Surplus funds are to be invested Professionals like C.A.’s are approached by clients to give advise about investing. Pros & Cons of Investing of each type. The most attractive in terms of liquidity and returns is capital markets. To minimise Risks of volatility of stock markets, Mutual Funds investment are relevant
Rates of Interest on Company Bonds may wary
The Sample of 2004 still holds good with the decline of Inflation rates ofcourse with the exception of Gold but then it is too cumbersome and risky to hold gold as an investment.
Sensex has moved back to the same point after two years, hypothetically meaning your share price is back to the same price which it was 2 years ago.
Still the largest is UTI- UTI Liquid Cash Plan has 8863 Cr Asset Size. Next is Birla Cash Plus at 8372. Standard Chartered Liquidity Manager Plus at 7910 Cr.
Sponsor: Establishes a MF, obtains Certificate of Registration from SEBI, forms a trust, appoints board of trustees & AMC, appoints Custodian Trustees: MF managed by body of individuals or a trust company (corporate body). Guardians of assets of Unitholders. Responsible. AMC: Investment Manager of Trust. Under the supervision of Board of Directors, Trustees, SEBI. Floates & manages different schemes. Mutual Fund: Formed under Indian Trusts Act, 1982. Invites subscriptions to units. Transfer agents: Issue and Redemption of units Custodian: For safekeeping of securities, participating in clearing system
AMFI: a forum where mutual funds have been able to present their views, debate and participate in creating their own regulatory framework. the body that is consulted on matters long before regulations are framed, and it often initiates many regulatory changes that prevent malpractices that emerge from time to time. Receive Unit certificates within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. Receive dividend within 42 days of their declaration Receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase.
dividend is always a percentage of face value. Face value is the price of unit of a fund and is Rs 10. So 10% of face value would be Re 1 per unit. NAV of the growth option will always be higher than that of the dividend option because money is going back into the scheme and not given to investors. dividend is not guaranteed, fund distributes dividends at its discretion, guarantee or assurance- funds are not obliged to declare a dividend-no legal compulsion In the dividend re-investment option, the dividend is not paid to you. Instead, additional units are purchased at the revised NAV. The bonus option is similar to dividend re-investment, except that the fund announces the bonus ratio instead of dividend., the scheme declares a bonus of 1:10. This means an additional unit for every 10 units held. NAV- less due to – dividend option, contra option, give some time income earned, net of recurring expenses, subject to a maximum ceiling of 2.5% in equity schemes and 2.25% in debt schemes, is shared by way of dividends or capital gains. These recurring expenses include asset management fees not exceeding 1.25%, it also is due to other expenses such as Trustee Fees, Registrar Fees and Marketing expenses etc. Total Value of Securities (Equity, Bonds, Debentures etc.)Rs. 1000 Cash Rs. 1500 LiabilitiesRs. 500 Total outstanding units 100 NAV [(1000+1500-500)/100] Rs. 20 per unit
Entry Load: If you invest Rs1,000 in a mutual fund with a 2% front-end load, Rs20 will pay for the sales charge, and Rs.980 will be invested in the fund. Sales Purchase = Applicable NAV x ( 1 + Sales Charge ) Repurchase Price = Application NAV x ( 1 - exit load)
Ultra Short term (180 days) debt funds called liquid funds or floating rate fund or cash funds, Bond funds– fixed return instruments, term papers, G-Secs, Corporate bonds, interest rate floating – depending on interest rate in economy – return of 5.5% per annum last year– aim: preserve the principal and earn a modest return. Savings bank rate= 3.5% p.a. Balanced funds for those who are not comfortable with 100% exposure to equity. B est of both worlds-Power of equities & stability of debt market instruments- 60:40 equity debt ratio. Performance ≈ average 30% return, Volatility (Risk) = Moderate Income: fixed income securities such as bonds, corporate debentures and Government securities. capital stability and regular income. Money Market: safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. easy liquidity, preservation of capital and moderate income. Unit Linked Insurance Plan - life insurance as well as an investment like a mutual fund. Part of the premium towards the sum assured (amount you get in a life insurance policy) and the balance invested whichever investments you desire - equity, fixed-return or a mixture of both. benefit under Section 80C. Gilt funds are those that only invest in government securities and are hence zero credit risk, very safe MIP - 5-25% in stocks, rest in fixed income instruments
Standard Deviation: how much the actual performance of a fund over a period of time deviates from the average performance. Low SD = good Sharpe Ratio : returns that a fund delivered were commensurate with the kind of volatility it exhibited; looks at both, returns and risk, and delivers a single measure that is proportional to the risk adjusted returns. High SR =Good Market Risk: overall stock or bond markets fall Non-Market Risk: Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. Credit Rate Risk: Bonds are debt obligations. corporate defaulting on their interest and principal payment obligations
Growth option : No change. Over time, the NAV will grow. Whenever you redeem the units, you get your entire earnings by way of capital appreciation. Dividend payout : The unit holder will get Rs 100 as dividend while the NAV falls to Rs 19. Dividend re-investment : The dividend of Rs 100 is not paid in cash but is used to purchase 5.2631 more units. Bonus option : You get 10 more units, because of which the NAV falls to Rs 18.1818.
