Explore The Basics of Mutual Funds Online at Mirae Asset

1. BASICS OF MUTUAL FUNDS

2. What to do with your money?

3. Why Should you save? You are not going to earn all your life and the period of working life is limited, so you must save regularly and invest to provide enough for your retirement or non-working life. Saving is important so as to take care during emergencies and achieve your goals in life.

4. What's wrong with just saving? Inflation eats up your savings over time !

5. Impact of Inflation •Inflation or price inflation is the general rise in the prices of various commodities, products, and services that we consume. •Inflation erodes the purchasing power of money. Inflation eats into value ₹ 100 ₹ 100 ₹ 90 ₹ 80 ₹ 70 59 ₹ ₹ 60 ₹ 50 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Feb-21 Feb-22 Feb-23 •The above graph shows the erosion of purchasing power of money. •Due to inflation, the value of ₹100 in Feb 2013 eroded to ₹59 in Feb 2023. •Inflation eats into the value of money over longer periods. Source: Internal Calculation

6. Solution?

7. Saving or Investing? Saving Investing Using your money to buy assets which you believe will give you acceptable rate of return for the level of risk taken. Setting aside your money for future needs. How do you define them? Cash cushion. Can be used for a future large purchase or unexpected expenses. Potential returns. Make your money work harder to potentially earn more return. Why do you save? Why Invest? How risky are these approaches? Risk varies according to your asset allocation. Relatively low risk. Varies, depending upon your risk tolerance level. Relatively Low but stable returns*. What are the potential returns? The saying “more risk ,more return", the higher the range of potential return, higher may be the risk. *If inflation is factored in, Savings often yield slightly negative return.

8. DETERMINE WHAT ARE YOU INVESTING FOR? Retirement Luxury Aspiration Educational Aspirations Essential Requirements Family Aspirations Source: AMFI knowledge Center

9. Instruments available for investing MUTUAL FUNDS GOLD PROPERTY STOCKS INSURANCE BANK DEPOSITS BONDS Source: AMFI knowledge Center

10. Your Investment should Fight inflation for you Provide Income when you need it Be accessible and usable in parts & Proportion Grow in value & appreciate over time Be realizable at fair value & low cost Source: AMFI knowledge Center

11. Factors to evaluate investments Safety Liquidity Returns(Growth/ Appreciation) Convenience Transparency Taxation

12. What is asset allocation?

13. MUTUAL FUNDS

14. Concept of a Mutual fund A mutual fund is a professionally managed investment vehicle. A vehicle in the form of a “trust” to mobilize money from investors, to invest in different markets and securities, in line with stated investment objectives. Investors buy units of a particular mutual fund scheme that has a defined investment objective & strategy. Anybody with an investable surplus of little as a few thousand rupees can invest in mutual fund. The money collected is invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme’s stated objectives. Source: AMFI knowledge Center

15. How does a Mutual Fund work? Pool their money Delivered to INVESTORS RETURNS Invest in Helps generate STOCKS / SECURITIES Source: AMFI knowledge Center

16. Why invest in Mutual Funds? Professional management Low cost Transparency Risk diversification Convenient (Invest small amounts) Liquidity Well regulated by SEBI Source: AMFI knowledge Center

17. Types of Mutual Funds Mutual funds Organisational structure. Management of portfolio. Investment objective. Investment portfolio. Other fund types Open ended funds. Exchange Traded Funds (ETF). Active funds. Growth funds. Equity funds. Retirement / Pension Scheme. Close ended funds. Passive funds. Income funds. Debt funds. Interval funds. Hybrid funds. Hybrid funds. Fund of funds. Liquid funds. Source: AMFI knowledge Center

18. EQUITY SCHEMES

19. Equity Funds Invests in equities and equity related instruments of companies. Seeking long term growth, but volatile in the short term. Suitable for investors with higher risk appetite horizon. and longer investment Source: AMFI knowledge Center

20. Equity Funds Categories Multi Cap Fund •Investment across Large cap, mid cap, small cap stocks. •At least 75% of total asset invested in equity & equity related instruments. •Minimum 25% each of total asset invested in Large cap, mid cap, small cap stocks respectively. Large Cap Fund •At least 80% of total asset invested in large cap stocks. Large & Mid Cap Fund •Investment in both large & mid cap stocks. •At least 35% of total asset invested in large cap stocks and 35% in mid cap stocks. Mid Cap Fund •At least 65% of total asset invested in mid cap stocks. Small cap Fund •At least 65% of total asset invested in small cap stocks. Source: AMFI knowledge Center

