A discussion on Mutual funds

With the employees of HSBC

Budget proposals
Some of the proposals having direct
impact on our industry
Income from investments
Interest rates on small saving schemes lowered by 1%
Repo rate & savings bank interest rate cut by 0.5%
Long-term capital gains from listed equity tax free
Dividends to be tax-free in the hands of investors with
introduction of withholding tax. Equity mutual funds exempt
from such withholding tax for one year
Some of the proposals having direct
impact on our industry contd.
Tax rebates
Although, dividends are tax-free in the hands of the
investor, the 80L limits remains untouched
Surcharge for corporates halved and removal of the same
for individuals having income lower than Rs. 8.5 lacs p.a.
Standard deduction limits increased for individuals having
salaries up to Rs. 5 lacs p.a.
Tax rebate to senior citizens increased to Rs. 20000
Education expenses up to Rs. 12000 per child for 2 children
will be eligible for rebate U/S 88.
Interest on housing loan continues to remain deductible
Some of the proposals having direct
impact on our industry contd.
Competitive products
RBI relief and saving bonds temporarily suspended
Introduction of Varishtha Pension Bima Yojana
A restructured pension scheme to be introduced for Central
Government employees and general public
Modifications in Section 10D reducing relative attractiveness
of single premium products of insurance companies
Investment strategies
Should I go direct or through mutual funds?
Equity direct v/s MF
Equity stocks

Dividends are tax-free in the
hands of investors, but the
company has to pay dividend
distribution tax

Long term capital gains are
tax-free
Equity Mutual funds

Dividends are tax-free in the
hands of investors, and the
fund does not pay any
dividend distribution tax

No change in taxability of
Long term capital gains
Debt direct v/s MF
Debt instruments

Interest is clubbed with the
income and hence taxed at
nominal rates (post 80L limit)

Long term capital gains are
not applicable
Debt Mutual funds

Dividends are tax-free in the
hands of investors, but the
fund pays withholding tax

No change in taxability of
Long term capital gains
Tax Efficiency Matters!
A 5.5% return from an income fund is better than a
bank deposit giving 6% interest
As per the current tax rates of 30% on individual tax payers in the
highest slab, 12.5% (plus 2.5% surcharge) on dividend of income fund
and 10% long term capital gains tax on growth in income fund.
The above returns are only indicative and taken for illustration only
Pre-Tax Post-Tax
Bank deposit 6.0% 4.20%
Income fund dividend 5.5% 4.795%
Income fund growth 5.5% 4.95%
The effect of compounding
Compounding the post-tax returns earned over 10
years
Pre-Tax Post-Tax Rs. 1 lac compounded over 10
years
Bank deposit 6.0% 4.20% Rs. 150896
Income fund D 5.5% 4.795% Rs. 159742
Income Fund G 5.5% 4.95% Rs. 170814
Since LTCG tax is paid at the end of 10 years when the investment is
encashed, the compounding happens pre-tax as against the former
two, where it happens post-tax
WHAT SHOULD INVESTOR DO ?
Asset allocation
Discipline
Long term outlook

Budgets dont change the basics
How do we invest, normally?
Product oriented approach
Tip about the hot investment option / opportunity
Get a thrill out of making money
Decisions based on emotions
After all, if you have nowhere in
particular to go, it doesnt
matter which road you take.

Youll end up there anyway!
Investment planning
What is planning?
Planning is all about answering 4 questions:
1. Where do you want to be? & when?
2. Where are you?
3. How do you get there?
4. Are you on course?
Planning the investments
Where do you want to be & when
Define your financial goals in terms of how much you will
need and when
Where are you?
Check your financial resources
How do you get there
The financial plan / asset allocation
Are you on course
Periodic review of your investments / your own condition
Financial planning for the future

Birth & Education
Earning Years
Retirement
38 yrs 22 yrs Over 25 - 30 yrs
Housing
Childs Education
Childs Marriage
Phase I
Phase III
Phase II
Age
Marriage
Children
22 yrs
60 yrs
Age
Assessing Resources
Check out:
Existing Investments
Current Income
Future Income

