What is mutual fund by manmohan joshi


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Manmohan Joshi , is an MBA person and a great motivation guru, having more than 6 years experience in finance sector. Presently working as a CEO With kautilya Group of education.

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What is mutual fund by manmohan joshi

  1. 1. Mutual Funds An Introduction By MAN MOHAN JOSHI
  2. 2. What is a Mutual Fund? <ul><li>A mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the stated investment objective of the scheme. </li></ul><ul><li>The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. </li></ul>
  3. 4. History <ul><li>Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.  </li></ul><ul><li>In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are - to protect the interest of investors in securities and to promote the development of and to regulate the securities market.  </li></ul><ul><li>SEBI notified regulations for the mutual funds in 1993. private sector entities were allowed to enter the capital market. revised in 1996 </li></ul><ul><li>SEBI formulates policies and regulates the mutual funds to protect the interest of the investors </li></ul>
  4. 5. Mutual Fund Set Up
  5. 6. How is a mutual fund set up? <ul><li>Is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. </li></ul><ul><li>The trust is established by a sponsor or more than one sponsor who is like promoter of a company. </li></ul><ul><li>The trustees of the mutual fund hold its property for the benefit of the unit holders. </li></ul><ul><li>Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. </li></ul><ul><li>Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. </li></ul>
  6. 7. SEBI Regulations <ul><ul><li>Require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. </li></ul></ul><ul><ul><li>50% of the directors of AMC must be independent. </li></ul></ul><ul><ul><li>All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).  </li></ul></ul>
  7. 8. Sponsor SEBI Trustee <ul><ul><li>AMC </li></ul></ul>Fund Manager Mutual Fund Schemes Investor
  8. 9. Sponsor <ul><li>Is the person who acting alone or in combination with another body corporate establishes a mutual fund. </li></ul><ul><li>Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. </li></ul><ul><li>The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund. </li></ul>
  9. 10. Trust <ul><li>The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908 </li></ul>
  10. 11. Trustee <ul><li>Is usually a company (corporate body) or a Board of Trustees (body of individuals). </li></ul><ul><li>Main responsibilities </li></ul><ul><ul><li>Is to safeguard the interest of the unit holders </li></ul></ul><ul><ul><li>Ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. </li></ul></ul><ul><li>At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner. </li></ul>
  11. 12. Asset Management Company (AMC) <ul><li>The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. </li></ul><ul><li>The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. </li></ul><ul><li>At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times. </li></ul>
  12. 13. Registrar and Transfer Agent <ul><li>AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. </li></ul><ul><li>Processes the application form, redemption requests and dispatches account statements to the unit holders. </li></ul><ul><li>Also handles communications with investors and updates investor records. </li></ul>
  13. 14. Types of Mutual Funds <ul><li>Mutual Funds can be categorized as follows </li></ul><ul><ul><li>Investment Objective </li></ul></ul><ul><ul><ul><li>Equity Oriented </li></ul></ul></ul><ul><ul><ul><li>Debt Oriented </li></ul></ul></ul><ul><ul><ul><li>Balanced Fund </li></ul></ul></ul><ul><ul><ul><li>Money Market or Liquid Fund </li></ul></ul></ul><ul><ul><ul><li>Gilt Fund </li></ul></ul></ul><ul><ul><ul><li>Index Funds </li></ul></ul></ul><ul><ul><li>Constitution </li></ul></ul><ul><ul><ul><li>Open Ended Schemes </li></ul></ul></ul><ul><ul><ul><li>Close Ended Schemes </li></ul></ul></ul>
