Mutual fund and investment strategy

Mutual Funds
singhneeraj1995@yahoo.com

To understand:
1. Meaning and benefits of mutual funds
2. History of mutual funds
3. Growth of mutual funds in India
4. Types of mutual fund schemes
5. Net asset value
6. Organisation of a mutual fund
7. SEBI guidelines relating to mutual funds
8. Association of mutual funds in India
9. Unit Trust of India and US-64
10. Growth and performance of mutual funds in India
Chapter Objectives

Mutual Funds
Meaning - A financial intermediary that pools the savings of investors for
collective investment in a diversified portfolio of securities
Benefits:
- Professional management
- Portfolio diversification
- Reduction in transaction cost
- Liquidity
- Convenience
- Flexibility
- Tax benefits
- Transparency
- Stability of the stock market
- Equity research

Difference between Stock IPO and
MF IPO
Stock IPO MF IPO
a. Share allotted at a price arrived at a. Units are issued at a face value
through the book building process of Rs. 10
b.The post- issue price is linked to theb.The NAV is linked to the market
demand-supply forces price
of underlying assets
c.The listing price may differ from the c.The NAV of the scheme opens
cut off (subscription) price lower than the
par value

History of Mutual funds
- Dates back to 19th century Europe
- Robert Fleming set up the first investment trust
in 1868
- First Mutual fund set up in the US in March
1924
- First international stock mutual fund introduced
in the US in 1940
- In 1979, the first money market mutual fund
created

Growth of Mutual funds in India:
In four phases:
Phase I (1964-87) – Setting up of the UTI, launch of US-64 and
Master share
Phase II (1987-92) – Entry of mutual fund companies sponsored
by banks and insurance companies; popularity of assured return
schemes
Phase III (1992-97) – Entry of private sector mutual funds, 1995
– the beginning of the sluggish phase
Phase IV – (beyond 1997) – Significant growth till 2001,
- trend reversed in 2000-01, due to debacle of US-64 – UTI lost to
private sector players, record growth from new offerings during
2004-05, Cumulative assets under management as on March 31,
2006, Rs. 2,17,707 crore.

Types of Mutual fund schemes
Type of
Mutual Fund
Schemes
Structure
Investment
Objective
Special
Schemes
Open Ended
Funds
Close Ended
Funds
Interval Funds
Growth Funds
Income Funds
Balanced Funds
Money Market
Funds
Industry Specific
Schemes
Index
Schemes
Sectoral
Schemes

Comparison of Open-ended and
Close-ended schemes
Open- ended scheme Close- ended
scheme
a. Continuous offer to sell and a. Scheme remains
open for a fixed
repurchase units at NAV period and has a
stipulated
maturity period
b. Do not have to be listed on the b. Listed on the stock
exchange
stock exchange
c. Do not have a fixed corpus c. Have a fixed
corpus

Types of Mutual Funds
Income funds :Invest predominantly in income bearing
instruments
Growth funds: Invest predominantly in equity shares
with growth potential
Balanced funds: Investment divided between equity
shares and fixed interest bearing instruments
Money market mutual fund: Invest in short- term
money market instruments
Domestic funds: Invest in securities issued and traded in
the domestic financial markets

Offshore funds: Invest in securities of foreign companies
Sectoral funds: Invest in specific core sectors
Tax- saving schemes : Close- ended and carry special tax incentives
Equity- linked savings scheme: Open- ended, diversified, tax-
saving schemes with a lock- in period of three years
Gilt funds: Invest in government securities
Load funds: Charge selling expenses known as ‘load’
It is of two types: Front- end load and Back- end load
No load schemes – do not charge a load
P/E ratio fund:The proportion of the investment determined by on- going
price- earning multiple

Index funds
Invests in securities in the index on which it is
based
Follows a passive investment strategy
Mirrors the performance of its benchmark index
Tracking error can occur but gains over the index
owing to stock- lending and index arbitrage

Exchange-traded Funds
Hybrid of open- ended mutual funds and listed individual stocks
traded on stock exchanges
Passively managed funds
Advantages :
1.Allow for intraday trading
2. Simple to understand
3. Provide benefits of diversification
4. Used as an arbitrage opportunity
5. Low operating expenses
6. Beneficial for financial institutions
First ETF – Nifty BeES

Fund – of – Funds : Invests in other mutual fund schemes. Kotak Mutual fund, Standard Chartered
Mutual fund and Prudential ICICI Mutual fund offer this scheme.
Advantages: (a) Provides diversification benefits through a single product and higher returns with
low risk.
(b) In-built rebalancing feature ensures a steady asset allocation.
© Simplifies the investment process for investors in a tax-efficient manner
:Factors restraining growth : a. Dividend distribution tax and Capital gains taxes
b. Major investment in own schemes
Floating rate funds: Invest in floating rate instruments
Coupon rate linked to a benchmark rate.
38 floating rate fund schemes.Templeton floating rate fund – the largest
Theme based mutual fund: Popular three broad schemes – Leadership,Valuation
and sector specific
Real estate mutual funds:Will invest in shares and debentures of property related
companies and mortgaged based securities

Risks in Mutual funds
Equity- oriented mutual fund more risky
compared to a debt mutual fund.
Proportion of risk varies from scheme to
scheme

