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Mutual Funds


Mutual Funds * * 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 ... – PowerPoint PPT presentation

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Title: Mutual Funds

Mutual Funds
  • Me - no expert
  • Not Comprehensive
  • Majority from websites and some practical

Mutual Fund Defined
Brief History
Terminologies Demystified
Organization of Mutual Fund
Risk Behavior
Types of Schemes
Investment Strategies
Equity Funds
Buying a Mutual Fund
Selecting a Mutual Funds
Keeping Track
Mutual Funds Comparision
Reference Websites
Warning Signals
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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Brief History
  • 1964-UTI
  • 1987- 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

Organization of a Mutual Fund
  • 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

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 funds
  • 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.

Terminologies Contd
  • NAV
  • Market value of assets of scheme minus its
  • Per unit NAV Net Asset
  • No.
    of Units Outstanding on Valuation date
  • Entry Load/Front-End Load (0-2.25)
  • The commission charged at the time of buying the
  • 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
  • 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

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

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  • 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

Investment strategies
  • Systematic Investment Plan (SIP)
  • Invest a fixed sum every month. (6 months to 10
    years- through post-dated cheques or Direct Debit
  • 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
  • Systematic Withdrawal Plan (SWP)

Before declaration of dividend / bonus Before declaration of dividend / bonus Before declaration of dividend / bonus Before declaration of dividend / bonus Before declaration of dividend / 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 After declaration of dividend / bonus After declaration of dividend / bonus After declaration of dividend / bonus 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
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)

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
  • 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)

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
  • Invest when surplus money in savings a/c based on
    expense ratio

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Investing Checklist
  • Draw up your asset allocation
  • Financial goals Time frame (Are you investing
    for retirement? A childs 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
  • Younger Riskier
  • Selecting the right fund/s
  • Based on schemes investment philosophy
  • Long-term, appetite for risk, beat inflation
    equity funds best
  • 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.

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