  14. 16. Equity Oriented Schemes <ul><li>Commonly called Growth Schemes, </li></ul><ul><li>Seek to invest a majority of their funds in equities and a small portion in money market instruments and have the potential to deliver superior returns over the long term. </li></ul><ul><li>They are exposed to fluctuations in value especially in the short term. </li></ul><ul><li>Hence not suitable for investors seeking regular income or needing to use their investments in the short-term. Ideal for investors who have a long-term investment horizon. </li></ul>
  15. 17. Sector Specific <ul><li>These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. </li></ul><ul><li>Depend upon the performance of select sectors only, these schemes are inherently more risky than general-purpose schemes. </li></ul><ul><li>They are suited for informed investors who wish to take a view and risk on the concerned sector </li></ul>
  16. 18. Special Schemes <ul><li>Index schemes </li></ul><ul><li>The primary purpose of an Index is to serve as a measure of the performance of the market as a whole, or a specific sector of the market. </li></ul><ul><li>Saving schemes </li></ul><ul><li>Investors (individuals and Hindu Undivided Families (“HUFs”)) are being encouraged to invest in equity markets through Equity Linked Savings Scheme (“ELSS”) by offering them a tax rebate. </li></ul><ul><li>Real Estate Funds </li></ul><ul><li>Specialized real estate funds would invest in real estates directly, or may fund real estate developers or lend to them directly or buy shares of housing finance companies or may even buy their securitized assets. </li></ul>
  17. 19. Debt Based Schemes <ul><li>These schemes, also commonly called Income Schemes, invest in debt securities such as corporate bonds, debentures and government securities. </li></ul><ul><li>The prices of these schemes tend to be more stable compared with equity schemes and most of the returns to the investors are generated through dividends or steady capital appreciation. </li></ul><ul><li>These schemes are ideal for conservative investors or those not in a position to take higher equity risks, such as retired individuals. </li></ul><ul><li>However, as compared to the money market schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher credit risk. </li></ul>
  18. 20. Income Schemes <ul><li>These schemes invest in money markets, bonds and debentures of corporate with medium and long-term maturities. </li></ul><ul><li>These schemes primarily target current income instead of capital appreciation. They therefore distribute a substantial part of their distributable surplus to the investor by way of dividend distribution. </li></ul><ul><li>Such schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long term investment horizon and are looking for regular income through dividend or steady capital appreciation. </li></ul>
  19. 21. Money Market Schemes <ul><li>Invest in short term instruments such as commercial paper (“CP”), certificates of deposit (“CD”), treasury bills (“T-Bill”) and overnight money (“Call”). </li></ul><ul><li>Least volatile of all the types of schemes because of their investments in money market instrument with short-term maturities. </li></ul><ul><li>Are popular with institutional investors and high net worth individuals having short-term surplus funds. </li></ul>
  20. 22. Gilt Funds <ul><li>This scheme primarily invests in Government Debt. Hence the investor usually does not have to worry about credit risk since Government Debt is generally credit risk free. </li></ul>
  21. 23. Hybrid Schemes <ul><li>These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. </li></ul><ul><li>By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. </li></ul>
  22. 24. Index Funds <ul><li>Replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc </li></ul><ul><li>Invest in the securities in the same weight age comprising of an index. </li></ul><ul><li>NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as &quot;tracking error&quot; in technical terms. </li></ul><ul><li>Exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. </li></ul>
  23. 25. Balanced Fund <ul><li>Aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities </li></ul><ul><li>Appropriate for investors looking for moderate growth. </li></ul><ul><li>They generally invest 40-60% in equity and debt instruments. </li></ul><ul><li>NAVs of such funds are likely to be less volatile compared to pure equity funds </li></ul>