Drawing up a financial plan
Quantify each objective by
When it will happen (i.e. years to go)
Future cost (Current cost + inflation)
Match the resources with the objective
Work out the rate of return needed to achieve the
objective
Check how much risk would you be comfortable with
Select investments that will be best suited to meet
the objective
Implement the plan
Periodic review of the investments
What do you see?
Performance of various asset classes
Performance of your portfolio relative to benchmarks
Your own situation
How often
Fixed frequency of six months to a year
Whenever there is a substantial change in your own
condition, e.g., loss of job, major expense, sudden wealth,
etc.
Can you do all this yourself?
Two ways you make money
Through your profession
Through investments
You cant run a race
between the two, i.e.,
your professional income
v/s investment income
You need an investment advisor
An investment advisor is not just
selling investment products, he is
taking responsibility for financial
well-being of the client.
What is a mutual fund?
Graphically speaking...
MF
Step 1 : Make investments
Investor community
Step 5: Returns provided to investors
Earnings to the
Fund House/ Distributor
Step 4: Expenses
deducted
from the returns
Various Assets
Investment Pyramid
Capital Preservation
Risk: Low to Medium
Period: Less than 1 year
Income
Risk: Medium to Low
Period: 1 to 3 years
Capital Growth
Risk: Medium to High
Period: 3 to 5 years
Investor Portfolio Composition
Growth
Funds
Stocks
Income/Bond Funds
Company Fixed Deposits
Bonds
Debentures
Money Market Funds
Short-term Deposits /Government Paper
Mutual Funds: The risk return
trade-off..
Risk
Investment horizon
Liquid Funds
Debt Funds
Gilt Funds, Bond Funds, Hi Yield Funds
Balanced Funds
Ratio of Debt : Equity
Growth Funds
Index,Value, Growth, Aggressive
Sector Funds
Having discussed the various options, let me
give you two choices
Investment
amount
Term On maturity you get
Option 1 Rs. 100 5 years Rs. 95 guaranteed
Option 2 Rs. 100 5 years Anywhere between Rs. 80 to
130
Which one would you choose?
VALUE OF RE. 1 INVESTED IN 1980
0
7
14
21
28
35
42
49
Mar-82 Apr-84 May-86 Jun-88 Jul-90 Aug-92 Sep-94 Oct-96 Nov-98
Rs. 37.98
Rs. 5.92
Rs. 16.14
Stocks
Co. Deposits
Bank Deposits
(Rs.)
Period - April 1980 to June 1999
THE IMPACT OF TAXES
0
4
8
12
16
Apr-80 Apr-83 Apr-86 Apr-89 Apr-92 Apr-95 Apr-98
Rs. 12.03
Rs. 3.38
Rs. 6.93
Stocks
Co. Deposits
Bank Deposits
(Rs.)
Period - April 1980 to June 1999
THE IMPACT OF TAXES & INFLATION
0
1
2
3
4
5
Apr-80 Apr-83 Apr-86 Apr-89 Apr-92 Apr-95 Apr-98
Rs. 2.50
Re. 0.69
Rs. 1.43
Stocks
Co. Deposits
Bank Deposits
(Rs.)
Period - April 1980 to June 1999
Source : RBI Report on Currency and Finance (1997-98)
BSE Sensitive Index of Equity Prices - BSE
9.19%
7.62%
9.74%
14.47%
20.16%
Inflation Gold Bank FD Co. FD Equities
INVESTMENT PERFORMANCE
(CAGR during 1980-98)
If this is what equities can deliver .
consider this ..
Sensex was at 3292.85 on December 1, 1993 the
inception date of Bluechip fund
Sensex was at 3226.10 on March 5, 2003
This means, if someone invested Rs. 100000 in
Sensex, the value of his investments would be Rs.
97973

However, if the investor invested Rs. 100000 in
Bluechip fund on inception ..
The value of holdings would be Rs. 505263
Note: Past performance may or may not be sustained in
future. Sensex data is without adjusting for dividends
But stocks are too risky!
Yes, they go up and down in short-term
However, with time risk comes down
1 3 5 7 9
Years
R
i
s
k

o
f

c
a
p
i
t
a
l

e
r
o
s
i
o
n
Stocks are too risky
A well-chosen portfolio may go up or down in short-
term of less than 3 yrs BUT
Over the long-term of 5 years+ almost always goes
up.
Good stocks go down, but never stay down
Building a good portfolio is best left to professional
fund managers
56% 63% 86%
37%
14%
44%
1 year 3 year 5 year
Other investment
outperformed
Stocks
outperformed
Source : RBI Report on Currency and Finance (1997-98)
BSE Sensitive Index of Equity Prices - BSE
EQUITIES ARE THE BEST LONG TERM BET
% OF STUDIED PERIOD IN WHICH
But in the last few years, debt has outperformed
equity
Debt funds
Are the past returns sustainable?
There are three ways debt instruments generate
returns

