AMFI Certification Program

Mutual Funds

Conceptual Framework
What is a Mutual Fund ?

 A mutual fund is a collective investment that

allows many investors, with a common
objective, to pool individual investments and
give to a professional manager who in turn
would invest these monies in line with the
common objective.
 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
 The money thus collected is then invested in Financial
markets, both Money market instruments like Bonds,
T.Bills & Call Money etc and Capital market instruments
such as shares, debentures and other securities.

 The income earned through these investments and the

capital appreciation realized are shared by its unit
holders in proportion to the number of units owned by
them.
 MF Operation Flow Chart

Investors
Passed Pool their
back to money with

Returns Fund
Manager

Generates Invest in
Securities
Mutual Funds
 Interesting Statistics

 3/4th of all U.S households invest in Mutual funds

 There are 3,400 Mutual funds with 30,000 schemes and 50 million
share holder accounts
 The Mutual fund industry in U.S. occupies the premier position in
the financial sector followed by Banking and Insurance.
 Japan has 5,400 funds; U.K has 1,400 funds and France has about
1,000 funds.
Mutual Funds
 THE INDIA STORY


The idea of a first Mutual fund was born out of the vision of
Sri.T. Krishnamachari Finance Minister under Jawaharlal Nehru
 U.T.I Act was passed in 1963 leading to the formation of Unit Trust
Of India.
 The first open ended scheme was launched in 1964, popularly known
as U.S. 64.
 The period 1987 – 1992 saw the birth of public sector Mutual funds,
S.B.I and Canara bank [1987], LIC [1989], Bank of India and PNB
[1990] , Indian bank [1991].
 Private both domestic and foreign players were allowed entry in
1992-1993.
 The first private sector Mutual fund was “Kothari Pioneer”, launched in 1993
followed by “Morgan Stanley in 1994
History of Indian Mutual Funds
 Phase I (1964-87)

Set up by RBI, de- linked later.

Act of parliament

First scheme US 64, still outside SEBI
purview
 Phase II (1987-93) entry of PSU Banks/ FIs

SBI in 87, LIC in 89, Indian Bank in 90
 Phase III (1993-95) Entry of Private players
 Phase IV (1993 onwards) SEBI regulation of
Mutual Funds
Types of
Mutual Funds -
Wide Range of Choice
Types of Mutual Funds Schemes

By Constitution

By Investment Objective

By Nature of Investments
By Constitution

OPEN-ENDED CLOSE-ENDED
 No fixed maturity  Fixed Maturity

 Variable Corpus  Fixed Corpus

 Not Listed  Generally Listed

 Buy from and sell to  Buy and sell in the

the Fund Stock Exchanges

 Entry/Exit at NAV  Entry/Exit at the

related prices market prices

 By Constitution
 Load or non load funds

 Tax exempt or non tax exempt

 Nature of Investments

Financial Assets (Equity/Debt/Money Market)

Physical Assets (Metal/ Real Estate)
Investment objective / patterns
 Growth - Equity
 Income - Debt
 Balanced - Equity and Debt
 Money Market - Liquid Debt
 Tax Saving - Equity
 Specialised - Equity
 Assured Return - Equity and Debt
 Aggressive Growth Funds

 Objective - Aggressive Capital Growth

 Investment Pattern
EQUITY OF
 Less researched Companies

 Speculative and momentum stocks

 Suitable for investors who are comfortable in

taking high risk.

 Diversified Growth Funds
 Objective - Capital Growth
 Investment Pattern
EQUITY of

Well researched and high market cap companies

Debt

Money market securities

Minimum time recommended for investment to
deliver expected returns 5 years +

Suitable for investors looking at capital growth
over a longer period of time
Other variety of equity funds
 Specialised Funds

Sector Funds

Offshore Funds/International funds

Small Cap Equity Funds
 ELSS
 Equity Index Funds
 Value Funds
 Equity Income Funds - invest in co. with
higher dividend yields i.e. power/utilities
Other equity oriented funds ...
 Hybrid Funds

Balanced Funds

Growth & Income Funds

 Commodity Funds

 Real Estate Funds(REITs)

 Debt Funds

 Diversified Debt Funds

 Focussed Debt Funds
 Sector / Specialised / Offshore

 Municipal bonds / infrastructure cos bond funds

 Mortgaged backed

 High yield debt funds

 Assured Return Funds
 Liquid Funds
 Types of Schemes
Mutual Who Should Objective Investment RISK Ideal
Fund Types Invest? Portfolio Investment
Horizon

Diversified Moderate
Equity and
Funds aggressive
High growth Equity Shares High 1-3 Years
investors
• Large Cap
High Equity Shares Very 3- 5 Years
•Mid Cap Aggressive
investors Growth High
• Small Cap
Sector
Funds Aggressive High growth Equity Shares Very high 3-5 Years
Thematic investors
Funds
Contra
Fund
Index Moderate To Generate Portfolio index Returns of 1-3
Funds investors returns which like BSE NAV vary years
are similar the Sensex, Nifty with index
returns of the etc. performance
respective index.