  24. 26. Constitution <ul><li>Schemes can be classified as Closed-ended or Open-ended depending upon whether they give the investor the option to redeem at any time (open-ended) or whether the investor has to wait till maturity of the scheme. </li></ul>
  25. 27. Open ended Schemes <ul><li>The units offered by these schemes are available for sale and repurchase on any business day at NAV based prices. </li></ul><ul><li>Unit capital of the schemes keeps changing each day. </li></ul><ul><li>Offer very high liquidity to investors and are becoming increasingly popular in India. </li></ul>
  26. 28. Closed ended Schemes <ul><li>The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. </li></ul><ul><li>Are launched with an initial public offer (IPO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. </li></ul><ul><li>In the interim, investors can buy or sell units on the stock exchanges where they are listed. </li></ul><ul><li>Unlike open-ended schemes, the unit capital in closed-ended schemes usually remains unchanged. </li></ul><ul><li>After an initial closed period, the scheme may offer direct repurchase facility to the investors. </li></ul><ul><li>Are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. </li></ul>
  27. 29. Frequently Used Terms <ul><li>Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. </li></ul><ul><li>  </li></ul><ul><li>Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. </li></ul><ul><li>Repurchase Price </li></ul><ul><li>Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price. </li></ul>
  28. 30. Frequently Used Terms <ul><li>Redemption Price </li></ul><ul><li>Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.   </li></ul><ul><li>Sales Load </li></ul><ul><li>Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes. </li></ul><ul><li>Repurchase or ‘Back-end’ Load </li></ul><ul><li>Is a charge collected by a scheme when it buys back the units from the unit holders. </li></ul>
  29. 31. Frequently Used Terms <ul><li>NAV is Market Value of investments+Current Assets and other assets+ accrued income- Current Liabilities- Accrued expenses </li></ul><ul><li>Sale Price= NAV( 1+entry load) </li></ul><ul><li>Repurchase price=NAV(1-exit load) </li></ul>
  30. 32. Dividend Yield <ul><li>A measure of Income yield on investment </li></ul><ul><li>It is the percentage of the face value of the share </li></ul><ul><li>Dividend Yield= Dividend*100%/Current Share price </li></ul>
  31. 33. Returns <ul><li>Simple Annualized Return:Return as percent per annum. </li></ul><ul><li>Equal to (Difference in NAV/Beginning NAV)*(365/No.of days)*100 </li></ul><ul><li>Compounded annualized return: Rate at which an investment grows </li></ul><ul><ul><li>Start NAV(1+r) No.of Days/365 =End NAV </li></ul></ul>
  32. 34. Loads <ul><li>Loads are the most talked about fees that mutual funds charge. These are one-time charges for purchasing or redeeming shares of a mutual fund. They are of two types: </li></ul><ul><li>Front-end load: A front-end load is a sales charge you pay when you buy units of a mutual fund. This reduces the amount of your investment in the fund. </li></ul><ul><li>For instance, if you invest Rs 10,000 in a mutual fund with a 2% front-end load, Rs 200 will be paid as sales charge, and Rs 9,800 will be invested in the fund. </li></ul>
  33. 35. Loads <ul><li>Exit (Back)-end load: A back-end load is a charge you pay when you sell your units. This reduces the amount you receive when you redeem the units. </li></ul><ul><li>Contingent deferred sales charge (CDSC): A CDSC is a sales load that investors pay at the time of redeeming the mutual fund units. This charge decreases over time. In order to charge a CDSC, the scheme has to be a no-load scheme as per the regulations laid down by SEBI. </li></ul><ul><li>The asset management company is entitled to levy a CDSC not exceeding 4% of the redemption proceeds during the first four years after purchase, 3% in the second year, 2% in the third year and 1% in the fourth year. </li></ul>
  34. 36. CRR and SLR <ul><li>CRR is the percentage of its total deposits a bank has to keep with RBI in cash or near cash assets </li></ul><ul><li>SLR is the percentage of its total deposits a bank has to keep in approved securities. </li></ul><ul><li>The purpose of CRR & SLR is to keep a bank liquid at any point of time. </li></ul><ul><li>When banks have to keep low CRR or SLR, it increases the money available for credit in the system. </li></ul><ul><ul><li>eases the pressure on interest rates & interest rates move down. </li></ul></ul><ul><ul><li>money is available & that too at lower interest rates, it is given on credit to the industrial sector that pushes the economic growth </li></ul></ul>