21. Equity Funds Categories Dividend Yield Fund •Predominantly invest in dividend yielding stocks, with at least 65% of total assets in equity. Value Fund •Open-ended equity scheme following a value investment strategy. •Minimum investment in equity & equity related instruments shall be 65% of total assets. Contra Fund •Scheme follows contrarian investment strategy with at least 65% of total assets in equity. Focused Fund •Invest in maximum 30 stocks (the scheme needs to mention where it intends to focus, viz., multi cap, large cap, mid cap, small cap). •Minimum investment in equity & equity related instruments shall be 65 % of total assets. Source: AMFI knowledge Center

22. Equity Funds Categories Sectoral/ Thematic Fund •An Open-ended equity scheme investing in stocks of a particular sector/ theme. •The minimum investment in equity and equity related instruments of a particular sector/ theme shall be 80% of total assets. Equity Linked Savings Scheme •An open-ended equity linked saving scheme with a statutory lock-in of 3 years and tax benefit. •The minimum investment in equity and equity related instruments shall be 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance). Source: AMFI knowledge Center

23. DEBT SCHEMES

24. Debt Funds Invests in different types of Fixed Income securities. Aims to earn interest income and capital appreciation. Suitable for investors seeking income at moderate risk. Source: AMFI knowledge Center

25. Debt Funds Categories Overnight Fund. •The investment is in overnight securities having a maturity of 1 day Liquid Fund •Investment is into debt and money market securities with a maturity of up to 91 days only. Ultra Short Duration Fund •Investment in Debt & Money Market instruments with Macaulay duration portfolio between 3 months- 6 months. Low Duration Fund •Investment in Debt & Money Market instruments with Macaulay duration portfolio between 6 months- 12 months. Source: AMFI knowledge Center

26. Debt Funds Categories Money Market Fund •Investment in Money Market instruments having maturity up to 1 Year. Short Duration Fund •Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 1 year - 3 years Medium Duration Fund •Investment in Debt & Money Market instruments with Macaulay duration of portfolio between 3 years - 4 years Medium to Long Duration Fund •Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 4 - 7 years Source: AMFI knowledge Center

27. Debt Funds Categories Long Duration Fund •Investment in Debt & Money Market Instruments with Macaulay duration of the portfolio greater than 7 years Dynamic Bond •Investment across duration. Corporate Bond Fund •Minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds Credit Risk Fund •Minimum 65% investment in corporate bonds, only in AA (excludes AA+ rated corporate bonds) and below rated corporate bonds. Source: AMFI knowledge Center

28. Debt Funds Categories Banking and PSU Fund •Predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds •The minimum investment in such instruments should be 80% of total assets. Gilt Fund •Investing in government securities across maturity. •The minimum investment in G-secs is defined to be 80% of total assets (across maturity). Floater Fund •Predominantly investing in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives). •Minimum investment in floating rate instruments shall be 65% of total assets. Source: AMFI knowledge Center

29. HYBRID SCHEMES

30. Hybrid Funds Invests in the mix of equity & debt Gain from a healthy dose of equities but the debt portion fortifies them against any downturn Ideal for investors who are looking for a mixture of safety, income and modest capital appreciation. Source: AMFI knowledge Center

31. Hybrid Funds Categories Conservative Hybrid Fund •Investing predominantly in debt instruments. •Investment in debt instruments shall be between 75% and 90% of total assets. •Investment in equity and equity instruments shall be between 10% and 25% of total assets. Balanced Hybrid Fund •The investment in equity and equity related instruments shall be between 40% and 60% of total assets. •Investment in debt instruments shall be between 40% and 60% •No arbitrage is permitted in this scheme. Source: AMFI knowledge Center

32. Hybrid Funds Categories Aggressive Hybrid Fund •Investing predominantly in equity and equity related instruments. •Investment in equity and equity related instruments shall be between 65% and 80% of total assets •Investment in debt instruments shall be between 20% and 35% of total assets. Dynamic Asset Allocation or Balanced Advantage •Investment in equity/debt that is managed dynamically. Multi Asset Allocation •Investing in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. Source: AMFI knowledge Center

33. Hybrid Funds Categories Arbitrage Fund •Investing in arbitrage opportunities •Minimum investment in equity and equity related instruments shall be 65% of total assets. Equity Savings •Investing in equity, arbitrage and debt. •Minimum investment in equity and equity related instruments shall be 65% of total assets. •Minimum investment in a debt shall be 10% of total asset. Source: AMFI knowledge Center.