Equity Moderate and Long term Equity Shares High 1-3

Linked aggressive growth with tax Years
Saving investors saving
Scheme
(ELSS)
Moderate Long term 1-3 years
Balanced Debt & Equity Moderate
investor
funds

Arbitrage Moderate Short term Equity (Deri- Moderate Below

Fund investor Vaties) 1 year
Bond Funds Salaried and Regular Predominantl Credit risk Over 9-12
conservative income y debentures, and interest months
investors Govt. rate risk
Securities,
Corporate
Bonds

Salaried and Security Interest rate Over 12

Gilt Funds Govt
conservative and income risk months
Securities

Call money,
Investors with Liquidity commercial Little 3 weeks-3
Short-term surplus short- interest rate months
and papers, T-
Funds term funds risk
moderate Bills, Short-
income term G-Secs
Liquid Investors who Liquidity + T-Bills Negligible 2 days- 3
Funds park their funds moderate certificate of risk weeks
in current income + deposits,
account or short preservatio commercial
term bank fixed n of capital papers, call
deposits money
Mutual Funds
New Fund Ideas
 International Funds
 Gold Funds
- ETFs
- Stocks of Gold Mining/Trading companies
 Real Estate Funds
Mutual Funds
Debt Funds

These are like Fixed Deposits and comes in varying tenors of 30

days, 60 days, 90 days, 180 days, 370 days, 3 years and so on. The
returns are superior to Fixed Deposits due to two factors.

1. Indexation Benefit
2. Lower incidence of tax

.
Advantages of
Mutual Funds
 Why Mutual funds…?

 Stock markets are very sophisticated

 Free pricing and integration with world markets

 Time , knowledge and luck

 Substantial capital for diversification

 Mutual Funds:
A Packaged Product

Professional
Management Diversification

Convenience
Liquidity
Tax Benefits
Advantages of Mutual fund
A packaged product
Transparency
Professional Management
Flexibility
 Diversification
 Choice of
 Convenient Administration
Schemes
 Return Potential
 Tax Benefits
 Low Costs
 Well Regulated
Liquidity
Convenience

Easy Way to Invest

Reduces excessive paperwork

Outsourcing of expertise
 Diversification

Portfolio of investments spreads out Risk

 Attempts Minimises value erosion

Potential losses are shared with other investors

Liquidity
Open-ended:
Assures liquidity
As liquid as the banks.

Close-ended:
Buying and selling can be done through
the stock exchange
Affordability

Provides an opportunity for a small investor

Invest as less as an amount of

Rs.5000/Rs.500 and in multiples of

Rs.1000/100 depending on the Scheme

(micro SIP) - discuss

Wide Choice

Offers a VARIETYOF SCHEMES

 Meet the investment needs of all Investors

Your needs

 Short Term  Banks / Liquid Funds

 Medium Term  Debt or Debt Related


( 1 to 3 years) Funds

(3 to 5 years)  Mix of Debt/Equity or
funds with an appropriate
mix (Balance)
 Long Term
 Equity or Equity Related
Funds
MF’s and Tax Benefits

 Income Tax Benefits in Equity funds(ELSS)


Investment upto 1 lakh under Sec 80C
 Capital Gains
Short Term Long Term

Equity 15%*(16.995%) NIL

Debt 30%*(33.99%) 20%**/10%***

*plus surcharge(@ 10% + 3%)
**with indexation
***without indexation
Well regulated
Governed by Multiple agencies

MOF/ CLB/ ROC

SEBI
RBI
Trustees
Auditors

Board of Directors
SEBI

 All Mutual Funds / AMC/ Trustee Companies to

be registered with SEBI

 Responsible for protecting investors interest and

promote orderly growth of Mutual Fund Industry

 Formulates regulations,monitors performance

and conduct of Mutual funds and enforces
compliance to regulations through reviewing
reports and regular inspections
Reserve Bank of India & SE

 RBI

Dual supervision for bank sponsored
AMCs

Issue concerning ownership bank
promoted AMC falls with RBI
 Stock Exchange (SE)

Close ended MF listed of SE. Needs to
comply with listing guidelines.
Office of public Trustee

 MF being public trustee - governed by Indian

Trust Act , 1882

 Trustee Co or Board of Trustee accountable

to office of Public Trustee

 Public trustees reports to Charity Comm.

