Mutual Funds Basics

- Money through wisdom -

MUTUAL FUND

It is a pool of money, collected from investors, and is invested according to certain investment objectives The ownership of the fund is thus joint or mutual, the fund belongs to all investors. A mutual funds business is to invest the funds thus collected, according to the the wishes of the investors who created the pool

Working of Mutual Fund

MUTUAL FUNDS A GREAT PRODUCT

Professional Management Portfolio Diversification Reduction in Risk Choice of Products Flexibility and convenience Liquidity Transparency Low Transaction Cost MFs also offer great tax benefits:
1. 2. 3. No long term capital gains on equity funds Tax free dividends & Eligibility u/s 80C

Great product for investment, wealth protection, creation, preservation

Classification of types of Fund

Open Ended Funds

In an open ended fund, investors can buy and sell units of the
fund, at NAV related prices, at any time, directly from the fund. Corpus of open-ended scheme changes everyday. Investors receive account statements of their holdings. The number of outstanding units goes up and down. No fix maturity.

Close Ended Funds

A closed -end fund is open for sale to investors for a specified
period ( NFO ), after which further sales are closed. Any further transactions happen in the secondary market (stock exchange) where closed-end funds are listed. The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV. The number of units of closed ended funds remains unchanged. Fix Maturity.

Interval Funds

These schemes combine the features of open-ended

and closed-ended schemes.

They may be traded on the stock exchange or may be

open for sale or redemption during pre-determined intervals at NAV based prices.
No Fix Maturity

Type of Funds By Investment Objective

Equity Debt
Fixed Income Funds GILT Funds

Money Market

Equity Funds Index Funds Sector Funds

Money Market Mutual Funds

Balanced Funds

Liquid Funds

Growth / Equity Oriented Schemes

The aim of growth funds is to provide capital

appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks.

Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index.

Sector specific Funds

These are schemes whose objective is to invest only in the equity of those companies existing in a specific sector. e.g. IT, Banking, Pharma stocks etc.

Diversified Equity Funds

These are schemes which do not focus on any particular sector. Since sectors are diversified hence risk is also reduced.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income

to investors.

Such schemes generally invest in fixed income securities such as bonds,

corporate debentures, Government securities and money market instruments. are not affected because of fluctuations in equity markets.

Such funds are less risky compared to equity schemes. These funds

However, opportunities of capital appreciation are also limited in such

funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa.

Liquid / Money Market Funds

These debt funds invest only in instruments with maturities less than a year. Lowest in the order of risk level. The investment portfolio is very liquid and enables investors to hold their investments for very short horizons of a day or more.

Gilt Fund
It invests only in securities that are issued by the Government and therefore do not carry any credit risk Government papers are called as dated securities also. It invests in medium to long-term government papers. Ideal for institutional investors who have to invest in Govt. Securities Enables retail Participation

Balance Funds
The aim of balanced funds is to provide both growth and

regular income as such schemes invest both in equities and fixed income securities.

They generally invest 60% in equity and 40% in debt

instruments.

These funds are also affected because of fluctuations in

share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

ELSS ( Equity Linked Saving Scheme )

Open or closed ended. Minimum investment of 90% in equity markets at all

times

So ELSS investment automatically leads to investment in

equity shares.

3 year lock in period. Tax Benefit u/s 80C upto Rs.1 L allowed Dividends are tax free. Benefit of Long term Capital gain taxation.

Fixed Term Plan

FTPs are closed ended in nature. AMC issues a fixed number of units for each series only

once, and closes the issue after an initial offering period.

Fixed Term plan are usually for shorter term less than

a year.
FTP series are likely to be an Income scheme. Good alternate of Bank deposits/ corporate deposits.

Fund of Fund Scheme ( FOF )

A scheme that invests primarily in other schemes of the

same mutual fund or other mutual funds is known as a FoF scheme.

A FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.

(considered to be debt fund as far as the tax implications are concerned)

Tax provision for Equity Mutual Fund Equity >65%

Dividends

Capital Gains

Within 12 m

After 12 m

Investors

DDT

Short Terms

Long Terms

Tax Free

NIL

15%

Tax Free

Tax provision for Debt Mutual Funds

Debt Mutual Fund

Dividend

Capital Gain

Within 12 m

After 12 m

Investor

DDT

Short term

Long term

Tax free

Paid by the Fund

As per slab 10%

Two options

20% after indexation

Risk Profile ..
Sectoral Funds Diversified Equity Funds Balanced Funds MIPs Gilt Funds Income Funds Short Term Plans Floating Rate Funds Money Market

Risk

Days

1 year

Investment horizon 3 years

Returns >>

Some Basic concept of equities & selling equity through Mutual Funds ?