34. OTHER SCHEMES

35. Other Schemes Index Funds/Exchange Traded Fund. Fund of Funds (Overseas/Domestic) Retirement Fund Children’s Fund •Have a lock-in of 5 years or till retirement age (whichever is earlier). •This is meant for long term planning related to acquiring a corpus for retirement. •Have a lock-in for at least 5 years or till the child attains the age of majority (whichever is earlier). •This is meant to invest to build a corpus for the child and their needs in the coming years •An open-ended scheme replicating/tracking a specific index. •This minimum investment in securities of a particular index (which is being replicated/ tracked) shall be 95% of total assets. •Invest in an underlying fund. •The minimum investment in the underlying fund shall be 95% of total assets. Source: AMFI knowledge Center.

36. COMMON TERMS

37. Asset Under Management (AUM) •Asset under management (AUM) is the total market value of all the assets that a mutual fund manages on behalf of its investors It includes all the securities, stocks, bonds, cash, and any other assets that the mutual fund has invested in. •AUM is highly useful when you want to have insights into the fund house and its success. How a fund house has performed as compared to its competitors is also reflected by the size of funds or Assets Under Management. •The AUM of a mutual fund fluctuates based on the inflows and outflows of investor capital. When investors invest in a mutual fund, the fund's AUM increases, and when investors redeem their shares, the AUM decreases. Source: AMFI knowledge Center.

38. Net Asset Value (NAV) •let's say the mutual fund has 300 shares outstanding, and the total value of all the assets it holds is ₹3,300. •The NAV would be calculated as follows: NAV = Total value of assets / Number of shares outstanding NAV = ₹3,300 / 300 NAV = ₹11 per share. •This means that each share of the mutual fund is worth ₹11. •NAVs are published daily on AMFI’s website, Mutual Fund Websites, etc. Source: AMFI knowledge Center. & internal Calculations

39. Net Asset Value (NAV) The NAV of a mutual fund can change on a daily basis, and there are several factors that can impact it: underlying securities Cash Flows Expenses •Both the NAV and share price are interlinked but they are not the same. The difference is that the share price changes on different factors demand and supply, and other market events & news updates. •The NAV of a mutual fund changes on the basis of the performance of underlying securities in the market. •If more investors are buying shares mutual fund, the NAV is likely to increase, and if more investors are selling their shares, the NAV is likely to decrease. •The expenses of a mutual fund, such as management fees and operating expenses, can also impact the NAV •These expenses are deducted from the assets of the mutual fund, which reduces the NAV. of a like Source: AMFI knowledge Center

40. Net Asset Value (NAV) Significance of NAV Analyze the daily performance of the fund Assess the returns on investment at maturity Know the value per share of a mutual fund Compare the performance of multiple funds with similar investment objective

41. Net Asset Value (NAV) Cut-off time For every kind of mutual fund scheme, SEBI has defined a cut-off time. Only if you place a request before the cut-off time are you eligible to get the NAV on the same day. Here are the cut-off timings and rules for various mutual fund schemes: Fund Type Cut-off time Types of scenarios NAV Applicable Liquid and Overnight mutual funds If you submit the application, transfer the money before 1.30 pm, and it reaches the fund’s accounts before 1.30 pm. 1.30 pm Previous day NAV Liquid and Overnight mutual funds 1.30 pm If you submit the application and transfer the money after 1.30 pm, and the money reaches the fund’s accounts on the same day. Same day NAV Debt and Equity mutual funds (other than Liquid Funds & Overnight Funds) 3.00 pm If you submit the application, transfer the money before 3 pm and it reaches the fund’s accounts before 3 pm. Same day NAV Debt and Equity mutual funds (other than Liquid Funds & Overnight Funds) 3.00 pm If you submit the application and transfer the money after 3 pm and it reaches the fund’s account after 3 pm or the next day before 3 pm Next day NAV Source: AMFI knowledge Center.