Diversified equity fund - invests in the stocks of various companies of various sectors. invest across industries as well as various market segments i.e. large cap, mid cap and small cap. Index- sensex, nifty- same proportion of equity as the index Mid-Cap - mid-cap companies, appetite for risk ELSS- tax saving, mirror image of a diversified equity fund, lock-in period of three years. tax benefit under Section 80C Opportunity : by definition diversified, but are aggressive by nature. emphasis on generating superior returns rather than risk containment. Sector : invest based on a particular dominant “prime-mover of profitability”. Theme : diversified across sectors. “outsourcing” is a theme: IT companies make money from it, so do medical companies, so do automobile ancillary companies and even textile companies. invest in any of the above-mentioned industries or all of them themes underlying the current economic resurgence of India are outsourcing, services (as opposed to manufacturing), infrastructure, debt restructuring, mergers & acquisitions etc Dividend Yield Funds : A dividend yield fund invests in shares of companies having high dividend yield. Within the diversified equity funds space, dividend yield funds are considered to be the medium risk proposition Contra Fund: Invests in out-of-favour companies but at the same time have unrecognized value. The reasoning behind this approach is the belief that sooner or later other investors will realize the true value of these companies and buy their shares, thereby increasing the stock prices. Exchange Traded Fund (ETF) is a fund that combines the features of an index fund as well as stocks. These funds are listed on the stock exchanges and their prices are linked to the underlying index. Traded on exchange at prices that are expected to be closer to the NAV at the end of the day
spare cash languishing in your savings account, but don't want to block it in a fixed deposit or risk an investment in shares Cash funds are known as ultra short-term bond funds or liquid funds that invest in fixed return instruments of short maturities. aim is to preserve the principal and earn a modest return Safety : highly unlikely that your principal amount will get eroded
Age 25-35: 35-40 % debt, 60% in equity Age 35-45: 45-50 debt, less than 50% in equity Age 55: mostly in debt IPO: Growth in the NAV depends on the quality of the portfolio, its exposure to various industries and segments of the market, strategy of the fund manager. Market timing – a strategy in which one tries to invest before the market goes up and sell before it declines remains one of the most tempting.
Contra with Contra… and not contra with SEBI -mandatory for funds to have a benchmark– lets say Sensex… fund should beat Sensex if the Sensex drops by 10% over a period of two months and during that time, the fund's NAV drops by only 6%, then the fund is said to have outperformed the benchmark. Report submitted to SEBI every 6 months
AMFI: Under the heading Investors Zone, you will find another one called ARN Search . This refers to the AMFI Registration Number. Click on it and you will arrive at a search page. You can locate an agent in your vicinity by just putting in your PIN code or name of your city
firstname.lastname@example.orgEducationEducation Earning YearsEarning Years Post Retirement YearsPost Retirement YearsPhase IPhase I Phase IIPhase II Phase IIIPhase IIIAge- 22 yrsAge- 22 yrs Age- 60 yrsAge- 60 yrsMarriageMarriageChild birthChild birthChild’s EducationChild’s EducationChild’s MarriageChild’s MarriageHousingHousing22 yrs22 yrs 38 yrs38 yrs 10- 20 yrs10- 20 yrsHuman Life Cycle
email@example.comRetirement40Middle Age27Young Married22Young IndependentIndividual Investor: Life StagesEarningsConsumptionSavingsAll individuals have a finite period to save for their investment goals
firstname.lastname@example.orgValue of Money over timeImpact of inflation on monthlyexpenses of Rs. 30,000 todayValue of Rs. 100,000 over timeAt inflation of 5%Investors need to beat inflation30,00038,28862,36879,599Today 5 years 15 years 20 years100,00078,35348,10237,689Today 5 years 15 years 20 years
email@example.comOPTIONS FOR INVESTING• Deposit in Bank – SB, RD, FD’s, Locker ;)• Loan a Friend/Relative on Interest• Property Investments• Invest in Bullion - Gold, Silver..• Investment in Capital Markets -- Direct - Equity Share Markets- Debt & Bonds Market- Indirect - Mutual Funds
firstname.lastname@example.orgSo what are my alternatives?• Fixed Interest Products –– Bank Deposits– Corporate Deposits– RBI Bonds– Corporate Bonds• Rates of Return?• Returns – Net of tax?• Won’t Inflation eat into thereturn?Returns – net of tax/ inflation is poor hedge against inflation4.54%1.95%0.01%4.54%2.10%0.36%4.54%2.40%1.06%4.54%2.25%0.71%0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%Bank FD Company FD RBI Bond Co BondsInflation Tax @30% Net Returns
email@example.comWhy Equities7.47% 7.12%10.64% 10.27%18.25%Inflation Gold G Secs Bank FD EquitiesSource : CLSACumulative annualised returns (1980 - 2004)Equities – the most attractiveasset classEquities produce highest long-term returns
firstname.lastname@example.orgEQUITIES-RISKY & VOLATALIEBSE SENSEX IN LAST TWO YEARS
email@example.comHow 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)
firstname.lastname@example.orgWhat is a Mutual Fund?• A Mutual Fund is a trust that pools the savings of a number ofinvestors who share a common financial goal.• Anybody with an investible surplus of as little as a few thousandrupees can invest in Mutual Funds.• These investors buy units of a particular Mutual Fund scheme thathas a defined investment objective and strategy.• The money collected is invested by the fund manager in differenttypes of securities. These could range from shares to debentures tomoney market instruments, depending upon the scheme’s statedobjectives.• The income earned through these investments and the capitalappreciation realized by the scheme are shared by its unit holders inproportion to the number of units owned by them.
