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Phase III
Earning Years
Age- 60 yrs
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40 Middle Age
60 Retirement
All individuals have a finite period to save for their investment goals
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chopra.rajiv@icai.org
chopra.rajiv@icai.org
Brief History
First Phase 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of 1988 UTI had Rs.6,700 crores of assets under management.
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chopra.rajiv@icai.org
Regulations
Governed by SEBI (Mutual Fund) Regulation 1996 All MFs registered with it, constituted as trusts ( under Indian Trusts Act, 1882)
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Cont.
Mutual funds have disadvantages as well, which include: Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize
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Cont
2. Tata Mutual Fund Inception Date June 30th 1995 Trustee Tata Trustee Company Pvt. Ltd. Top Performing Schemes AUM as on 30th April 09 + Tata Pure Equity (269.95 cr) + Tata Index Nifty (6.77 cr) + Tata Short-term Bond (292.08 cr)
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Cont
3. SBI Mutual Fund Inception Date June 29th 1987 Trustee SBI Mutual Fund Trustee Company Pvt. Ltd. Top Performing Schemes AUM as on 30th April 09 + Magnum Contra (1,958.50 cr) + Magnum Balanced (333.11 cr) + Magnum Multiplier Plus (687.15 cr)
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Cont.
4. Reliance Mutual Fund Inception Date - June 30th 1995 Trustee Reliance Capital Trustee Company Ltd. Top Performing Schemes AUM as on 30th April 09 + Reliance MIP (168.52 cr) + Reliance Banking Retail (681.25 cr) + Reliance Diversified Power Sector Fund (3809.57 cr)
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Cont
5. DSP BlackRock Mutual Fund Inception Date December 16th 1996 Trustee DSP Merrill Lynch Trustee Company Pvt. Ltd. Top Performing Schemes AUM as on 30th April 09 + DSPBR top 100 Equity (1167.08 cr) + DSPBR Equity (919.77 cr) + DSPBR GSF Longer Duration (425.67 cr)
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chopra.rajiv@icai.org
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.
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. = Net Asset Value No. of Units Outstanding on Valuation date
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.
Redemption Price
Price at which open-ended scheme chopra.rajiv@icai.org
Index Schemes
Sectoral Schemes
Balanced Funds
Money Market Funds
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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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SPECIAL SCHEMES-EXAMPLE
Funds based on Size of the Companies Invested in Large cap funds:Funds that invest in companies whose total market cap is above Rs40bn Mid cap funds: Funds that invest in companies whose market cap is between Rs20-40bn Small cap funds: Funds that invest in companies whose market cap is below Rs20bn
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chopra.rajiv@icai.org
TAXATION
All dividends declared by debt / equity oriented schemes are tax free in the hands of the investor Dividend distribution tax @ 14.1625% for individuals and 22.66% for corporates under debt oriented schemes No DDT under equity schemes Long term capital gain in equity schemes exempt from tax Indexation benefit available for long term non equity schemes Equity short term capital gain @10% STCG in Debt funds Rates applicable for the investor Deduction of Rs. 1 lac under section 80C
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chopra.rajiv@icai.org
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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Before declaration of dividend / bonus Growth Dividend payout Dividend reinvestment Bonus
NAV
Units Value (Rs) NAV Units Value (Rs)
20
100 2,000 20 100 2000
20
100 Rs 2,000 19 100 1900
20
100 Rs 2,000 19 105.2631 2000
20
100 Rs 2,000 18.1818 110 2000
Rs 100
- chopra.rajiv@icai.org 5.2631
10
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.
SIP is a simple method of investing used across the world as a means to creating wealth
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Benefits of SIP
Regular
Investments happen every month unfailingly
Automated
Completely automated process No hassles of writing cheque every month
10 9 8 7 6 5 4 3 2
9.35
9.40 8.12
8.75 8.01
8.93
When the price is highest, you buy the least number of units
106.39 units 154.75 units
When the price is lowest, you buy the highest number of units
Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04
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chopra.rajiv@icai.org
chopra.rajiv@icai.org
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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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)
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Invest when surplus money in savings a/c based on chopra.rajiv@icai.org expense 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
Checklist Contd
Think hard about investing in sector funds
For relatively aggressive investors Close touch with developments in sector, review portfolio regularly
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
TRAPS TO AVOID
IPO Blur
Begin with existing schemes (proven track record) and then new schemes
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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Agents/Brokers
Locate one on AMFI site
Financial planners
Bajaj Capital etc.
ATMs
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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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