Mutual Funds

Vishal Aggarwal
MBA Class of 2007
 Disclaimer

• Me - no expert

• Not Comprehensive

• Majority from websites and some practical

experience
 Contents
Mutual Fund Defined

Brief History Regulations

Organization of Mutual Fund Terminologies Demystified

Types of Schemes Risk Behavior

Investment Strategies Equity Funds

Buying a Mutual Fund Selecting a Mutual Funds

Mutual Funds Comparision Keeping Track

Warning Signals Reference Websites

 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
 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

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 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
 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 Adobe Acrobat 7.0

– Profits given to the investor from time to time. Document

• Growth
– Profits ploughed back into scheme. This causes the NAV to rise.
 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
 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 Adobe Acrobat 7.0
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• ULIP
 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)
 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)

Before declaration of dividend / bonus
Growth Dividend Dividend Bonus
payout reinvestment
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 - Rs 100 - -
received in
cash
Additional - - 5.2631 10
units
 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 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)
 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
 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 ACDSee JPEG
Image
– 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 Adobe Acrobat 7.0
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– Professional advisor
Adobe Acrobat 7.0
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 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.
 Websites

• http://news.moneycontrol.com/mf/glossary.php

• http://www.investopedia.com/university/mutualfunds/default.asp

• http://www.valueresearchonline.com

• http://www.amfiindia.com/

• http://www.sbimf.com/portal/static/calculator/RiskAssess/RiskAssessCal1.asp

• http://www.mutualfundsindia.com/resourcecentre.asp