Trustee and AMC to comply with Cos Act 1956

R e g is t r a r s o f C o m p a n ie s ( R O C )

D e p a r t m e n t o f C o m p a n y A ffa ir s

C o m p a n y L a w B o a rd (C L B )

M in is t r y o f L a w & J u s t ic e
Ministry of Finance

 Supervises both SEBI and RBI

 Ultimate policy making & supervising body

 Appellate Authority for any disputes over

SEBI guidelines
 Investor’s rights
 Proportionate ownership in scheme’s assets
 Rights of information from Trustee
 To received dividend warrants, inspect major docs
(Trust deed, investment management agreement, R&T
A Agreement, custodian services agreement
 with 75% voting rights and approval of SEBI can close
the scheme, change the AMC.
 Rights of info for fundamental change in the scheme
features and also an opportunity to redeem units without
any load.
 Receive annual report and a/c statement
Investor’s rights & Obligations
 Rights - Legal Limitations

Unit holder’s are not distinct from trust, they
cannot sue trust.

Sponsor do not have any legal obligations
(Limited to initial contribution)

No rights to prospective investors
 Obligations

Must read offer doc & AOD

Beware of risk factors

Must monitor investments regularly
Investor’s complaint redressal mechanism

 Client Servicing

 Compliance Officer

 Investors cannot be protected by companies

Act.
The Offer Document
What is offer documents
 Contains the details of scheme.
 Filed with SEBI
 Like Prospectus of an IPO
 Close ended scheme - One Time
 Open ended Scheme - Perpetual - kept
updated from time to time.
 Significance

 Legal document that protects and governs the

right of the investor to information
 Is the primary vehicle for the investment decision
 Is the operating document and describes the
fundamental attributes of schemes.
 One of the most important sources of information
for the prospective investor
 Is a reference document for the investor to look for
relevant information at any time.
 Mandatory Information
 Details of the Sponsor
 Description of the scheme and investment
objective/strategy
 Terms of issue
 Historical statistics
 Investors’ Rights and Services

Key Information Memorandum that is distributed with the

application form is an abridged version of the offer
document.
 Investment Options & Features
• Options
•Growth
•Dividend and Dividend Reinvestment
•Plans
•Systematic Investment Plan – SIP
• Systematic Withdrawal Plan - SWP
•Systematic Transfer Plan - STP
• Other
• Nomination facility
Who can invest ?
 Resident Indian Individuals
 Indian Companies
 Trusts / charitable institutions / PFs
 Banks/ FIs / NBFCs
 Insurance Companies
 NRIs/ OCBs/ FIIs
 Partnership firms etc.
 NAV - COMPUTATION

NAV = Net assets of scheme / No of units Outstanding

i.e. Market value of investments+ Receivables+

Other accrued income+ Other assets- accrued
expenses- Other Payables- Other liabilities
No. of units outstanding as at the NAV date
Imp :
Day of NAV Calculation is known as valuation day
HOW NAV IS COMPUTED

 Market value of Equities - Rs.100 crore - Asset

 Market value of Debentures - Rs.50 crore - Asset
 Dividends Accrued - Rs.1 crore -Income
 Interest Accrued - Rs.2 crore - Income
 Ongoing Fee payable - Rs.0.5 crore - Liability
 Amt..payable on shares purchased -Rs.4.5 crore - Liability
 No. of units held in the Fund : 10 crore units
 NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10
= [153-5]/10
= Rs. 14.80
 NAV - Other information
•Open end funds to declare NAV daily

•NAV to be published at least weekly

•Close end Schemes (which are not listed) may publish

NAV monthly/qt with prior approval from SEBI

•NAV has to consider up to date transactions

•Non - recorded transactions not to affect NAV calculation

by more than 2%
NAV
 Nav is influenced by


Purchase and sale of Investment

Valuation of Investment

Other assets and Liabilities

Units sold or redeemed.
 CHANGE IN NAV

FORMULA :

For NAV change in absolute terms =

(NAV at end of period - NAV at beginning of period) * 100
NAV at beginning of period

For NAV change in annualised terms =

( NAV change in % in absolute terms) * (365 / No. of days )
Loads
 Entry Load or front ended load
Paid at the time of purchase
Sale Price = NAV / (1- Sales Load, if any)
 Exit Load or back ended load
Paid at the time of exit
Redemption Price = NAV/(1+ Exit Load)
 Contingent Deferred Sales Load (CDSL)