1. Interest accrual
2. Valuation changes resulting into capital gains /
loss
3. Trading profits
Interest rates rise
Bond prices decline
Valuation changes
Comparison of performance of Templeton
India Income Builder Account (IBA) &
Franklin India Bluechip Fund (Bluechip)
Fund 1 year 2 years 3 years 4 years 5 years
Bluechip 23.92% 1.94% -2.61% 25.96% 27.06%
IBA 18.27% 18.10% 15.71% 14.83% 14.40%
Note: The above returns are as on 31-December-2002.
Past performance may or may not be sustained in future
There is often no
relationship between
performance of a fund

and

an investors
performance
EQUITY INVESTING
Why investors lose money in equities?
Term Speculation as Investments
Lack of Asset Allocation
Lack of Diversification
Do not average out
Biggest of all.. Exit in down markets
You need to invest in Equities only if...
You have longer term goals
You believe that Ownership produces wealth and
not lending
Hence you believe equities have only one way to
go that is up. Eventually!
You have liquid assets to fall back in case markets
do not work in your favour!
Some important things to keep in mind while
planning your investments
START EARLY; SAVE REGULARLY
Every Year Counts
330,000
350,000
300,000
Saves from age
25 to 60
Saves from age
27 to 60
Saves from age
30 to 60
Assuming an annual savings of Rs. 10,000 in an instrument providing return of 9.5%
p.a.
THE EIGHT WONDER OF THE WORLD...
The Power of Compounding
330,000
350,000 300,000
2,099,636
2,533,529
1,572,834
Saves from age
25 to 60
Saves from age
27 to 60
Saves from age
30 to 60
Savings Returns *
Assuming an annual savings of Rs. 10,000 in an instrument providing return of 9.5% p.a.
This graph is for illustration only.
Are you investing strategically or emotionally?
Are You Investing Strategically or
Emotionally?
This hypothetical example is for illustrative purposes only, and does not
represent an investment in any Franklin Templeton fund.
The illustrations provided herein are not intended to reflect the price movements of a particular Franklin Templeton Fund,
nor are they meant to represent actual investment performance. All investments in mutual funds and securities are subject
to market risks and the NAV of the schemes may go up or down depending upon the factors and forces affecting the
securities market including the fluctuations in the interest rates. There can be no assurance that a schemes investment
objectives will be achieved. The past performance of the mutual funds managed by the Franklin Templeton Group and its
affiliates is not necessarily indicative of future performance of the schemes. Franklin India Index Fund, Franklin India
Balanced Fund, Franklin India Growth Fund, Templeton India Growth Fund, Templeton India Income Fund, Templeton
Monthly Income Plan, Templeton India Government Securities Fund and Templeton India Liquid Fund are only the names of
the schemes and do not in any manner indicate the quality of the schemes, their future prospects or returns. The Mutual
Fund is not guaranteeing or assuring any dividend under any of the schemes. The Mutual Fund is also not assuring that it
will make any dividend distributions under the dividend plans of the schemes though it has every intention of doing so. All
dividend distributions are subject to the investment performance of the schemes. The investments made by the schemes
are subject to external risks on transferring, pricing, trading volumes, settlement risks etc. of securities and hence
redemptions may be delayed inordinately. The schemes may invest in various derivative instruments including index futures
which are untested instruments in India Markets and may carry high risk return ratio. In the case of Franklin India Index
Fund the existence, accuracy and performance of the S&P CNX Nifty Index will directly affect the scheme performance and
tracking errors are inherent in any Index Fund. All subscriptions in Franklin India Index Fund will be subject to a lock-in
period of 30 business days. In the case of Franklin India Balanced Fund, in the event that the investible funds of more than
50% of the total proceeds of the scheme are not invested in equity shares, then tax exemption on income distribution may
not be available to the fund. Please call the Templeton Investor Service Centre numbers to obtain a copy of the offer
document and go through the same before investing.
Statutory Details: Templeton Mutual Fund in India has been set up as a trust by Templeton International Inc. (liability
restricted to the seed corpus of Rs.1 lac) with Templeton Trust Services Pvt. Ltd. as the trustee (Trustee under the Indian
Trust Act 1882) and with Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager. The Fund offers NAVs,
purchases and redemptions on all business days.
Risk Factors
THANKS