email@example.comBrief History• First Phase – 1964-87Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of1988 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 banksand 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 of1993, 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, underwhich all mutual funds, except UTI were to be registered and governed. The erstwhile KothariPioneer (now merged with Franklin Templeton) was the first private sector mutual fund registeredin 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 2003In February 2003, following the repeal of the Unit Trust of India Act 1963. UTI MutualFund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions underthe SEBI Mutual Fund Regulations
firstname.lastname@example.orgGROWTH IN ASSETS UNDERMANAGEMENT
email@example.comMUTUAL FUND DATA April 30th,2009Category Sales Redemption Asset Under ManagementExistingschemesTotal Total as on Apr30 ,2009as on Mar 31, 2009Inflow/OutflowB Bank Sponsored 118793 118793 87357 93839 81013 12826C Institutions 55866 55866 48898 26115 23092 3023Private Sector & Joint Venture :Indian 239486 239605 184342 172701 153432 19269Predominantly Foreign 23329 23329 19571 23843 22857 986Predominantly Indian 250760 250760 198352 198866 180163 18703D Total Private Sector 513575 513694 402265 395410 356452 38958Grand Total(B+C+D) 688234 688353 538520 515364 460557 54807
firstname.lastname@example.orgOrganization of a Mutual Fund
email@example.comRegulations• Governed by SEBI (Mutual Fund) Regulation 1996– All MFs registered with it, constituted as trusts ( under Indian TrustsAct, 1882)• 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, offerperiod, investment guidelines etc.– NAV to be declared everyday for open-ended, every week for closedended– Disclose on website, AMFI, newspapers– Half-yearly results, annual reports– Select Benchmark depending on scheme and compare
firstname.lastname@example.orgTerminologies Demystified…• Asset Allocation– Diversifying investments in different assets such as stocks, bonds, real estate,cash in order to optimize risk.• Fund Manager– The individual responsible for making portfolio decision for a mutual fund, inline with fund’s objective.• Fund Offer Document– Document with investment objectives, risk factors, expenses summary, how toinvest etc.• Dividend– Profits given to the investor from time to time.• Growth– Profits ploughed back into scheme. This causes the NAV to rise.
email@example.comTerminologies Contd…• NAV– Market value of assets of scheme minus its liabilities.• Per unit NAV = Net Asset ValueNo. of Units Outstanding on Valuation date• Entry Load/Front-End Load (0-2.25%)– 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%)– The commission or charge paid when an investor exits from a mutual fund. Imposed to discouragewithdrawals– May reduce to zero as holding period increases.• Sale Price/ Offer Price– Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher thanNAV)• Re-Purchase Price/ Bid Price– Price at which close-ended scheme repurchases its units• Redemption Price– Price at which open-ended scheme
firstname.lastname@example.orgTypes of Mutual Fund Schemes• By Structure– Open-Ended – anytime enter/exit– Close-Ended Schemes – listed on exchange, redemption after period ofscheme 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(Govt.)– Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)• Other Schemes– Tax Saving Schemes– Special Schemes• ULIP
email@example.comSPECIAL SCHEMES-EXAMPLE• Funds based on Size of the CompaniesInvested in• Large cap funds:Funds that invest incompanies whose total market cap is aboveRs40bnMid cap funds: Funds that invest in companieswhose market cap is between Rs20-40bnSmall cap funds: Funds that invest incompanies whose market cap is below Rs20bn
firstname.lastname@example.org REASONS TO INVEST INMUTUAL FUNDS• Expert on your side: When you invest in a mutual fund, you buy into the experience and skillsof a fund manager and an army of professional analysts• Limited risk: Mutual funds are diversification in action and hence do not rely on the performanceof a single entity.• More for less: For the price of one blue chip stock for instance, you could get yourself a numberof 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 individualsalso have the option of investing in a monthly savings plan.• Convenience: You can invest directly with a fund house, or through your bank or financialadviser, or even over the internet.• Investor protection: A mutual fund in India is registered with SEBI, which also monitors theoperations of the fund to protect your interests.• Quick access to your money: Its good to know that should you need your money at shortnotice, you can usually get it in four working days.• Transparency: As an investor, you get updates on the value of your units, information on specificinvestments made by the mutual fund and the fund managers strategy and outlook.• Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry outcost-effective brokerage transactions.• Tax benefits: Over the years, tax policies on mutual funds have been favourable to investors andcontinue to be so.