Investors Psyche
Every one wants to time the market. Greed

Fear

Hope

The Cycle of Fear, Greed & Hope It is the time that matters & not the timing..

Simply put

Reasons of Failure
Equity Investments are made on Tips & Flavors Equity Investments are tracked part time & not full time Skill sets required to understand a company is lacking Equity Investments are made for short term Equity Investments are not adequately diversified People look at acquisition price & not future value

Past Performance (BSE Sensex)

Year 1979 2008

Sensex 100 17000

Investment Rs. 1,00,000 1,70,00,000

In past

28 years BSE Sensex has given about 20% returns

This is in spite of Two wars At least 3 recessionary periods At least three major financial scandals 10 different governments and Assassination of 2 prime ministers An unfair share of natural disasters

P R O M N EO B ES N ITIV E F R AC F S E S ITYIN E - E u D X q itiesn t ris yinlo gru o k n n

R llin R rn - G w o g etu s ro th Ya e rs 0 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0 2 1 2 2 2 2 2 2 2 3 2 4 2 5 Y A E D E R N 3 -M r-7 1 a 9 3 -M r-8 1 a 0 3 -M r-8 1 a 1 3 -M r-8 1 a 2 3 -M r-8 1 a 3 3 -M r-8 1 a 4 3 -M r-8 1 a 5 3 -M r-8 1 a 6 3 -M r-8 1 a 7 3 -M r-8 1 a 8 3 -M r-8 1 a 9 3 -M r-9 1 a 0 3 -M r-9 1 a 1 3 -M r-9 1 a 2 3 -M r-9 1 a 3 3 -M r-9 1 a 4 3 -M r-9 1 a 5 3 -M r-9 1 a 6 3 -M r-9 1 a 7 3 -M r-9 1 a 8 3 -M r-9 1 a 9 3 -M r-0 1 a 0 3 -M r-0 1 a 1 3 -M r-0 1 a 2 3 -M r-0 1 a 3 3 -M r-0 1 a 4 3 -M r-0 1 a 5 3 -M r-0 1 a 6 A erag R rn v e etu s P b ility o L s ro ab f os S N E le e E S X vl 10 0 0 .0 18 7 2 .5 13 4 7 .4 27 1 1 .7 21 1 1 .5 25 3 4 .3 33 6 5 .8 54 1 7 .1 50 6 1 .3 38 7 9 .3 73 0 1 .6 71 5 8 .0 1 6 .9 17 7 4 8 .0 25 0 2 8 .5 20 2 3 7 .9 78 9 3 6 .9 20 6 3 6 .6 36 1 3 6 .8 30 9 3 9 .7 82 5 3 3 .9 79 6 5 0 .2 01 8 3 0 .3 64 8 3 6 .3 49 5 3 4 .7 08 2 5 9 .6 50 0 6 9 .8 42 2 129 6 1 7 .9 2 .5 % 8 7 3 .9 % 4 0 2 .5 % 5 2 -2 5 .8 % 1 .9 % 5 9 4 .2 % 4 4 6 .2 % 2 4 -1 .1 % 1 0 -2 .9 % 1 4 7 .1 % 9 3 9 5 .4 % 4 .5 % 9 4 26 8 6 .8 % -4 .7 % 6 8 6 .7 % 5 1 -1 .7 % 3 1 3 4 .2 % -0 7 .1 % 1 .8 % 5 2 -3 2 .9 % 3 .7 % 3 3 -2 .9 % 7 3 -3 5 .7 % -1 .1 % 2 2 8 .3 % 3 8 1 .1 % 6 4 7 .7 % 3 3 2 .2 % 8 9 1 /2 0 7 2 .6 % 9 1 1 .0 % 8 5 1 .2 % 2 5 1 .5 % 7 8 3 .4 % 9 9 2 .6 % 7 6 4 3 .0 % 7 2 .5 % 1 .2 % 5 4 4 .1 % 3 2 8 .7 % 1 6 4 .9 % 2 3 4 .9 % 7 0 -8 0 .7 % 1 .8 % 3 6 -3 3 .8 % 6 8 .0 % 3 7 .5 % 1 .1 % 4 7 -2 3 .5 % -2 7 .4 % -1 .2 % 5 1 1 .7 % 5 6 2 .2 % 3 3 5 .6 % 4 7 1 .4 % 9 3 5 5 /2 1 .6 % 9 6 2 .4 % 2 4 2 .0 % 7 5 1 .5 % 8 8 1 .5 % 3 0 2 .8 % 3 1 1 .1 % 7 6 1 .2 % 5 6 5 .0 % 3 4 4 .7 % 1 6 3 .5 % 9 7 3 .0 % 3 9 2 .5 % 3 8 -4 4 .7 % 1 .2 % 1 9 -0 1 .2 % 8 3 .9 % 1 7 .3 % 0 4 .6 % -4 7 .7 % 8 7 .3 % 5 6 .3 % 2 .6 % 5 3 1 .4 % 7 1 3 3 /2 2 .3 % 8 6 2 .7 % 1 7 1 .6 % 2 1 1 .4 % 8 8 2 .5 % 0 2 2 .9 % 4 7 4 .8 % 2 0 2 .7 % 1 8 3 .1 % 3 1 3 .0 % 5 3 2 .8 % 4 1 2 .1 % 3 8 1 .7 % 8 7 -1 2 .9 % 1 .8 % 1 7 -0 7 .6 % 0 9 .8 % -1 1 .4 % 7 4 .5 % 7 8 .5 % 1 .0 % 7 8 1 .4 % 7 8 3 1 /2 2 .7 % 1 2 1 .7 % 9 7 2 .0 % 1 1 3 .7 % 4 1 2 .8 % 6 4 3 .4 % 1 5 2 .8 % 4 7 1 .3 % 9 5 2 .7 % 0 4 2 .6 % 5 0 1 .0 % 8 2 2 .4 % 0 0 1 .9 % 1 3 -2 9 .0 % 2 5 .9 % 3 9 .9 % 7 3 .1 % 1 .8 % 2 5 1 .8 % 7 5 1 8 /1 2 .4 % 7 0 2 .0 % 4 5 2 .8 % 1 6 2 .0 % 0 2 2 .4 % 1 3 1 .9 % 9 2 1 .3 % 9 1 1 .0 % 3 3 1 .6 % 3 3 1 .5 % 4 3 1 .7 % 4 1 1 .1 % 5 6 1 .3 % 6 2 1 .5 % 8 7 0 3 /1 1 ye r a 3 ye rs a 5 ye rs a 7 ye rs a 1 ye rs 0 a 1 ye rs 5 a