Net AssetValue
Reflects the performance of the scheme
on a day- to- day basis
NAV = Market price of securities + other
assets – total liabilities / Units
outstanding as at the NAV date

Mutual Fund Investors
a. Residents : Resident Indian individuals,
Indian companies, Indian trusts/
Charitable Institutions, Banks, NBFCs,
Insurance companies and Provident
funds
b. Non- residents
c. FIIs registered with SEBI

Organisation of a Mutual fund

Some Mutual fund Regulations
- Each mutual fund shall have at least 20 investors and no
single investor should hold more than 25% of the total
corpus of the scheme
- The daily schedules for sales and redemption fixed
- MFs advised to collect bank account number and PAN
from investors
- Investors can issue their demat accounts for buying and
selling units
- MFs allowed to invest in securitised paper

Association of Mutual funds in India
(AMFI)
- Established in 1993
- Dedicated to developing MF industry protecting
and promoting the interests of mutual funds and
their unit holders
- Catalyst for setting new standards
- Maintains a liaison with different regulators
- Launched market indices
- Conducts investor awareness programmes

Role of Intermediaries in MF
Industry
 Offer two levels of services:
Value- added
Basic

UTI
: First mutual fund organisation
: Single largest mutual fund
: Set up in 1964 as a trust
: 54 branch offices, 266 chief representatives, 67000 agents, 72 schemes, 20.02
mn investors
UTI’s associates :
UTI bank limited
UTI Securities Exchange Limited
UTI Institute of Capital Markets
UTI Investment Advisory Services Ltd
UTI International Limited
UTI promoted institutions such as:
ILFS, CRISIL, SHCIL,TDCIL, OTCEI, NSDL & NEDFCL

US - 64
- The flagship open- ended scheme
- Around 20 mn investors
- Launched as a debt fund
- Administered pricing and high dividend payments depleted reserves
- A bail out package in the form of SUS – 1999
- Failure to implement recommendations of Deepak Parekh Committee
- Repurchase and Sale of US – 64 units freezed in July 2001. NAV dipped to a low of
Rs. 9.60. Government set up two committees- Tarapore and Malegam Committee
- US 64 moved to NAV basis on Jan 1, 2002
- In 2002, problems of liquidity and redemption pressures surfaced again
- UTI bifurcated into UTI-I and UTI-II on Feb 1,2003
- UTI I – all the assured return schemes
- UTI II – other schemes and under the regulatory ambit of SEBI
- US 64 shortfall wiped out by stock market rally in Oct, 2003.

Investment 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 units
when the share prices are low. Average cost price tends to
fall below the average NAV.
 Systematic Transfer Plan (STP)
◦ Invest in debt oriented fund and give instructions to transfer
a fixed sum, at a fixed interval, to an equity scheme of the
same mutual fund.
 Systematic Withdrawal Plan (SWP)

What is a Systematic Investment Plan?
An investment plan to invest a
fixed amount regularly at a
specified frequency say, monthly or
quarterly.
SIP is a simple method of investing used
across the world as a means to creating wealth

Benefits 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 pinch
of it being directly deducted, yet the small amount is powerfully working
towards your financial security

Systematic Investing,An Example
9.40
6.93
6.46
7.57
8.31
9.108.93
8.018.12
8.75
9.35
7.60
2
3
4
5
6
7
8
9
10
Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04
106.39
units
154.75
units
When the price is highest,
you buy the least number of units
When the price is lowest,
you buy the highest number of units

Investing at Peak – SIP is the way

Start Early : SIP
A 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 yrs
4.20 3.60 3.00 2.40 1.80 1.20
148.61
70.10
32.84
15.16
6.77 2.79
-
20
40
60
80
100
120
140
160
25 30 35 40 45 50
Investment Wealth at 60

Equity 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)

 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 sector
funds – in right proportion.
◦ Beginner- it makes sense to begin with a diversified fund
◦ Gradual exposure to sector and specialty funds.
 Look at performance of various funds with similar objectives for
at least 3-5 years (managed well and provides consistent returns)
Investing in Equity Funds

Tired of your savings account?
 Extra Cash in savings A/c?? Consider Cash Funds
 Liquidity: Savings account wins
◦ b/w a savings account and a fixed deposit, no ATM (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

Investing Checklist
 Draw up your asset allocation
◦ Financial goals & Time frame (Are you investing for retirement? A
child’s education? Or for current income? )
◦ Risk Taking Capacity
 Identify funds that fall into your Buy List
 Obtain and read the offer documents
 Match your objectives
◦ In terms of equity share and bond weightings, downside risk protection,
tax benefits offered, dividend payout policy, sector focus
 Check out past performance
◦ Performance of various funds with similar objectives for at least 3-5
years (managed well and provides consistent returns)

Checklist 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.

Portfolio 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

MF Comparison
 Absolute returns
◦ % difference of NAV
◦ Diversified Equity with Sector Funds– NO
 Benchmark returns
◦ SEBI directs
◦ Fund's returns compared to its benchmark
 Time period
◦ Equal to time for which you plan to invest
◦ Equity- compare for 5 years, Debt- for 6 months
 Market conditions
◦ Proved its mettle in bear market

Buying Mutual Funds
 Contacting the Asset Management Company directly
◦ Web Site
◦ Request for agent
 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

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

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.

 THANKYOU……

Mutual fund and investment strategy

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