72712-29656-mutual funds
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Mutual Funds
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Disclaimer
Me - no expert
Not Comprehensive
Majority from websites and some practical
experience
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Contents
Keeping Track
Buying a Mutual Fund Selecting a Mutual Funds
Equity FundsInvestment Strategies
Risk BehaviorTypes of Schemes
Organization of Mutual Fund Terminologies Demystified
Brief History
Reference Websites
Mutual Fund Defined
Regulations
Mutual Funds Comparision
Warning Signals
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Mutual Fund ??
Form of trust that pools the funds of a wholelot of investors to make more money byinvesting 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
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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 ( underIndian Trusts Act, 1882)
Bank operated MFs supervised by RBI too
AMC registered as Companies registered underCompanies 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
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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 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.
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Terminologies Contd
NAV Market value of assets of scheme minus its liabilities.
Per unit NAV = Net Asset ValueNo. 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
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Types of Mutual Fund Schemes
By Structure Open-Endedanytime enter/exit
Close-Ended Schemeslisted on exchange, redemption after period ofscheme is over.
By Investment Objective
Equity (Growth)only in StocksLong 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/HybridStocks + Fixed Income Securities (1-3 years)
Other Schemes Tax Saving Schemes
Special Schemes
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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)
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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 tofall below the average NAV.
Systematic Transfer Plan (STP)
Invest in debt oriented fund and give instructions to transfera fixed sum, at a fixed interval, to an equity scheme of thesame mutual fund.
Systematic Withdrawal Plan (SWP)
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Before declaration of dividend / bonus
Growth Dividendpayout
Dividendreinvestment
Bonus
NAV 20 20 20 20Units 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
Dividendreceived incash
- Rs 100 - -
Additionalunits
- - 5.2631 10
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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)
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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
fundsin 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 forat least 3-5 years (managed well and provides consistent returns)
Investing in Equity Funds
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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 onexpense 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)
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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.
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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 schemes investment philosophy
Long-term, appetite for risk, beat inflationequity funds best
TRAPS TO AVOID
IPO Blur Begin with existing schemes (proven track record) and then new schemes
Avoid Market Timing
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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
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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
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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
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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.
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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
http://www.mutualfundsindia.com/resourcecentre.asphttp://www.mutualfundsindia.com/resourcecentre.asp
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