Equities: Not Risky in Long Run

18.57% 0 / 13

Qualities needed for a successful Investment

Qualities Description Do you Does a have ? mutual fund have it?

Investment process

A systematic method of selection of the ??? scripts, with the synchronization of objective. Technology, information at hand, statistical tools, research team, time etc. ???

Yes

Infrastructure

Yes

Experience

The experience of making investment ??? decisions on a regular basis & experience of standing all the business/economy cycles.

Yes

Qualities needed for a successful investment contd

Do you Does a have ? mutual fund have it? Yes

Qualities

Description

Knowledge & qualification

Most Fund managers are professionally ??? qualified. Moreover, their knowledge is assisted by a lot many support which they get in the form of their research team, study etc. Reviewing & analyzing your investment at every moment of time . ???

Constant monitoring

Yes

Qualities needed for a successful investment ..contd

Qualities Description Do you Does a have ? mutual fund have it? ?? Yes

Full Time Involvement

Managing your investments is the full-time job of the fund managers. But for you it is the management of your savings generated from other full-time job. Favoritisms for a particular group/ company/sector etc. Temptations to wait & watch for market to further go down & then enter the market missed opportunities Temptations to wait & watch for markets to further move up & then exit missed opportunities

Bias

No ??

INVESTMENT AVENUES
Risk - Return Payoff Matrix
Asset Class Gold Property Bank FDs RBI Bonds PPF Insurance Equity Risk Return

Low Low Low Very low Low Low High

Around inflation levels Higher than inflation levels Nominal Interest rates Fixed - 8% Taxable Fixed - 8% Tax Free Fixed - On lower side High

INVESTMENT AVENUES
Strengths & Weaknesses
Asset Class Gold Property Bank FDs RBI Bonds PPF Insurance Equity Strength Weakness

As Inflation Hedge Decent Payoff Decent Payoff - very passive Returns certain Returns certain Life cover distribution network Can give great returns

But to what extent? Huge initial investments, time ?? Negative returns? Forget growth 6 yrs lock-in. 5 yrs lock-in, Maturity 15 yrs Not pure investment products But have you done homework?

Risk Return Spectrum

High

Equity Real Estate

Return potential

Gold

Debt Funds PPF, NSC, KVP, PO Deposits, RBI Bonds Liquid Funds Savings Bank/ FD

Low

Low

Risk

High

Equities- The Most Attractive Asset Class

Equities have outperformed all other asset classes in the long run globally as well as in India
18.25%

10.64% 7.47% 7.12%

10.27%

Inflation

Gold

G Se cs

Bank FD Equitie s
Source : CLSA

Cumulative annualised returns (1980 - 2004)

Why Equities through Mutual Fund ??

