Uploaded byKumar Rama Shankar
Mutual Funds
Mutual funds allow investors to pool their money together for investment purposes. The key advantages are professional management, diversification, flexibility, low costs, and transparency. Regulations in India are governed by SEBI and funds are organized as trusts. Terminology includes asset allocation, fund manager, NAV, entry/exit loads, and types of schemes such as equity, debt, balanced, tax saving, and other specialized funds. Investors must consider their goals, risk tolerance, fund performance and costs when selecting funds.
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Mutual Funds
- 1. Mutual Funds PresentedBy- KUMAR RAMA SHANKAR
- 2. Disclaimer Me -no expert Not Comprehensive Majority from websites and some practical experience
- 3. Contents Keeping TrackBuying a Mutual Fund Selecting a Mutual Funds Equity Funds Investment Strategies Risk Behavior Types of Schemes Organization of Mutual Fund Terminologies Demystified Brief History Reference Websites Mutual Fund Defined Regulations Mutual Funds Comparision Warning Signals
- 4. Mutual Fund ??Form of trust that pools the funds of a whole lot of investors to make more money by investing in an array of financial instruments. Advantages of a MF Professional Management Diversification Flexibility in choice - selection, redemption Low costs Transparency
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- 6. Brief History 1964-UTI1987- Public Sector banks, Insurance Companies SBI, Canbank, PNB LIC, GIC 1993- Private Sector Kothari Pioneer ( later merged with Franklin Templeton), J P Morgan, Morgan Stanley, George Soros and Capital International
- 7. Organization of aMutual Fund
- 8. Regulations Governed bySEBI (Mutual Fund) Regulation 1996 All MFs registered with it, constituted as trusts ( under Indian Trusts Act, 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, offer period, investment guidelines etc. NAV to be declared everyday for open-ended, every week for closed ended Disclose on website, AMFI, newspapers Half-yearly results, annual reports Select Benchmark depending on scheme and compare
- 9. Terminologies Demystified… AssetAllocation 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, in line with fund’s objective. Fund Offer Document Document with investment objectives, risk factors, expenses summary, how to invest etc. Dividend Profits given to the investor from time to time. Growth Profits ploughed back into scheme. This causes the NAV to rise.
- 10. Terminologies Contd… NAV Market value of assets of scheme minus its liabilities. Per unit NAV = Net Asset Value No. 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 discourage withdrawals 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 than NAV) Re-Purchase Price/ Bid Price Price at which close-ended scheme repurchases its units Redemption Price Price at which open-ended scheme
- 11. Types of MutualFund Schemes By Structure Open-Ended – anytime enter/exit Close-Ended Schemes – listed on exchange, redemption after period of scheme 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
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- 13. Risks Historical analysisReturn is remembered, Risk forgotten Risk = Potential for Harm Market Risk Non-Market Risk Credit Rate Risk MF Risk = Volatility (fluctuation of NAV) Standard Deviation Websites give star rating ( basis = risk-adjusted return)
- 14. 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)
- 15. Before declaration ofdividend / bonus Growth Dividend payout Dividend reinvestment Bonus NAV 20 20 20 20 Units 100 100 100 100 Value (Rs) 2,000 Rs 2,000 Rs 2,000 Rs 2,000 After declaration of dividend / bonus NAV 20 19 19 18.1818 Units 100 100 105.2631 110 Value (Rs) 2000 1900 2000 2000 Dividend received in cash - Rs 100 - - Additional units - - 5.2631 10
- 16. 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)
- 17. Errors Invest inonly 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
- 18. Tired of yoursavings 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 on expense ratio
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- 20. 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)
- 21. Checklist Contd… Thinkhard 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.
- 22. Portfolio Decision Theright 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
- 23. MF Comparison Absolutereturns % 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
- 24. Buying Mutual FundsContacting 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
- 25. Keeping Track… Fillingup 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
- 26. Warning Signals Fund'smanagement 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.
- 27. Websites http://news.moneycontrol.com/mf/glossary.php http://www.investopedia.com/university/mutualfunds/default.asphttp://www.valueresearchonline.com http://www.amfiindia.com/ http://www.sbimf.com/portal/static/calculator/RiskAssess/RiskAssessCal1.asp http://www.mutualfundsindia.com/resourcecentre.asp
Editor's Notes
- #5 Professional Management: strong research Low Costs: relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. Even 500 rupees in SIP start with. Transparency: investor gets regular information on the value of his investment in addition to disclosure on the specific investments made by the fund, the proportion invested in each class of assets and the fund manager's investment strategy and outlook
- #7 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.
- #8 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
- #9 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.
- #10 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
- #11 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)
- #12 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
- #14 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
- #16 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.
- #17 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
- #19 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
- #23 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 http://www.sbimf.com/portal/static/calculator/RiskAssess/RiskAssessCal1.asp 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.
- #24 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
- #25 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