Deferred exit load depending on the period

Also known as deferred load
 PRICING OF UNITS

Sale price not greater than 107% of the NAV

Re-purchase price to be not lower than 93% (95% for

close-end funds) of the NAV

Difference between the repurchase & sale price can

not be more than 7% of the sale price
 Sale Price
 Sale Price is the price at which units are sold to
investors.
 Sale Price = NAV + Entry load
 Formula for computation of Sale Price =
NAV/(1-Load)
Assuming an entry load of 2% in the earlier
NAV computation example
Sale Price = 14.80/(1- 0.02)
= 15.10
MUTUAL FUND ACCOUNTING &
MATHEMATICS
 FEES & EXPENSES

Initial Issue
Transaction Annual Recurring Expenses
Cost Expenses
Entry / Exit load AMC Fee
Custodian Fee
CDSC for no-load Registry Exp.
schemes Trustee Fee
Audit Fee
Mktg. & Selling Exp.
Brokerage Exp.
Others
Fees & Expenses
 Initial Issue expenses

For launching of the scheme

Can charge up to 6%
 Recurring Expenses

Mkt & selling exp including brokerage

Transaction cost

R&T cost

Custodian Fees

Audit fees etc

Investor Communication’s cost
 Fees & Expenses
 Amc can charge Investment management fee to
the fund on weekly avg. net assets.

 The limits are: (Subject to overall limit of 6%)


1.25% for up to Rs.100 cr Of weekly avg net assets

1% in excess of Rs.100 cr.

No Load schemes can charge an additional fee of 1%
Fees & Expenses

 Total Expenses that can be charged to the

Fund ( excluding entry and exit loads):
Equity Debt

On the first Rs.100 cr 2.50% 2.25%

On the next Rs.300 cr 2.25% 2.00%

On the next Rs.300 cr 2.00 % 1.75%

On the balance assets 1.75% 1.50%

Based on average weekly net assets

 MUTUAL FUNDS - FEES
 Initial issue expenses
Charge to the scheme capped at 6% of the initial resources
raised under that scheme
 Entry/Exit Loads - Transaction costs
Sale price not greater than 107% / Re-purchase price not lower
than 93% (95% for close-ended schemes) of the NAV
 Contingent Deferred Sales Charge ( For No-Load Schemes)
Ceiling For redemption within 1year 4%
For redemption within 2years 3%
For redemption within 3years 2%
For redemption within 4years 1%
 AMORTISATION
Initial Expenses amortisation for load schemes -
 for close-ended schemes - on a weekly basis over the
period of the scheme
 for open-ended schemes - annually over a period not
greater than 5 years
 Un-amortised portion to be added to other assets for
computation of NAV
 Amortisation not part of normal recurring expenses
Accounting, Valuation & Taxation
Accounting Policies
Investments to be marked to market on market prices.
Unrealised appreciation cannot be distributed.
Purchase & sale of investments to be recognised on the
trade date and not on settlement date.
Investments to be taken as NPA if it gives no return
through interest for more than 6 months
 Dividend / Bonus/ rights to be recognised on ex-
dividend / ex-bonus dates and not on declared dates.
Income receivable on Invst NOT accrued for more than
3 months , should be provided for.
For determining gain/ loss on investments - avg cost is
to be taken
Mutual Fund Valuation

 Marking to Market
 Equity Valuation Norms - Listed, Unlisted, NPA,
Un-traded
 Debt valuation norms - Listed, Unlisted, Illiquid
 Money Market Instruments - valuation norms
 Effect of Buybacks, Mergers
 Valuation Models - CRISIL
Valuation
 TRADED SECURITIES

Last quoted closing price on the SE where principally traded

If Not traded on any SE on a particular day, then earliest
previous day price is taken (not more than 30 days)

Valuation = Market Price X current holding
NON - TRADED SECURITIES
Stocks which are not traded for more than 30 days on any SE are
valued on good faith basis by AMC within following parameters
Debt - YTM basis
Equity

Capitalisation of earning or NAV or combination of both
 Disclosures and Reporting
Audit by independent auditor
Audited Annual report every year
Un-audited accounts to be published within 1 month
after March 31 & September 30
Within 6 months of closure, publish abridged summary
of report scheme-wise in newspapers
Summary to be forwarded to SEBI & unit holders
Full portfolio disclosure to be made within a month from
the half-year ended March 31 & September 30
Disclosure and Reporting
 Reporting to SEBI

Annual audited accounts

Six monthly unaudited a/cs

Half yearly statement of movements in net assets of each
scheme

Qtr portfolio statement

Monthly amount mobilized
 Communication to investor

Qtr portfolio

Annual report
Investment Restrictions as a % of Net assets -
AMC
 Max. Investment under all schemes of the AMC in paid up capital
carrying voting rights in single Co. - 10 %
 Max. Inter scheme investments of the same AMC - 5 % (no AMC
fee payable)
 Inter scheme transfers at CMP and within the objectives of scheme
 Max. Investment in listed shares of Group Co’s - 25 % for each
scheme.
 No investments allowed in unlisted/private placement of
group/associate cos.
 Can borrow only to meet liquidity requirements. Max for 6 months
& not more than 20% of NAV of scheme.
Investment Restrictions as a % of Net Assets -Debt