Most qualities for successful investment making are present with a

mutual fund. The qualities which an investment team of a mutual fund possess are much more reliable than the next door unqualified broker.

It is much easier to analyze and find out a good mutual fund rather

than finding a good stock. The parameters to judge a good mutual fund are the past proven facts rather than on some probable uncertain future facts.

It is much easier to track a mutual fund investment rather than an

investment in stock.

Why Equities through Mutual Fund ??

The risk control mechanism on your investment are actively taken

care of by the fund managers.

You can be free of all tensions & worry after handling your money

to fund managers. Like stock , you need not track it very wildly. You save a lot of time & energy to focus on your competence business, thereby earn & invest more & more.

You can easily satisfy your long-term objective of wealth

maximization.

All above, mutual funds are the best representations of the minority

shareholders.

Smart Investors Preference

(SIP)

What is SIP .. ??
Systematic investment plan is a disciplined way of investing, where we can invest fixed amounts at regular intervals through a mutual fund. Its like RD A/C in Post Office or Banks. SIP helps to buy more when market falls. SIP helps to buy less when market rise. Thus Market fluctuation get averaged.

Benefit of SIP

No need to time the market Rupee cost averaging Power of Compounding Disciplined investment habit Auto debit facility Low investments Commensurate Returns Easy to create wealth

Rupee Cost Averaging .

Month
1 2 3 4 TOTAL
Amount you invest

NAV
Rs.10 Rs. 5 Rs. 2 Rs. 5 Rs 5

No. of units 100 200 500 200 1000

Rs.1000 Rs.1000 Rs.1000 Rs.1000 Rs.4000

Avg Pur Cost = 4000/1000 = Rs 4 You invest Rs 4000 and get Rs. 5000 even in fluctuating market.

Power of Compounding
Year Invest/Year Total Inv. Accumulation Int. % 1 2 3 4 5 6 7 8 9 10 Interest Value

12000 12000 12000 24000 12000 36000 12000 48000 12000 60000 12000 72000 12000 84000 12000 96000 12000 108000 12000 120000

12000 26182 42941 62748 86155 113817 146509 185143 230801 284760

18% 18% 18% 18% 18% 18% 18% 18% 18% 18%

2182 4760 7806 11407 15663 20691 26635 33658 41958 51768

14182 30941 50748 74155 101817 134509 173143 218801 272760 336528

An investment of Rs.1,000/- every month for 10 years at an average return of 18% yields Rs.3,36,528/-

After 15 20 Years..

Year Invest/Year Total Inv. Accumulation Int. % 11 12 13 14 15 16 17 18 19 20

Interest

Value

12000 12000 12000 12000 12000 12000 12000 12000 12000 12000

132000 144000 156000 168000 180000 192000 204000 216000 228000 240000

348528 423888 512949 618200 742586 889584 1063306 1268609 1511236 1797971

18% 18% 18% 18% 18% 18% 18% 18% 18% 18%

63361 77061 93251 112386 134998 161722 193303 230627 274735 326862

411888 500949 606200 730586 877584 1051306 1256609 1499236 1785971 2124832

On Retirement ..

Year Invest/Year Total Inv. Accumulation Int. % 21 22 23 24 25

Interest

Value

12000 12000 12000 12000 12000

252000 264000 276000 288000 300000

2136832 2537297 3010565 3569870 4230853

18% 18% 18% 18% 18%

388465 461267 547305 648984 769147

2525297 2998565 3557870 4218853 5000000

Believe it or not ..

Year Invest/Year Total Inv. Accumulation Int. % 26 27 28 29 30

Interest

Value

12000 12000 12000 12000 12000

312000 324000 336000 348000 360000

5012000 5935155 7026135 8315450 9839155

18% 18% 18% 18% 18%

911155 5923155 1078980 7014135 1277315 8303450 1511705 9827155 1788707 11627862

Better still, an investment of Rs.1,000/- every month for 30 years at an average return of 18% yields Rs.1,16,27,862/-

Power of Compounding
3500 2800 2100 1400 10% 700 0 0 5 10 15 20 8% 25
Difference is quiet significant in long run, and such return is possible only by investing in equity, equity investment can largely beat inflation

15%

Growth of Rs. 100 Equity Best Bet of Investments in Long Run

Let Us Begin With A Little Quiz..

What is the Average Age when one starts Earning?

25 Years

What is the Average Retirement Age?

60 Years

What is an Average Income of an Middle-Class House-hold?

Rs.15,000/- p.m.