  35. 37. Inflation Rate <ul><li>Inflation Rate : Typically a higher inflation rate means higher interest rates. The interest rates prevailing in an economy at any point of time are nominal interest rates, i.e., real interest rates plus a premium for expected inflation. Due to inflation, there is a decrease in purchasing power of every rupee earned on account of interest in the future; therefore the interest rates must include a premium for expected inflation. In the long run, other things being equal, interest rates rise one for one with rise in inflation. </li></ul>
  36. 38. What is Yield Curve? <ul><li>Relationship between time and yield on securities is called the Yield Curve. </li></ul><ul><li>Relationship represents the time value of money - showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future.  A yield curve can be positive, neutral or flat. </li></ul><ul><li>  A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis </li></ul><ul><ul><li>People demanding higher compensation for parting their money for a longer time into the future.  </li></ul></ul>
  37. 39. What Is A Yield Curve? <ul><li>A neutral yield curve is that which has a zero slope, i.e. is flat across time. </li></ul><ul><ul><li>Occurs when people are willing to accept more or less the same returns across maturities.  </li></ul></ul><ul><li>The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long-term yield is lower than the short-term yield. </li></ul><ul><ul><li>Has important economic ramifications when it does. </li></ul></ul><ul><ul><li>Generally represents an impending downturn in the economy, where people are anticipating lower interest rates in the future.  </li></ul></ul>
  38. 40. What is Yield to Maturity (YTM)? <ul><li>Simply put, the annualised return an investor would get by holding a fixed income instrument until maturity. </li></ul><ul><li>It is the composite rate of return of all payouts and coupon. </li></ul><ul><li>P=C/(1+r)+C 2 /(1+r) 2+………..+ C n /(1+r) n </li></ul><ul><li>YTM is the value of “r” in the previous </li></ul>
  39. 41. Average Maturity Period and Duration <ul><li>It is a weighted average of the maturities of all the instruments in a portfolio.  </li></ul><ul><li>Tenor is a simple measure of time till the bonds maturity </li></ul><ul><li>Duration is weighted average maturity </li></ul><ul><ul><li>An indicator of the interest rate risk of a bond </li></ul></ul><ul><ul><li>Present Value of the Bond cash flows being the weightage </li></ul></ul><ul><li>Higher the duration of the bond </li></ul><ul><ul><li>If Duration is 3 years a 1% change will bring about a 3% change in price of the bond </li></ul></ul>
  40. 42. Relationship between price and yield of bonds <ul><li>Price and Yield are inversely related </li></ul><ul><li>In interest Rates fall after a bond was bought the future cash flows will now be valued at lower rates </li></ul><ul><li>Therefore price of the bond will go up with fall in yields </li></ul>
  41. 43. VOLATILITY MEASURES <ul><li>R-Squared </li></ul><ul><li>Beta </li></ul><ul><li>Standard Deviation </li></ul><ul><li>Sharpe Ratio </li></ul>
  42. 44. R-squared <ul><li>Statistical measure of how closely the portfolio's performance correlates with the performance of a benchmark index. </li></ul><ul><li>R-squared is a proportion that ranges between 0.00 and 1.00. For example, an R-squared of 1.00 indicates perfect correlation to the benchmark index, while an R-squared of 0.00 indicates no correlation. </li></ul><ul><li>A lower R-squared indicates that fund performance is significantly affected by factors other than the market. </li></ul>
  43. 45. R - Squared <ul><li>A fund has an R-squared of 1(typically an index fund) with the S&P CNX 500 index. This means that when the index has gone up, so has the fund, and when it has gone down, the fund has too.  </li></ul><ul><li>A fund which invests in unlisted stocks or in ADR/GDRs or in stocks, which are not listed in the S&P CNX 500 index, will have an R-squared less than 1. The behavior of this fund will not match the index.  </li></ul>