42. Alpha (α) and Beta (β) WHAT IS ALPHA (α) ? •In layman terms, alpha is used for measuring the fund performance against its benchmark. For mutual funds, the baseline alpha is considered to be 0. If the alpha of a mutual fund category is negative, it suggests that the performance of the particular fund was underwhelming as compared to its benchmark index. A positive alpha indicates the opposite. WHAT IS BETA (β)? •Beta measures the sensitivity of a mutual fund scheme against its benchmark index. For mutual funds, the baseline beta is 1. Schemes with a beta of 1 show the same level of variation against its benchmark index. If it is higher than 1, it suggests that the scheme shows a higher level of variation than its benchmark. A beta lower than 1 indicates the opposite. •For instance, if the beta of your selected fund is 0.70, it indicates that if the benchmark index of the fund moves by 1 point, the value of the fund will move by 0.70 points. Source: AMFI knowledge Center.

43. Standard Deviation •Standard deviation in mutual funds is commonly used for determining risk. •Standard deviation in mutual funds is a statistical measure that quantifies the level of volatility or risk associated with a mutual fund's returns. It measures how much the returns of a mutual fund vary from the fund's average return over a specific period. •Investors use standard deviation to assess the risk associated with a mutual fund's returns. •Mutual funds with a higher standard deviation tend to be riskier than those with a lower standard deviation. •However, it's important to note that a higher standard deviation doesn't necessarily mean that a mutual fund is a bad investment. •Higher risk can sometimes lead to higher returns, but it's important to balance risk with other factors such as the fund's investment strategy, fees, and past performance. • Overview of Total Risk The standard deviation is a broader metric that considers total risk. •Investors can better predict the returns they can generate from their mutual fund investment. Indicates Potential Returns •Investors can also use standard deviation to match their risk appetite with the risk profile of the mutual fund they’re interested in to make informed decisions. Match Risk Level

44. EXPENSE RATIO •Expense ratio refers to the annual charge levied by asset management companies (AMCs) to cover expenses for operating the fund. A small percentage is deducted from the investors’ total assets each fiscal year for various operating expenses which get reflected in the scheme’s expense ratio. •These include costs incurred for administrative services, allocation, management, communication, legal matters, custodian fees, and marketing, to name a few. •It is a percentage of the total fund assets, the ratio can have a direct bearing on investment returns. Let’s say a mutual fund has an expense ratio of 2% and makes a profit of 15%. •This will translate into a 13% return for the investor. Given that the expense ratio is charged regularly a higher rate may drain your returns due to the power of compounding. In contrast, a lower rate could yield more profitability. Components of Expense ratio Management fees Administrative Costs Distribution Fee Source: AMFI knowledge Center.

45. SCHEME RELATED DOCUMENTS

46. Scheme Related Documents SID, SAI, and KIM are important documents that provide investors with valuable information about a mutual fund's features, investment objectives, investment strategy, risks, fees, and past performance. Investors should read these documents carefully before investing in a mutual fund to make informed investment decisions. Scheme Information Document (SID): • The SID is a comprehensive document that provides details about the mutual fund's features, investment objectives, investment strategy, asset allocation, risks, performance, fees, and other important information that an investor should know before investing. • It is a mandatory document that must be updated at least once a year and is available on the mutual fund company's website and from authorized distributors. Statement of Additional Information (SAI): •The SAI is a supplementary document that provides additional information about the mutual fund that is not included in the SID. It includes details about the mutual fund's investment strategies, portfolio holdings, financial statements, and other information that investors may find useful. •It is an optional document and is available upon request. Key Information Memorandum (KIM): •The KIM is a shorter version of the SID that provides an overview of the mutual fund's key features, investment objectives, investment strategy, risks, fees, and past performance. •It is a useful document for investors who want a quick summary of the mutual fund before investing. •It is mandatory for every mutual fund to have a KIM, and it must be updated at least once a year. •One must read & understand scheme related documents before investing in a mutual fund scheme. Source: AMFI knowledge Center.