email@example.comTAXATION• All dividends declared by debt / equity oriented schemes are taxfree 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
firstname.lastname@example.orgInvestment strategies• 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 unitswhen the share prices are low. Average cost price tends tofall below the average NAV.• Systematic Transfer Plan (STP)– Invest in debt oriented fund and give instructions totransfer a fixed sum, at a fixed interval, to an equityscheme of the same mutual fund.• Systematic Withdrawal Plan (SWP)
email@example.comWhat is a Systematic Investment Plan?An investment plan to invest afixed amount regularly at aspecified frequency say,monthly or quarterly.SIP is a simple method of investing usedacross the world as a means to creating wealth
firstname.lastname@example.orgBenefits of SIP• Regular• 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• Automated• 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 pinchof it being directly deducted, yet the small amount is powerfully workingtowards your financial security
email@example.comSystematic Investing, An Example9.406.936.467.578.319.108.938.018.128.759.357.602345678910Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04106.39units154.75unitsWhen the price is highest,you buy the least number ofunitsWhen the price is lowest,you buy the highest number of units
firstname.lastname@example.orgSimple plotting of closing price of BSE Sensex for the first of every month. Thetime period considered here is from 1/1/1990 to 02/12/2005 Source:Credence AnalyticsInvesting at Peak – SIP is the way
email@example.comStart Early : SIPA gap of 5 only years can result in a lot of difference in wealth creation !Rs. 1000 invested per month @15% p.a. till the age of 60 yrs4.20 3.60 3.00 2.40 1.80 1.20148.6170.1032.8415.166.772.79-2040608010012014016025 30 35 40 45 50Investment Wealth at 60
firstname.lastname@example.orgEquity Funds• Diversified equity funds• Index funds• Opportunity funds• Mid-cap funds• Equity-linked savings schemes• Sector funds like Auto, Health Care, FMCG etc• Dividend Yield Funds• Others (Exchange traded, Theme, Contra etc)
email@example.com• Errors– 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 sectorfunds – 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 forat least 3-5 years (managed well and provides consistent returns)Investing in Equity Funds
firstname.lastname@example.orgTired 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 (Now-Rel 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 onexpense ratio
email@example.comInvesting Checklist• Draw up your asset allocation– Financial goals & Time frame (Are you investing for retirement? Achild’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 riskprotection, tax benefits offered, dividend payout policy, sector focus• Check out past performance– Performance of various funds with similar objectives for at least 3-5years (managed well and provides consistent returns)
firstname.lastname@example.orgChecklist Contd…• 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.
email@example.comPortfolio Decision• 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
firstname.lastname@example.orgMF Comparison• Absolute returns– % difference of NAV– Diversified Equity with Sector Funds– NO• Benchmark returns– SEBI directs– Funds 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
email@example.comBuying Mutual Funds• Contacting the Asset Management Company directly– Web Site– Request for agent• Agents/Brokers– Locate one on AMFI site• Financial planners– Bajaj Capital etc.• Insurance agents• Banks– Net-Banking– Phone-Banking– ATMs• Online Trading Account– ICICI Direct– Motilal Oswal, Indiabulls- Send agents
firstname.lastname@example.orgKeeping Track…• Filling up an application form and writing out acheque= end of the story… NO!• Periodically evaluate performance of your funds– Fact sheets and Newsletters– Websites– Newspapers– Professional advisor
email@example.comWarning Signals• Funds management changes• Performance slips compared to similar funds.• Funds expense ratios climb• Beta, a technical measure of risk, also climbs.• Independent rating services reduce their ratings of thefund.• It merges into another fund.• Change in management style or a change in theobjective of the fund.