  44. 46. Beta <ul><li>It is the statistical measure of a portfolio's sensitivity to market movements. For example, a benchmark index such as the BSE Sensex or S&P CNX 500 has a beta of 1.0. </li></ul><ul><li>Use beta in conjunction with R-squared for a better understanding of the scheme's risk-adjusted performance. </li></ul><ul><li>Lower the R-squared (which means less correlation between the scheme and the benchmark utilized), the less reliable beta is as a measure of volatility. </li></ul>
  45. 47. CAPM Formula <ul><li>R S =R F +B(R M -R F ) </li></ul><ul><li>R S =expected return from the share </li></ul><ul><li>R F =Risk free rate of return </li></ul><ul><li>B is the beta factor for the individual share measured by the statistical analysis of Historical returns </li></ul><ul><li>R M is the average stock market return </li></ul>
  46. 48. <ul><li>If Beta = 1, the expected return is same as the average market return </li></ul><ul><li>If Beta is ), the expected return is risk free yield </li></ul><ul><li>If Beta is between 0 an 1 , Risk is lower than the market as a whole-Defensive Stocks </li></ul><ul><li>If Beta greater than 1 , risk is more than the stock market as a whole- Cyclical Stocks </li></ul>
  47. 49. Sharpe Ratio <ul><li>It is the statistical measure of a portfolio's historic &quot;risk-adjusted&quot; performance and is calculated by dividing a fund's excess return by the standard deviation of those returns. </li></ul><ul><li>As a measure of reward per unit of total risk, the higher the ratio, the better. </li></ul><ul><li>The main drawback of the Sharpe ratio is that it is expressed as a raw number. </li></ul><ul><li>So if a fund produced a 20% return while the SBI fixed deposit rate returned 6.5% and its standard deviation is 10%, its Sharpe Ratio would be </li></ul><ul><li>(20 – 6.5) / 10 = 1.35. </li></ul>
  48. 50. Standard Deviation <ul><li>Statistical measure of the historic volatility of a portfolio. </li></ul><ul><li>Measures the dispersion of a fund's periodic returns (often based on 36 months of monthly returns). The wider the dispersions, the larger the standard deviation and the higher the risk. For example let's compare two funds - A & B  </li></ul><ul><li>Fund A posts annual returns of 8%, 10%, and 12%. Over the three years, it earns an average annual return of 10%, with a standard deviation of 1.63.  </li></ul><ul><li>Fund B returns 1%, 9%, and 20%. It too earns an average return of 10%, but its standard deviation is 7.79.  </li></ul><ul><li>Thus we know that Fund B has been more volatile than Fund A.. </li></ul>
  49. 51. Treynor Ratio <ul><li>Alpha: The Alpha measure is less about risk than it is about &quot;value added.&quot; Alpha represents the difference between the performance you would expect from a fund, given its Beta, and the actual returns it generates. A high alpha (more than 1) means that the fund has performed well. A negative alpha means the fund under performed. </li></ul><ul><li>Mathematically, Alpha= fund return - [Risk free rate + Beta of fund (Benchmark return - Risk free return)] </li></ul><ul><li>Treynor: the Treynor ratio is similar to the Sharpe ratio. Instead of comparing the fund’s risk adjusted performance to the risk free return, it compares the fund’s risk adjusted performance of the relative index. </li></ul>
  50. 52. Tax Aspects in Mutual Funds
  51. 53. Capital gains tax <ul><li>The difference between the sale consideration and the cost of acquisition of the asset is called capital gain. If the investor sells his units and earns capital gains he is liable to pay capital gains tax. Capital gains are of two types: Short term and Long term capital gains. </li></ul>
  52. 54. Long Term Capital Gains <ul><li>All units held for a period of more than 12 months will be classified as long term capital assets. The investor has to pay long-term capital gains on the units held by him for period of more than 12 months. In this case the investor will </li></ul><ul><li>1] Pay tax at a flat rate of 10 % (plus surcharge @ 5% of the applicable tax rate) on the capital gains without indexation or </li></ul><ul><li>2] Avail cost indexation on capital gains and pay 20 % tax (plus surcharge @ 5% of the applicable tax rate) whichever is lower. </li></ul><ul><li>Indexation means that the purchase price is marked up by an inflation index resulting in lower capital gains and hence lower tax. </li></ul><ul><li>Inflation index =   Inflation index for the year of transfer/  Inflation index for the year of acquisition </li></ul>
