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Mutual Funds

Mutual Funds. Human Life Cycle. Phase I. Phase II. Phase III. Child’s Marriage. Child’s Education. Housing. Child birth. Marriage. 38 yrs. 10- 20 yrs. 22 yrs. Earning Years. Post Retirement Years . Education. Age- 22 yrs. Age- 60 yrs. Earnings. 22. 27. 40. 60. Consumption.

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Mutual Funds

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  1. Mutual Funds

  2. Human Life Cycle Phase I Phase II Phase III Child’s Marriage Child’s Education Housing Child birth Marriage 38 yrs 10- 20 yrs 22 yrs Earning Years Post Retirement Years Education Age- 22 yrs Age- 60 yrs chopra.rajiv@icai.org

  3. Earnings 22 27 40 60 Consumption Young Independent Young Married Middle Age Retirement Savings All individuals have a finite period to save for their investment goals Individual Investor: Life Stages chopra.rajiv@icai.org

  4. 100,000 79,599 78,353 62,368 48,102 38,288 37,689 30,000 Today 5 years 15 years 20 years Today 5 years 15 years 20 years Investors need to beat inflation Value of Money over time Impact of inflation on monthly expenses of Rs. 30,000 today Value of Rs. 100,000 over time At inflation of 5% chopra.rajiv@icai.org

  5. OPTIONS 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 chopra.rajiv@icai.org

  6. So 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 the return? Returns – net of tax/ inflation is poor hedge against inflation chopra.rajiv@icai.org

  7. Why Equities Equities produce highest long-term returns Equities – the most attractive asset class 18.25% 10.64% 10.27% 7.47% 7.12% Inflation Gold G Secs Bank FD Equities Source : CLSA Cumulative annualised returns (1980 - 2004) chopra.rajiv@icai.org

  8. EQUITIES-RISKY & VOLATALIE BSE SENSEX IN LAST TWO YEARS chopra.rajiv@icai.org

  9. How 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) chopra.rajiv@icai.org

  10. What is a Mutual Fund? • A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. • Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. • These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. • 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. • The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them. chopra.rajiv@icai.org

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  12. Brief History • First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of 1988 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, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the SEBI Mutual Fund Regulations chopra.rajiv@icai.org

  13. GROWTH IN ASSETS UNDER MANAGEMENT chopra.rajiv@icai.org

  14. MUTUAL FUND DATA April 30th, 2009 chopra.rajiv@icai.org

  15. Organization of a Mutual Fund chopra.rajiv@icai.org

  16. Regulations • Governed by SEBI (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 chopra.rajiv@icai.org

  17. Terminologies 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, 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. chopra.rajiv@icai.org

  18. 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 chopra.rajiv@icai.org

  19. TYPES OF MUTUAL FUNDS chopra.rajiv@icai.org

  20. Types of Mutual Fund 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 chopra.rajiv@icai.org

  21. SPECIAL SCHEMES-EXAMPLE • Funds based on Size of the Companies Invested in • Large cap funds:Funds that invest in companies whose total market cap is above Rs40bnMid cap funds: Funds that invest in companies whose market cap is between Rs20-40bnSmall cap funds: Funds that invest in companies whose market cap is below Rs20bn chopra.rajiv@icai.org

  22. 10 REASONS TO INVEST IN MUTUAL FUNDS • Expert on your side:   When you invest in a mutual fund, you buy into the experience and skills of a fund manager and an army of professional analysts • Limited risk: Mutual funds are diversification in action and hence do not rely on the performance of a single entity. • More for less: For the price of one blue chip stock for instance, you could get yourself a number of 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 individuals also have the option of investing in a monthly savings plan. • Convenience: You can invest directly with a fund house, or through your bank or financial adviser, or even over the internet. • Investor protection: A mutual fund in India is registered with SEBI, which also monitors the operations of the fund to protect your interests. • Quick access to your money: It's good to know that should you need your money at short notice, you can usually get it in four working days. • Transparency: As an investor, you get updates on the value of your units, information on specific investments made by the mutual fund and the fund manager's strategy and outlook. • Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry out cost-effective brokerage transactions. • Tax benefits: Over the years, tax policies on mutual funds have been favourable to investors and continue to be so. chopra.rajiv@icai.org

  23. TAXATION • All dividends declared by debt / equity oriented schemes are tax free 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 chopra.rajiv@icai.org

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  25. Risks • Historical analysis • Return 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) chopra.rajiv@icai.org

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  27. 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) chopra.rajiv@icai.org

  28. 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 chopra.rajiv@icai.org

  29. 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 chopra.rajiv@icai.org

  30. Systematic Investing, An Example When the price is highest, you buy the least number of units 154.75 units 106.39 units When the price is lowest, you buy the highest number of units chopra.rajiv@icai.org

  31. Investing at Peak – SIP is the way Simple plotting of closing price of BSE Sensex for the first of every month.  The time period considered here is from 1/1/1990 to 02/12/2005    Source: Credence Analytics chopra.rajiv@icai.org

  32. Start Early : SIP Rs. 1000 invested per month @15% p.a. till the age of 60 yrs chopra.rajiv@icai.org A gap of 5 only years can result in a lot of difference in wealth creation !

  33. 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) chopra.rajiv@icai.org

  34. Investing in Equity Funds • 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) chopra.rajiv@icai.org

  35. 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 • Invest when surplus money in savings a/c based on expense ratio chopra.rajiv@icai.org

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  37. 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) chopra.rajiv@icai.org

  38. 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. chopra.rajiv@icai.org

  39. 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 chopra.rajiv@icai.org

  40. 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 chopra.rajiv@icai.org

  41. 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 chopra.rajiv@icai.org

  42. 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 chopra.rajiv@icai.org

  43. 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. chopra.rajiv@icai.org

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