 Max. Investment in Rated paper in single Co - 15% (can

be increased to 20% with approval by Board of
AMC/Trustee)
 Max.Investment in Unrated/ Rated but below
investment grade in single issuer- 10% of NAV
 Max. Investment in Unrated/Rated but below investment
grade in all cos - 25% (subject to approval of Board of
AMC /Trustee).
 Restrictions not applicable to Govt. Securities/Money
Market
 Can only invest in marketable securities - no loans
Investment Restrictions as a % of Net Assets -Equity

 Max. Investment in Equity/Equity related

instruments of single Co. - 10%
 No restrictions in case of Index Fund
 Max. Investment in Unlisted Cos. - 10% in close
ended & 5% in open ended funds
 Buy & Sell securities on Delivery position , No
short selling/ carry forward allowed.
 Security should be transferred to schemes
immediately. Cannot remain in general a/c
 Mutual Fund - Legal Structure

 In USA

Investment Companies structure
 In UK

Two alternative structure
 What is the Structure Here?
Foreign
Sponsor Trustee
Partner

Asset Management Other Service

Company
Trust Providers

Scheme 1 Scheme 2 Scheme 3

HDFC Mutual Fund Standard Life Investments

HDFC Ltd. Computer Age Management
HDFC Trustee Co Ltd. HDFC Bank
HDFC Asset Management Co. Ltd.
MUTUAL FUND - FRAMEWORK- India

Sponsor

Trustee Company Asset Management Company

Fiduciary Fund Operations Marketing

responsibility to Management

the Distribution
Brokers Registrar
Custodi
Investors an
Markets Bank
SPONSOR
 Main Promoter
 Approval by SEBI
 Sound track record
 Experience in Financial Services
 Professional Competence, Financial Soundness,
Reputation, etc.
 Contribution to AMC Capital 40% minimum
 Minimum AMC capital of Rs. 10 Cr
 TRUSTEE
 Fiduciary responsibility to the Investors.
 Directors to be approved by SEBI.
 Execution of trust deed by sponsor in favour of
trustee.
 Trust deed is stamped and registered with SEBI
 Legally responsible for administering the Trust and
Compliance with Regulations.
 Norms for Trustees
- Experience in Financial Services
- Minimum 4 members on the board and 2/3rd of the
members not to be connected with the sponsor
ASSET MANAGEMENT COMPANY
 Responsible for :
 Launching Schemes
 Managing Funds for Schemes
 Performing Accounting Functions
 All day to day affairs of the Mutual Fund
 Income of an AMC /Asset Management Fee
 1.25% of weekly average NAV of each Scheme up
to Rs.100 cr of assets managed
 1.00% greater than Rs.100 cr
 Minimum 4 directors with 1/2 independent
 AMC cannot act as trustee for other MF
TRANSFER AGENTS
 Issue of Account Statements to Investors
 Arranges payment to Investors when they
redeem
 Takes care of Non commercial transactions
like change of address,loss of account
statement etc.
 should be registered with SEBI
 Appointed by Board of Trustee
CUSTODIAN
 Safe keeping of the assets held by the Fund
 Receives and Delivers Securities for
payment
 Follow up on Corporate benefits
 Provide an independent means of control
 Independent of Sponsors
 should be registered with SEBI
Legal & Regulatory Environment

 SEBI - Capital Markets Regulator

 RBI - Money Markets Regulator
 MOF - Policies
 CLB, DCA, ROC
 Stock Exchanges
 Office of the Public Trustee
Evaluating Fund Performance

Should be judged in light of :

Investment Objectives
Current Market Conditions
Alternative investment returns
Performance Evaluation
Different valuation methods

Change in Nav
Total Return
Total Return with dividend reinvested at NAV
Performance Evaluation
Change in Nav - The most common
Nav on day 1 = Rs.10
Nav on day x = Rs.12
% Change in nav = dayx-day1/day1 * 100
= 2/10 *100 = 20 %
Limitations:
Does not account for dividend
Suitable only for growth plans
Performance Evaluation
Total Return
Nav on day 1 = Rs.20
Nav on day x = Rs.22
Dividend = Rs.4 per unit
Total Return = (( Distribution + Change in nav)/day1
nav)* 100 = ((4+(22-20)/20)*100
= 30%
Limitation:
does not account for reinvestment
 Performance Evaluation
 Return on Investments - most suitable
 Nav on day 1 = Rs.20
 Dividend = Rs.4 per unit Nav at Rs. 21
 Div reinvested = Rs (4 /21) = 0.19 units allotted
 Total units = 1.19 (original +new allotted)
 NAV at year end = Rs.22
 Total Return = (Nav on year end*total units )-day1
nav)/ day 1 NAV* 100
= ((22*1.19)- 20))/20*100
= 30.9%
Performance Evaluation
Other Parameters