  53. 55. Short Term Capital Gains <ul><li>If the units are held for a period of less than one year they will be treated as short-term capital gains and the investor will be taxed depending on the income tax rate applicable to him. </li></ul>
  54. 56. Short Term Capital Gains 48% no surcharge Foreign Companies 30% plus surcharge Non Resident Indians 35% plus surcharge Indian Companies 35% plus surcharge Partnership Firms 30% plus surcharge as applicable Resident Individuals Rate Category
  55. 57. Tax Deducted at Source <ul><li>No tax is deducted at source on capital gains arising to any resident unit holder (under section 194K)vide circular no.715 dated August 8, 1995 issued by the Central Board for Direct Taxes (CBDT). </li></ul>
  56. 58. <ul><li>Wealth tax </li></ul><ul><li>Units held by the investor are not treated as assets within the meaning of section 2(ea) of the Wealth Tax act 1957, and therefore not liable for wealth tax </li></ul><ul><li>Gift tax </li></ul><ul><li>Units of Mutual Funds may be given as a gift and no gift tax will be payable either by the donor or the donee. </li></ul><ul><li>TDS on redemption </li></ul><ul><li>No TDS is required to be deducted from capital gains arising at the time of redemptions in case of mutual funds </li></ul>
  57. 59. Section 88 of Income Tax Act <ul><li>Under Section 88 of the Income Tax Act an investor has some tax benefits if he invests in specified mutual funds (called equity linked savings schemes or ELSS). The tax break is available for a maximum investment of Rs 10,000. However, the deduction will depend on the income tax bracket the investor falls in. For taxable income upto Rs 1.5 lakh the deduction is 20 per cent or Rs 2,000. For taxable income between Rs 1.5 lakh and Rs 5 lakh the deduction is 15 per cent or Rs 1,500. For income above Rs 5 lakh there is no deduction under this section. These funds have a lock-in period of three years. </li></ul>
  58. 60. Tax and TDS Rate Gain will be added to the total income of the investor and taxed at the marginal tae of Tax. No TDS NRI: 30% TDS from Gain a)20% with Indexation b) 10 % without , NO TDS NRI’s:20% TDS from Gain Difference of the Sale Price and The Purchase Cost/The Indexed Purchase Cost* No.Units The Capital Gain or Loss is the difference of the Sale Price and the Purchase Cost. Capital Gain/ Loss Applicable N.A Indexation Benefits Long Term Capital Gain Short Term Capital Gain Capital Gain
  59. 61. Assumptions : 1. Purchase Cost (as on 01-01-2002): Rs.20 per Unit 2. Sale Price (as on 22-09-2003): Rs.22 per unit 3. Indexation component (463 /447) = 1.0358 (where 463 is the cost inflation index for the year 2003-04 and 447 was the cost inflation index for the year 2002-03) 4. Indexed Cost of Purchase = (1.0358*20) = 20.716 Description Formula Calculation Tax liability with Indexation LTC Gain = Sale Price - Indexed cost of purchase LTC Gain = Rs.22 - Rs.20.716 = Rs.1.284 (excluding surcharge) LTC Gain Tax = LTC Gain * 20% LTC Gain Tax = Rs.1.284 * 20% = Rs.0.2568 Tax liability without Indexation LTC Gain = Sale Price - Purchase Cost LTC Gain = Rs.22 - Rs.20 = Rs.2 (excluding surcharge) LTC Gain Tax = LTC Gain * 10% LTC Gain Tax = Rs.2 * 10% = Rs.0.20 In the above example, since the tax liability “without Indexation” is lower, an investor will have to pay Rs.0.20 as the Long Term Capital Gain Tax.
  60. 62. Indexation Since the tax rate in case of ‘without Indexation’ is exactly half that of ‘with Indexation’, we can conclude the following: 1. When Growth in NAV is more than double of Indexation Component, an Investor needs to pay Tax applicable ‘without Indexation’. 2. When Growth in NAV is exactly double of Indexation Component, an Investor will be indifferent for either option, since both ‘with and without Indexation’ will yield the same tax liability. 3. When Growth in NAV is less than double of Indexation Component, an Investor needs to pay Tax applicable ‘with Indexation’ option.
