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Mutual funds presentation for jagoinvesor mumbai group july 24


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Mutual funds presentation for jagoinvesor mumbai group july 24

  1. 1. Mutual Funds as an investment vehicle Presented by Gajendra Kothari, CFA July 24, 2010 Jagoinvestor Mumbai Meet
  2. 2. INDEX 1. Mutual Fund Concept 2. Organization of a Mutual Fund 3. Advantages / Disadvantages of Mutual Funds 4. Types of Mutual Fund Schemes 5. Computing Net Asset Value 6. Mutual Fund Investment Strategies 7. Myths / Facts about Mutual Funds 8. Mutual Funds Vs. Direct Equity Investments 9. Factors to consider before choosing a fund 10. Worldwide MF Industry 11. Mutual Funds – Performance 12. Mutual Fund Investment Blunders 13. Mutual Funds Taxation
  3. 3. “What is good for the client is also good for the firm” T Rowe Price Investment Services 6th largest fund house in the USA
  4. 4. CONCEPT A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units 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 basket of securities at a relatively low cost.
  5. 5. INVESTOR PERSPECTIVE Basics of Investments: Risk Aversion Risk Management Bank Deposits, PPF, NSC, Insurance, Mutual Funds Kisan Vikas Patra etc. Low Risk/Low Return Managed Risk/High Return
  7. 7. FUND STRUCTURE Fund Sponsor Trustees Asset Management Company Depository R&T Agent Custodian
  8. 8. MUTUAL FUND STRUCTURE This is just an illustration
  9. 9. BRIEF HISTORY First Phase: 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of 1987, 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 was formed and sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the SEBI Mutual Fund Regulations. The AUM of 38 fund houses as at June 30, 2010 stands at Rs 6,75,831 crores
  11. 11. ADVANTAGES OF MUTUAL FUNDS Professional Management Diversification Potential Higher Return Vs other Avenues Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated
  12. 12. DISADVANTAGES OF MUTUAL FUNDS Management fees Exit Costs Potential poor performance Complicated tax reporting issues Potential market risk with all investments Aggressive or unethical sales personnel / practices
  13. 13. REALITY CHECK…. In a country with a population of close to 120 crores, we at best have about 1 crore investors – less than 1% ! (even that is suspect) 4-5 crore mutual funds investors a myth; these are folios that belong to about 60-70 lakh active unique investors Households’ investments in capital market have fallen from a high 23.3% of gross financial savings in 1991-92 to a meagre 2.6% in 2008-09!
  14. 14. TYPES OF SCHEMES By Structure Open Ended Schemes Close Ended Schemes Interval Schemes By Investment Objectives Growth Schemes Income Schemes Balance Schemes Money Market Schemes Other Schemes Tax Saving Schemes Special Schemes Index Schemes Sector Specific Schemes ETFs (including gold ETFs) Fund of Funds ULIPs
  16. 16. COMPUTING NET ASSET VALUE For investors, the performance of their investment depends on what happens to the fund’s per unit value, or net asset value (NAV) NAV = Market Value of Assets – Liabilities Number of Shares Outstanding
  17. 17. MUTUAL FUND INVESTMENT STRATEGIES Choose in funds consistent with your objectives, constraints, and tax situation Invest. Don’t speculate. (Stock market is not a casino) Be regular Own funds in different asset classes Do your homework or hire wise experts to help you. Monitor your investments at a regular interval. Remember, no investment is forever. Don’t panic.
  18. 18. MYTHS ABOUT MUTUAL FUNDS Mutual Funds invest only in shares. Mutual Funds are prone to very high risks/actively traded. Mutual Funds are very new in the financial market. Mutual Funds are not reliable and people rarely invest in them. The good thing about Mutual Funds is that you don’t have to pay attention to them.
  19. 19. FACTS ABOUT MUTUAL FUNDS Equity Instruments like shares form only a part of the securities held by mutual funds. Mutual funds also invest in debt securities which are relatively much safer. The biggest advantage of Mutual Funds is their ability to diversify the risk. Mutual Funds are their in India since 1964. Mutual Funds market is very evolved in U.S.A and is there for the last 60 years. Mutual Funds are the best solution for people who want to manage risks and get good returns. The truth is as an investor you should always pay attention to your mutual funds and continuously monitor them. There are various funds to suit investor needs, both as a long term investment vehicle or as a very short term cash management vehicle.
  20. 20. DIRECT EQUITY INVESTMENT VS. MUTUAL FUND INVESTING Diversification is the key to success in equity investments. A diversified portfolio serves to minimize risks. An individual investor may not have the capital to build a diversified portfolio. Professional Management by mutual funds ensure that the best avenues are tapped with the aid of comprehensive information and detailed research. Liquidity of mutual funds is high as you have daily repurchase options for open-end funds. Transaction costs are lower in mutual funds as compared to direct investment due to economies of scale. Convenience is high for mutual funds as they sell through service networks, banks and other distributors. Many funds allow investors the flexibility to switch between schemes within a family of funds. Blue Chip portfolio available to investors for as low as Rs. 500/-. High Service Standards maintained by mutual funds. Transparency – High degree of transparency is maintained by the funds.