Expense ratios - indicates fund efficiency and cost

effectiveness
Portfolio Turnover ratio - measures amount of buying and
selling done by the fund
Transaction cost
Fund size
Cash holdings
 Fund Literature

• Fund Factsheet
• Newsletter
• Sales meet / Mailers etc
Fund Mergers & Take overs
 Mergers of two AMC

Provisions of Cos Act

Approval of high court and SEBI

75% unit holders consent
 Scheme takeover
 Unit holders permission - 75%

SEBI’s permission
Fund Mergers & Take overs
 AMC taken over by other sponsor
(a. Zurich - 20th Century b. ITC Threadneedle
- Zurich c. Kothari - HFCL)

No high court approval

No unit holders consent , only info with rights
to exit from scheme without any load

SEBI clearance is compulsory
Instruments in the market
 Equity

Ordinary shares

Pref. shares

Equity warrants

Convertible Debentures
 P/E Ratio
 Dividend Yield
 Cyclical / Growth / Value Stocks
 Market Capitalisation = Sum total of
CMP of shares * no. of shares outstanding
 Approach/Strategy to Fund Management

 Equity

Passive - Index

Active - (a) Growth (b) Value
 Debt

Buy and hold - Passive

Duration management - Active

Credit Selection - in anticipation of
changes in credit ratings

Prepayment predictions
Debt instruments
 Commercial Deposits

Issued by SCB and RRBs

Unsecured Promissory Notes

91 to 365 days

Issued by FIs can be 1-3 years
 Corporate Debentures
 Zero coupon bond
 Floating rate bonds
Debt instruments

 Commercial papers (CPs)


Short term- 3-12 months and unsecured

Issued by corp bodies
 Govt Securities

 T - bills (7- 364 days)

 Banks/ FIs/ PSU Bonds

Risk in a Debt Fund

 Interest Rate Risk

 Credit Risk (Asset quality)
 Reinvestment Risk
 Call Risk
 Liquidity
 Inflation
Basic Terminologies:
 Net Asset Value (NAV)  Expense Ratio

 Open-ended Fund

 Close-ended Fund

 Portfolio

 Corpus

 Unit

 Load
Terms used in MFs
 Yield Curve

Graph which shows yields of various
maturities using a bench mark

usually upward - some time inverted

 Yield to Maturity (YTM)


Annual rate of return expected of a bond
over its maturity with the assumption that all
coupon payment will be recd on time and
reinvested at the same rate and principal
recd on maturity.
Start
Investments
Early
 Invest Early

Charu is 2 years old

Her parents invest

Rs. 5,000/- every month
for the next 5 years

Total Investment :
Rs. 3 lacs
 Invest Early
Rahul is 12 years old

His parents invest

Rs. 5,000/- every month
for the next 5 years

Total Investment :
Rs. 3 lacs
 Invest Early

Who do you think has

more money at the
age of 17 ?
 At the age of 17…

Rahul has Charu has

Rs. 3.9 lacs* Rs. 10.6 lacs*
The delay of 10 years, cost Rahul Rs. 6.7 lacs
* compounded monthly, @ 10% p.a.
 THE POWER OF COMPOUNDING

2 year old Charu’s parents

Rs. 10.6 lacs
invests Rs. 5,000 monthly for 5
years. They do not withdraw
any money.

12 year Rahul’s parents invest a

similar amount i.e. Rs. 5,000. They
invests for 5 years and they too do Rs. 3.9 lacs
not withdraw any money

0 2 5 8 11 14 17
 So, how do we
plan our investments ?
First, consider your….