47. Factsheet A fund factsheet is a document that provides investors with key information about a mutual fund's performance, holdings, fees, and other important information in a summarized form. It is usually updated monthly or quarterly and is available on the mutual fund company's website. The fund factsheet typically includes the following information: • Fund performance: It provides the performance of the mutual fund over a specific period, including the returns and volatility. • Asset allocation: It provides a breakdown of the mutual fund's asset allocation by different sectors, geographies, and asset classes. • Holdings: It provides a list of the mutual fund's top holdings, including the name of the security, its weightage in the portfolio, and its sector. • Fees: It provides information about the mutual fund's fees, including the expense ratio, front-end or back-end load, and other charges. • Investment objective: It provides information about the mutual fund's investment objective, risk level, and investment strategy. • Management team: It provides information about the mutual fund's management team, including the portfolio manager's experience and tenure. Source: AMFI knowledge Center.

48. Product Labelling Mutual funds are required to ‘Label’ their schemes on the following parameters: •Nature of scheme in an indicative time horizon (short/medium/long term). •A brief about the investment objective (in a single line sentence) followed by kind of product in which investor is investing (Equity/Debt). Level of risk, depicted by ‘Riskometer’ as under: Label Description Principal at low risk Low Principal at moderately low risk Moderately Low Principal at moderate risk Moderate Principal at moderately high risk Moderately High Principal at high risk High Source: AMFI knowledge Center.

49. Potential Risk Class matrix PRC matrix in Debt mutual funds •From December 2021, SEBI has made it mandatory for every debt mutual fund scheme to have a PRC matrix. It defines the maximum level of risk any debt scheme can take. •There are basically two different types of risks associated with debt mutual funds- interest rate risk and credit risk. •If the interest rate increases, then the value of underlying bonds in a debt scheme will decrease, and the NAV of the scheme will fall. This is known as the interest rate risk. •On the other hand, if the scheme has invested in debt papers of a company and the company defaults on the principal repayment or interest payment, then the underlying bond’s value decreases, leading to a fall in the scheme value. This is known as credit risk. •The PRC matrix categorizes debt schemes based on the maximum level of interest rate and credit risks. Different PRC matrix categories •As per the PRC matrix rule, there are three interest risk categories- Class I, II, and III, and three credit risk categories- Class A, B, and C. •Schemes categorized as Class I have the lowest level of interest risk, whereas schemes that fall in the Class III category come with the highest level of interest risk. •Similarly, if a debt scheme is categorized as Class A, then it has the lowest level of credit risk. If the scheme is classified as Class C, then it has the highest level of credit risk. •If we combine the two, an A-I debt scheme has the lowest interest rate and credit risk level, whereas a C-III scheme has the highest interest and credit risk. Source: AMFI knowledge Center.

50. Potential Risk Class matrix How the PRC Matrix Uses Macaulay Duration and Credit Risk Value to Define Risk PRC Matrix Classification Based on Macaulay Duration (MD) PRC Matrix Classification Based on Credit Risk Value (CRV) Class I MD of up to 1 year (residual maturity up to 3 years) Debt Funds with lowest potential interest rate risk Debt Funds with lowest potential credit risk Class A CRV equal to or greater than 12 Class II CRV greater than or equal to 10 but less than 12 Debt Funds with moderate potential credit risk MD of up to 3 years (residual maturity up to 7 years) Debt Funds with moderate potential interest rate risk Class B Class III Debt Funds with highest potential interest rate risk Debt Funds with highest potential credit risk Any MD Class C CRV of less than 10 How to read PRC matrix Maximum Credit Rate Risk of the Fund → Maximum Interest Rate Risk of the Fund ↓ Class A (CRV More than 12) Class B (CRV between 10 and 12) Class C (CRV less than 10) Relatively low interest rate risk and relatively low credit risk (A-I) Relatively low interest rate risk and moderate credit risk (B-I) Relatively low interest rate risk and relatively high credit risk (C-I) Class I (MD up to 1 year) Moderate interest rate risk and relatively low credit risk (A-II) Relatively high interest rate risk and relatively low credit risk (A-III) Moderate interest rate risk and moderate credit risk (B-II) Relatively high interest rate risk and moderate credit risk (B-III) Moderate interest rate risk and relatively high credit risk (C-II) Relatively high interest rate risk and relatively high credit risk (C-III) Class II (MD up to 3 years) Class III (Any MD) Source: AMFI knowledge Center. MD: Macaulay Duration, CRV: Credit Risk Value