  61. 63. Matrix for the Set-Off of various Capital Gains v/s various Capital Losses STC Loss V/s LTC Gain Permitted STC Loss V/s STC Gain Permitted LTC Loss V/s LTC Gain Permitted LTC Loss V/s STC Gain Not Permitted
  62. 64. The cost of investing in mutual funds <ul><li>Mutual fund costs can be classified into two broad categories: operation expenses, which are paid out of the fund's earnings, and sales charges, that are directly deducted from your investment. </li></ul>
  63. 65. Expense Ratio/ operating expenses <ul><li>Every mutual fund is allowed to charge for operating expenses, which are basically the costs of doing business. </li></ul><ul><li>Costs are deducted from the income earned by the fund, and are called &quot;expense ratios.&quot; </li></ul><ul><li>It is an annual fee that is charged to a mutual fund to pay for such expenses as: </li></ul><ul><ul><li>Investment management and advisory fees </li></ul></ul><ul><ul><li>Sales/agents commissions and ongoing service fees </li></ul></ul><ul><ul><li>legal and audit fees </li></ul></ul><ul><ul><li>registrar and transfer agent fees </li></ul></ul><ul><ul><li>fund administration expenses </li></ul></ul><ul><ul><li>marketing and selling expenses </li></ul></ul>
  64. 66. An annual expense <ul><li>Expressed a percentage of the fund's average daily/weekly net assets. </li></ul><ul><li>Break-up of these expenses is required to be reported in the scheme's offer document. </li></ul><ul><li>Expense ratio is calculated by dividing the operating expenses by the average net assets. For instance, a fund with Rs. 100 crore in assets and expenses of Rs. 20 lakh would have an expense ratio of 2%. </li></ul>
  65. 67. N et assets Equity schemes Debt schemes First Rs. 100 crore 2.50% 2.25% Next Rs. 300 crore Next Rs. 300 crore On the balance of assets 2.25% 2.00% 2.00% 1.75% 1.75% 1.50%
  66. 68. Example <ul><li>Assuming that an equity scheme generating 15% returns has net assets of Rs 100 crore. </li></ul><ul><li>If operating expense ratio at 2.50%, the effective return would be 12.5% (i.e. 15-2.5). </li></ul><ul><li>Operating expenses are calculated on an annualized basis and are normally accrued on a daily basis. </li></ul>
  67. 69. Investment Strategies
  68. 70. Conservative Portfolio
  69. 71. Conservative Portfolio <ul><li>The Conservative Portfolio suggests 25% in stocks or equity funds, 50% in bonds or debt funds, and 25% in bank deposits or liquid funds </li></ul><ul><li>Ideal for you if you are about to retire or have recently retired. </li></ul><ul><li>Aims to keep your savings secure while at the same time generate enough income to help you relax and enjoy your retirement years. </li></ul><ul><li>25% equity portfolio can assist you in staying ahead of inflation. </li></ul>
  70. 72. Moderate Portfolio
  71. 73. Moderate Portfolio <ul><li>A moderate growth portfolio seeks to balance growth and stability. It recommends around 50% of your portfolio in stocks or equity funds, 30% in bonds or debt funds and 20% in short-term instruments or liquid funds. </li></ul><ul><li>This portfolio would seek to provide regular income with moderate protection against inflation. </li></ul><ul><li>The equity component provides the potential for growth, whereas the component in bonds and short-term instruments helps balance out fluctuation in the stock market. </li></ul><ul><li>Retirement that may be still some years away. </li></ul>
  72. 74. Aggressive Portfolio
  73. 75. Bogle's Strategic asset allocation
  74. 76. <ul><li>An aggressive growth portfolio suggests 65% -70%of your portfolio in stocks or equity funds, 20-25% in bonds or debt funds and 10% in short-term money market instruments or liquid funds. </li></ul><ul><li>Recommend this portfolio for people who are just starting out. </li></ul><ul><li>The younger you are, the greater is your ability to withstand higher risk. Follow the Thumb Rule </li></ul><ul><li>The equity part of the portfolio is meant for capital growth to meet longer-term goals while the bond portfolio is to provide for medium-term needs. </li></ul>
  75. 77. Golden Rules for Investors <ul><li>Outperforming the market is a difficult task. </li></ul><ul><li>Invest – don’t trade or speculate. </li></ul><ul><li>Buy value, not market trends or the economic outlook. </li></ul><ul><li>There’s no free lunch. Never invest on sentiment. Never invest solely on a tip. </li></ul><ul><li>Do your homework or hire wise experts to help you. </li></ul><ul><li>Diversify – by company, by industry. </li></ul><ul><li>Aggressively monitor your investments. Remember, no investment is forever. </li></ul><ul><li>Learn from your mistakes. </li></ul>
  76. 78. Thank You All