 Financial goals
 Risk-taking ability
 Expected Return
 Investment Period
 Financial Planning
 Financial Goals
• identifying various needs for money

 Converting needs into specifics

• amount of money
• time frame for requirement of money

 Planning saving & investment to achieve these

goals
 Professional Financial Planners
 Understands investment universe

 Understands risk and return profile of various

investment alternatives

 Assist clients in choosing the right investment

mix keeping in mind client’s
-- saving ability
-- risk appetite
-- cash flow requirements
-- tax status
 Why become a Financial Planner?
 Ability to recommend financial products based on suitability of
investor rather than product features

 Ability to build mutually beneficial long term relationship with

investors

 Ability to profit from their expertise and value addition to investors

 Ability to act as financial intermediaries relied upon by investors and

issuers
 Attributes of Financial Planners
 Understanding of the investment universe
-- risk & return profile of investment alternatives
-- past performance
-- behaviour of asset classes
 Expertise in tax planning & estate planning
 Ability to correlate investors life cycle with matching
financial products
 Highly organised in their professional lives
 Excellent communication and interpersonal skills
 Financial Planning
 Establish & define relationship with client

 Define Clients Financial Goals

• Specific Goals and their timings

 Appreciate clients ability to save and cash flow requirements

 Appreciate clients disposition to risk

 Appreciate tax liability and focus on post-tax returns to client

 Financial Planning. . . . . Elaborated
 Create asset allocation plan
- tailor make portfolio suiting client needs

 Enable actual performance

- role of an intermediary

 Review and Rebalance continually

- periodic review of performance
- take corrective action, if required
 Client Responsibilities
 Set measurable goals

 Appreciate effect of financial decisions on cash flows

 Be open to review and re-balance portfolio on an ongoing

basis

 Start early

 Be systematic, consistent and disciplined

 Investors Needs
Protection Need Investment Need
To protect living Financial needs served
standards, current and through investments
survival requirements and savings
- Regular Income - Children education
- Retirement Income - Housing
- Insurance Cover - Children professional
growth
Asset Allocation and Model
Portfolio
 Recommended Model
Portfolios . .

 Accumulation Stage:

- Investible surplus available

- Financial goals are not near term

• Diversified Equity 65 – 80%

• Income & Gilt 15 – 30%
• Liquid Funds & Bank Deposits 5%
 Recommended Model
Portfolios . .

 Transition Stage:

- Closer to Financial Goals

- Transition from ‘Growth to Income’

- Near Retirement , Children Education or Marriage

- Increase Asset Allocation to Income Component

 Recommended Model
Portfolios . .

 Distribution Or Reaping Stage:

- Require Income as Dependence on Investment

- Income ‘Grows for Regular Expenses’

- Investors Start Liquidating Portfolio For Current Requirements

• Diversified Equity & Balanced Funds 15 – 30%
• Income Funds 65 – 80%
• Cash Funds 5%
 Recommended Model
Portfolios . .

 Inter-generational Or Transfer Stage:

- Focus on Serving Needs of Heirs

- Growth and Income Funds in balance

- Higher percentage in Growth Funds if heirs are ‘Young’

- Income Funds suitable if heirs are ‘Trusts and Charities’

 Recommended Model
Portfolios . .

 Affluent Investors:

- HIGHER RISK APPETITE:

• Sectorial and Growth Funds 70 – 80%
• Diversified Equity or Balanced Funds Balance

- LOWER RISK APPETITE:

• Income , Gilt and Liquid Funds 70 – 80%
• Diversified Equity or Balanced Funds Balance
 Asset Allocation

 Process of deciding portfolio composition

 Allocate funds across equity, debt and other asset

classes based on risk-return profile
 Asset Allocation Strategies
 Basic Managed Portfolio
- Diversified equity value funds 50%
- Govt. securities fund 25%
- High grade corporate bond fund 25%

 Basic Indexed Portfolio

- Stock market index fund 50%
- Bond market index fund 50%
 Asset Allocation Strategies
 Simple Managed Portfolio
- Balanced Fund 85%
- Medium term bond fund 15%
 Complex Managed Portfolio
- Diversified equity fund 20%
- Aggregate growth fund 20%
- Specialty Funds 10%
- Long term bond funds 30%
- Short term bond funds 20%
 Readymade Portfolio
- Single Index
- Equity 60%
- Debt 40%
 Bogle’s Strategic Allocation
 Combines investors age, risk profile and
preference in asset allocation
 Older investors in distribution phase
- 50% Equity, 50% Debt
 Younger investors in distribution phase
- 60% Equity, 40% Debt
 Older investors in accumulation phase
- 70% Equity, 30% Debt
 Younger investors in accumulation phase
- 80% Equity, 20% Debt
 Fixed Asset Allocation Strategy
 Maintain fixed ratio between chosen asset classes

 Disciplined approach that ensures profit booking

and purchases at lower prices

 Example
- 50% Equity and 50% Debt
- Equity markets rise ensuring profit booking
- 50:50 Ratio maintained
 Flexible Asset Allocation
Strategy

 No portfolio re-balancing

 Ensures riding bull wave if markets are rallying

 Ratio changes as per market changes

 Model Portfolio
 Set long term goals keeping risk-return profile
and time horizon in mind

