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
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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…
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Asset Allocation
– Diversifying investments in different assets such as stocks, bonds, real estate,
cash in order to optimize risk.
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Fund Manager
– The individual responsible for making portfolio decision for a mutual fund, in
line with fund’s objective.
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Fund Offer Document
– Document with investment objectives, risk factors, expenses summary, how to
invest etc.
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Dividend
– Profits given to the investor from time to time.
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Growth
– Profits ploughed back into scheme. This causes the NAV to rise.
Terminologies Contd…
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NAV
–
Market value of assets of scheme minus its liabilities.
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Per unit NAV
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Entry Load/Front-End Load (0-2.25%)
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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
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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
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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%)
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=
Net Asset Value
No. of Units Outstanding on Valuation date
Price at which close-ended scheme repurchases its units
Redemption Price
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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
• ULIP
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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)
Investment strategies
• Systematic Investment Plan (SIP)
– Invest a fixed sum every month. (6 months to 10 yearsthrough 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
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
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
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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 (NowRel 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
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Agents/Brokers
– Locate one on AMFI site
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Financial planners
– Bajaj Capital etc.
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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
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Fact sheets and Newsletters
Websites
Newspapers
Professional advisor
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Warning Signals
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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