How much can a person save on a regular basis?

Rs.5,000/- p.m.

If a person can save Rs.5,000/- per month What will be his wealth when he retires?
Assuming: He increases his investments by 5% every year Invests in an Asset class that gives returns of 20%

At Age 60 his wealth would have been

Rs.27 Crores

THE TRUTH

Creating Wealth is Easy We can all be Wealthy

How can you create wealth?

Start Saving Early

The longer you save, the more you make

Save in the Right Asset Class

This will dictate how much wealth you create

Save Regularly
Even a small amount saved regularly, is good

Start Early
Ram
Savings Starting Age Savings - Monthly SIP Saving Years till age 60 Total Amount Saved (appx.) 25 Rs.5,000/35 years Rs.57 lacs

Shyam
40 Rs.15,000/20 years Rs.62 lacs

27 Crores*

Give time to your investments Give time to your investments rather than timing rather than timing

4.90 Crores*

25 years

40 years

60 years

Assumptions: (a) Savings grows at 5% annually (b) Returns assumed at 20% CAGR

Selecting Right Asset Class

Equity market (represented by BSE Sensex) has outperformed all other investment avenues
6,000 5,000 4,000 3,000 2,000 1,000 0
1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 200491 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Sensex
Company Deposits Bank Deposits

Inflation Gold

Save Regularly
Disciplined Investing through Systematic Investment Plans (SIPs) is the ideal way to reduce risk

Twin Benefits of Investing Regularly

Rupee Cost Averaging Automatic Timing Average Purchase cost will be less At higher prices less units At lower prices more units

Rising Market

Falling Market

Market

Units Purchased

Units Purchased

Market

Save Regularly
It is the small drops that make an ocean!! Relieves you of the last minute pressure Slow and steady wins the race

E.g. Split your Sec 80C investments into smaller amounts and invest every month Reduces the risk of investing at the wrong time Difficult to predict the market and know when is the right time

We earn regularly; We spend regularly Shouldnt we also invest regularly?

Save Regularly
.It all adds up!
25 20 Rs. Lakhs 15 10 5 0 1 5 9 13 17 21 25 29 No. years

Rs.21.7 lakhs Rs.1000 invested every month for 30 years @10%

30

A small amount invested regularly can grow to substantial lumpsum

Earn More..

Earn moreit can make a big difference

One time investment of Rs.1 lakh invested for 30 yrs

@ 6% 5.7 lakhs

@ 10% 17.45 lakhs

@ 15% 66.2 lakhs

Earn More..

Rs. 10,000 invested every month for a period of 30 years

Power of Compounding - QUIZ

1.5 crores Postal Recurring

At 8% -

At 15% -

7.0 crores

??????

At 20% -

23 crores

??????

A Snapshot of poor performing schemes

Scheme Name Pru Tech Fund Alliance New Millenium Amount Invested through SIP(Rs. 1000 p.m.) from March 2000 61,000 61,000 Amount Invested One Time Pru Tech Fund Alliance New Millenium 61,000 61,000 Current Value As on 31-03-2005 105,930 106,347 Current Value 41,480 33,673 SIP Returns 22.06% 22.22% Annualised Returns -7.34% -11.08%

A Snapshot of better performing schemes

Scheme Name HDFC Equity Reliance Growth Amount Invested through SIP(Rs. 1000 p.m.) from March 2000 61,000 61,000 Amount Invested One Time HDFC Equity Reliance Growth 61,000 61,000 Current Value As on 31-03-2005 161,209 226,349 Current Value 146,501 167,023 SIP Returns 39.69% 54.64% Annualised Returns 18.90% 22.02%

Formula for Creating Wealth

6 ,0 0 0 5 ,0 0 0 4 ,0 0 0 3 ,0 0 0 2 ,0 0 0 1 ,0 0 0 0
1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 41 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Start Early

Invest Regularly

Earn More

Create Wealth

Make your money work hard for you

Wisdom
We do not need to be wealthy to be an investor But we can be wealthy if we are investors The Right way to create wealth

Buying potential big winning stocks Successfully timing the markets Following Expert Advisors recommendations Saving a lot of money

X X X X

Wealth can be successfully created if we just follow the three basic principles ...

Starting early and saving for long Investing in the right asset class Investing Regularly big or small

Using the Wisdom

Child Education

We all have goals in life like

Car

Dream House

Child Marriage

Using the Wisdom

We can direct our savings in such a manner that we achieve our goals, way we wish

the

DISCIPLINED SAVINGS + SUFFICIENT TIME + RIGHT ASSET CLASS = GOAL ACHIEVEMENT

Start an SIP today and Sit back and Relax