 Asset allocation exercise based on growth,

income and liquidity criteria

 Sector Distribution exercise

- Allocation of funds across various Mutual Fund
products

 Fund manager selection

- Which scheme? Which Fund house?
 Recommended Model
Portfolios . .
 Young unmarried professional
- Aggregate Equity funds 50%
- High yield bond, growth & income funds 25%
- Conservative money market funds 25%

 Young Couple: Double income, 2 Children

- Money Market Funds 10%
- Aggressive Equity Funds 30%
- High Yield Bond & Long Term Growth Funds 25%

- Municipal bond funds 35%

 Recommended Model
Portfolios . .
 Older couple single income
- Short term municipal funds 30%
- Long term municipal funds 35%
- Moderately aggressive funds 25%
- Emerging growth equity 10%

 Recently retired couple

- Conservative equity funds 35%
- Moderately aggressive equity funds 25%
- Money market funds 40%
Fund Selection
 Equity Fund Selection . . . . . .
 Form categories based on risk-return profile
- Diversified , Index , Sectorial & Specialised

 Form categories based on fund manager’s style

- Value and Growth

 Evaluate Performance
- Peer Group and Benchmark comparison
 Equity Fund Selection . . . . . . . .
 Consider Structural Characteristics
- Size of the Fund
- Fund History
- Portfolio Manager Experience
- Cost of Investing: Expense Ratio

 Consider Portfolio Characteristics

- Percentage Cash
- Portfolio Concentration
- Market Capitalisation of Fund
- Portfolio Turnover: Churn
- Portfolio Risk Characteristics
• R-squared
• Beta
• Dividend Yield
 Equity Fund Selection . . . . . . . .

 High R Squared , Low Beta And High

Dividend yield preferred
 Bond Fund Selection . . . . . .
 Fund Age and Size

 Relative yield: YTM

 Expense Ratio

 Portfolio Quality
• Credit Rating of portfolio holdings

 Average maturity
• Duration
 Money Market Fund Selection

 Expense Ratio
 Credit Quality
 Yield

 Principal is safe due to lower duration

 Income can be volatile
 Strategy To Smart Investing

 Identify Objective

 Start early

 Focus long-term and stay invested

 Beware of the effects of inflation & taxes

Need Based Investment Strategy

Age Group Growth Income Liquidity

(Years) (Equity) (Bonds) (Banks)
25- 40 75% 15% 10%

41- 50 50% 35% 15%

51- 60 35% 45% 20%

Above 60 25% 50% 25%

The Risk Return Trade-off
Hedge Funds

Growth Funds Sectoral Funds

Potential
Aggressive, Value,
for Growth
return
Debt
Funds Balanced Funds
Gilt Funds, Bond Ratio of Debt : Equity
Funds, High
Yield Funds

Liquid Funds
Risk
 Equities are the best long term bet
percentage of studied period in which

Other 14%
investment
outperformed 37%
44%
Stocks
outperformed
56% 86%
63%
1 year 3 year 5 year
Source : RBI Report on Currency and Finance (1997-98)
BSE Sensitive Index of Equity Prices - BSE
Equities are the best long term bet
Cumulative annualised returns (1980 - 98)
25.0%
20.16%

20.0%
14.47%
15.0%
9.2% 9.74%
7.62%
10.0%

5.0%

0.0%
Inflation Gold Bank FD Co. FD Equities

Inflation Gold Bank FD Co. FD Equities

Source: RBI report on Currency & Finance (1997-98); BSE Sensitive index of Equity prices - BSE
Remember :
1. Investment Decision Are Long Term Decision
2. 1% Superior Return Can Make 20%
Difference in 25 Years.
3. Understand the Virtues of Rupee Cost
Averaging
4. Discipline Is More Important Than
Intelligence.
5. Avoid Wastage, Look at Returns Net of Taxes
 Myths and Reality about savings
 I am not a natural saver

Saving is a skill and like most skill it gets better
with practice.
 Savings mean putting big amount aside

Its’ the little drops that make mighty ocean
 My earnings are not enough

If you have little now, you will have lesser later.
Saving is all about discipline.
 Budgeting is unnecessary

You need budgeting to cut expenses.
Myths and Reality about savings
 No goals, no savings

Create needs, save for rainy days
 Saving only after paying off loans

does not develop saving habits

will have precious little to live on.

Ideal , pay loan and save simultaneously
 Need to buy now, will save later

Saving is life time process, sooner the better it is
 Do not have time

It is not enough to work hard. Also invest wisely.
Myths and Reality about savings

 I earn enough

Nothing is permanent

 Never spend saved money


for specific goals

emergencies
Myths and Reality about savings

 I earn enough

Nothing is permanent

 Never spend saved money


for specific goals

emergencies