  21. 21. WORLDWIDE MUTUAL FUND ASSETS Worldwide MF Assets in Rs 1,064,00,000 crs (31st Dec’09) India MF Assets in Rs. 6,75,831 crs (30thJun’10) 0.63% of the worldwide MF assets 1 USD = Rs 46.53 as at Dec 31, 2009 (trillions of U.S. dollars, end of Dec 2009) Source: Investment Company Institute
  23. 23. WORLDWIDE MUTUAL FUND ASSETS BY TYPE OF FUND Data as of Sep 2010 Source: Investment Company Institute
  24. 24. FACTORS TO CONSIDER BEFORE CHOOSING A FUND 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
  25. 25. INVESTMENT MODES 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)
  26. 26. PERFORMANCE OF DIVERSIFIED EQUITY FUNDS Performance as at July 19,2010
  27. 27. PERFORMANCE OF TAX-SAVING EQUITY FUNDS Performance as at July 19,2010
  28. 28. PERFORMANCE OF BALANCED FUNDS Performance as at July 19,2010
  29. 29. TWO GREATEST INVESTMENT BLUNDERS 1. Investing in the NFOs 2. Investing in the schemes which gives high dividends
  30. 30. INVESTING IN NFOS 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 neighbour is buying it My distributor / agent has strongly recommended it. I can make good profit in the short term
  32. 32. DON'T FALL FOR THE DIVIDEND BAIT The NAV falls to the extent of dividend payout Expense incurred on advertisement campaigns for spreading the word goes from your fund It might be a sign of the fact that the fund manager doesn't see any attractive investment opportunities. If the basis of investing in a scheme is flawed, so is the investment
  33. 33. TAXATION - EQUITY MF ORIENTED SCHEME Investor Category Short Term Long Term Dividend Dividend TDS Capital Gain Tax Capital Gain Tax Income Distribution (holding period (holding period Tax < 12 months) > 12months) Residential 15%* Nil Tax Free Nil Nil Individual/ HUF Partnership 15%* Nil Tax Free Nil Nil Firms/AOP/BOI Domestic Companies 15% *$ Nil Tax Free Nil Nil NRIs 15%* Nil Tax Free Nil STCG- 15%* LTCG – Nil TDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual *Additional education cess of 3% on the amount of tax $ Additional surcharge of 7.5% and an education cess of 3% on the amount of tax
  34. 34. TAXATION - DEBT MF ORIENTED SCHEME Investor Category Short Term Long Term Dividend Dividend Dividend TDS Capital Gain Capital Gain Income Distribution Tax Distribution Tax Tax – Other than Tax - Liquid (holding (holding Liquid & Money & Money period period >12 Market Market <12months) months) Schemes Schemes Residential As Per Tax 10%(20% with Tax Free 13.841% # 27.681%# Nil Individual/ HUF Slab indexation)* Partnership 30%* 10%(20% with Tax Free 22.145% # 27.681% # Nil Firms/AOP/BOI indexation)* Domestic 30%*$ 10%(20% with Tax Free 22.145% # 27.681%# Nil Companies indexation)$^ NRIs As Per Tax 10%(20% with Tax Free 13.841% # 27.681%# STCG- 30%* Slab indexation)* LTCG- 20%* (After providing for indexation) TDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual *Additional education cess of 3% on the amount of tax $ Additional surcharge of 7.5% and an education cess of 3% on the amount of tax #DDT includes 7.5% surcharge and 3% education cess
  35. 35. WARNING SIGNALS 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.
  36. 36. BUYING MUTUAL FUNDS Contacting the Asset Management Company directly Web Site Request for agent Mutual Fund / Insurance Agents Locate one on AMFI site Financial Planners ASK Wealth Sykes & Ray FP National Distributors Birla Sunlife, Bajaj Capital Banks Net-Banking Phone-Banking ATMs Online Trading Account ICICI Direct, Motilal Oswal, Indiabulls
  37. 37. KEEPING TRACK… 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 Websites Newspapers Professional advisor
  38. 38. SIP CALCULATIONS My retirement portfolio at the end of my 50th Birthday Atleast 15 crores Monthly pension Rs 12 lakhs
  39. 39. EQUITY INVESTMENT WITH ZERO RISK Post Office MIS (8%) SIP of Rs 2,800 in a Investment : 6 lakhs good diversified Equity Monthly income: Rs 4,000 fund for 6 years After 30% tax : Rs 2,800 5 yr category average per month return – 19.77% At the end of 6 years you Value of SIP at the end get = Rs 6 lakhs of 6 years : Rs 3.93 lakhs Total Tax-free return = Rs 6 lakhs + Rs 3.93 lakhs = ~ Rs 10.00 lakhs (Source , As at July 19, 2010)
  40. 40. THANK YOU