USD = Rs 44.40 as at Mar 31, 2011 (trillions of U.S. dollars, end of Dec 2010) Source: Investment Company InstituteWORLDWIDE MF ASSETS BY TYPE OF FUND Data as of Dec 2010 Source: Investment Company InstituteFACTORS TO CONSIDER FOR CHOOSING A FUND PERFORMANCE OF DIVERSIFIED EQUITY FUNDS 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 Sensex 9.77 32 7.51 22 11.47 16 Performance as at March 31, 2011 22
  23. 23. 28-05-2012PERFORMANCE OF TAX-SAVING EQUITY FUNDS PERFORMANCE OF BALANCED FUNDS Sensex 9.77 16 7.51 14 11.47 8 Performance as at March 31, 2011 Performance as at March 31, 2011INVESTMENT MODES PATH TO BUILDING YOUR PORTFOLIO 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)SYSTEMATIC INVESTMENT PLANNING (SIP) DIFFERENCE IN APPROACH Earn (Rs 1 lakh) Earn (Rs 1 lakh) Spend (???) Save (Rs 20,000) Save (???) Spend (Rs 80,000) A long journey begins with a small step 23
  24. 24. 28-05-2012POWER OF AN SIP 24
  25. 25. 28-05-2012 SIP CALCULATIONS Rs 18 lakhs My investment in retirement portfolio at SENSEX the end of my 50th Birthday growing to Rs 3.46 crores Atleast in 30 years 15 crores Monthly pension Rs 12 lakhs SIP CALCULATIONS Monthly Amount Rs 50,000 Rs 1,00,000 My Period 10 years 10 years retirement Total Investment Rs 60,00,000 Rs 1,20,00,000 portfolio at Return @15% Rs 1,37,60,852 Rs 2,75,21,705 the end of my Return @20% Rs 1,88,04,764 Rs 3,76,09,529 55th Birthday Period 25 years 25 years Total Investment Rs 1,50,00,000 Rs 3,00,00,000 Atleast Return @15% Rs 16,21,76,480 Rs 32,43,52,961 85 crores Return @20% Rs 42,42,64,335 Rs 84,85,28,670You earn regularly, You spend regularly, Why not invest regularly? 25
  26. 26. 28-05-2012Focus on Goals not Market….. 26
  27. 27. 28-05-2012GOAL - ADITI’S EDUCATION GOAL - ADITI’S MARRIAGE Current investment – Rs 10,000 p.m Current investment – Rs 10,000 p.m Tenure – 30 years Tenure – 25 years Expected Rate of return – 18% Expected Rate of return – 18% Aditi’s estimated wealth on her 30th Bday – Rs 14,32,52,892 Aditi’s estimated wealth on her 25th Bday – Rs 5,82,33,121SIP VS STP TWO GREATEST INVESTMENT BLUNDERS 1. Investing in the NFOs 2. Investing in the schemes which gives high dividends 27
  28. 28. 28-05-2012INVESTING IN NFOS NFO MANIA – NOW HISTORY…. 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 friend / relative is buying it My distributor / agent has strongly recommended it. I can make good profit in the short termRS.10 OR RS.100 - NAV MAKES NO DIFFERENCE DOES NAV MATTER?DONT FALL FOR THE DIVIDEND BAIT MF EXPENSES The NAV falls to the extent of dividend payout Initial Issue Expenses : One time expense Expense incurred on advertisement campaigns for Born by the AMC spreading the word goes from your fund Earlier 6% charged to the scheme If the basis of investing in a scheme is flawed, so is the investment Recurring Expenses : These can be charged to the scheme. 28
  29. 29. 28-05-2012FEES AMCS PROFIT AFTER TAXSEBI has stipulated the following annual limits on recurringexpenses (including management fees) for schemes other thanindex schemes:Avg weekly New asset Max Expenses for Max Expenses for Crore)(Rs Crore) Equity Scheme Debt SchemeFirst 100 2.5% 2.25%Next 300 2.25% 2%Next 300 2% 1.75%Above 700 1.75% 1.5%The management fees cannot exceed :1.25% on the first Rs 100 crore of net assets of a scheme1.00% on the balance net assetsFEES BREAK-UP MF TAXATION Fees of various service providers, such as Trustees, AMC, Registrar & Transfer Agents, Custodian, & Auditor fees Selling expenses including scheme advertising and commission to the Short Term Capital Long Term Capital distributors Gain Tax Gain Tax Mutual Funds (holding period Expenses on investor communication, account statements, dividend / (holding period > < 12 months) redemption cheques / warrants 12months) Listing fees and Depository fees Service tax Equity 15%* Nil As per your tax slab 10% / 20%*Expenses cannot be charged to the scheme Debt Penalties and fines for infraction of laws. Interest on delayed payment to the unit holders. Legal, marketing, publication and other general expenses not attributable to any scheme(s). *Additional education cess of 3% on the amount of tax Expenses on general administration, corporate advertising and $ Additional surcharge of 5% and an education cess of 3% on the amount of tax % infrastructure costs.WARNING SIGNALS BUYING MUTUAL FUNDS Contacting the Asset Management Company directly Web Site Funds management changes Branch Offices Performance slips compared to similar funds. Mutual Fund Agents / IFAs Locate one on AMFI site Funds expense ratios climb Financial Planners Independent rating services reduce their ratings of the ASK Wealth Sykes & Ray FP, IMM, Parag Parikh FAS fund. National Distributors Change in management style or a change in the Birla Sunlife, Bajaj Capital, India Infoline objective of the fund / Scheme Mergers. Banks Net-Banking Branch Banking / Relationship Managers ATMs Online Platform Fund Supermart, ICICI Direct, Motilal Oswal, Indiabulls 29
  30. 30. 28-05-2012KEEPING TRACK… Filling up an application form and writing out a cheque = end of the story… NO! Mutual Fund investments are subject to market risks. Periodically evaluate performance of your funds Please read the SID and SAI carefully Fact sheets and Newsletters and consult your Websites financial advisor before investing. Newspapers Professional advisorSOURCE Sundaram BNP Paribas Mutual Fund Religare Mutual Fund UTI Mutual Fund ICICI Prudential Mutual fund Fidelity Mutual Fund The Finance Literates blog Bloomberg 30