Mutual Funds

What, Why and How

Mutual Fund- Know now

What is a Mutual Fund?

Mutual Funds pool money from many small investors with similar (one could say mutual) objectives, to achieve Economies of Scale and Diversification in the investment of these funds. This can result in higher returns at lower risk

Mutual Fund- Know now

Graphically speaking ...

Step 1 : Make investments

MF

Step 5: Returns provided to investors

Investor community

Step 4: Expenses
deducted from the returns

Earnings to the Fund House/ Distributor

Various Assets

Mutual Fund- Investment Where is the money invested

Your money is invested in various securities depending on the objectives of the scheme you choose.

STOCKS

BONDS

MONEY MARLKET

Mutual Fund- Types What are the types of mutual funds ..(1)
Open end schemes: You can invest or redeem in these schemes at any time Closed end schemes: You can invest during the initial issue period and your money is locked in for a stipulated period (ranging from 2 to 15 years)

What are the types of mutual funds ..(2)

Based on the investment objective Growth schemes: Invest in shares of companies. Have the potential to deliver better returns over the long term as compared to other mutual fund schemes

Mutual Fund- Types What are the types of mutual funds ..(3)
Types of growth funds
 Diversified Funds  Sector Funds  Index Funds

What are the types of mutual funds ..(4)

Income schemes: Invest in fixed income securities such as bonds issued by corporate and other government agencies Gilt Funds invest exclusively in government securities for added safety

Mutual Fund- Types What are the types of mutual funds ..(5)
Balanced schemes: Invest in both shares and bonds, thereby receiving income that can moderate the effects of price fluctuations due to stocks Money market schemes: Invest in short term instruments such as certificates of deposits and short term bonds

Mutual Fund- Other Schemes Other types of schemes

Need based schemes Tax-Saving schemes Equity Linked Savings Schemes Pension Schemes Future needs schemes Children s Savings Plans Retirement benefit schemes

Risk and Investment The risk return trade-off .. tradeInvestment horizon

Sector funds Growth Funds

Index, Active diversified

Balanced Funds
Ratio of Debt : Equity

Debt Funds
Liquid Fund

Risk

Risk and Investment Investment Pyramid

Investor Portfolio Composition
Capital Growth Risk: Medium to High Period: 3 to 5 years Income Risk: Medium to Low Period: 1 to 3 years Capital Preservation Risk: Low to Medium Period: Less than 1 year
Stocks Growth Funds

Bonds Debentures Income/Bond Funds Company Fixed Deposits Money Market Funds Short-term Deposits /Government Paper

Why Mutual fund? Why invest in a mutual fund?..(1)

Professional Management:
experience and resources to thoroughly analyze the economy/markets to spot good investment opportunities

Why invest in a mutual fund?..(2)

Diversification:
Reduces the risk to which you would've been exposed by investing in a single stock/bond Invests in a broad cross section of industries or companies - negative performance of one security will not have as much of an impact on the fund

Why Mutual fund? Why invest in a mutual fund?..(3)

Liquidity & Convenience:
You will be able to get your money back within a short period as compared to other securities

Very little paperwork

Helps avoid problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies

Why Mutual fund? Why invest in a mutual fund?..(4)

Tax Efficiency:
Some mutual fund schemes offer tax benefits under Section 88 Dividends declared under mutual fund schemes are tax free in the hands of the investor* Mutual funds offer favorable post tax returns
However, some funds are required to pay dividend distribution tax

How you make money in Mutual fund? How do I make money from a mutual fund?..(1)
Capital appreciation:
As the value of securities in the fund increases, the fund's unit price will also increase. You can make a profit by selling the units at a price higher than at which you bought

Income Distribution:
The fund passes on the profits it has earned in the form of dividends

The right scheme How to choose the right scheme

Determine your financial goals and your time horizon Determine your tolerance for risk Study the objectives of the funds available and match them with your need

The right Fund house How to choose the right fund house

Look for: Professional management Performance track record Quality of service Choice of schemes

The winning combination How to make the winning mutual fund investment (1)
Start Early Save regularly Use a portfolio approach spread your investments across sectors and asset classes See that your portfolio contains both short term and long term investments

How to make the winning mutual fund investment (2)

Monitor your investment portfolio periodically in light of market changes and changes in your life Stay calm, steady and disciplined keep your goals firmly in sight do not get carried away by emotions or temporary market fluctuations

Basics of Systematic Investing & Asset Allocation

Systematic Investing

Systematic Investing

What is Systematic Investing?

The term systematic investing , applies to the process of investing regularly i.e. at fixed intervals, say, monthly or quarterly.

Why should one systematically invest?

When chasing a financial goal, the simplest form of planning is to invest regularly Most of us calculate our earnings, expenses and savings monthly. The easiest way to plan our investments, therefore, is on a monthly basis

Systematic Investing- Basic Issues

Why don't most people save regularly?
1. 2. 3. 4. Lack of awareness/ concern/ planning for financial goals No money left after monthly expenses Hassle of keeping track of investments Unaware of power of compounding

Systematic Investing
The mother of all equations

FV = PV (1 + r)n
FV = Future Value PV = Present Value r = Rate of Return/ Coupon Rate n = No. of compounding periods

Systematic Investing
Enhancing Future Value

nn FV = PV (1 + r)

The more you save, makes a difference

The more you earn, makes a difference

The sooner you start, makes a difference

The power of compounding

The Power of Compounding

The more you save, makes a difference

Growth rate of 7% p.a. Amount saved per month 5,000 3,000 1,500 1,000 Total Amount Saved 1,500,000 900,000 450,000 300,000 Value after 25 years 4,073,986 2,444,391 1,222,196 814,797

Past performance may or may not be sustained in future

The powerThe compounding of Power of Compounding

The Power of Compounding

The sooner you start, makes a difference

#VALUE! Starting Age 25 30 35 40 Total Amount Saved 420,000 360,000 300,000 240,000 Value at the age of 60 2,309,175 1,500,295 957,367 592,947

Past performance may or may not be sustained in future

The power of compounding

The Power of Compounding

The more you earn, makes a difference

#VALUE! Growth Rate 5% 7% 10% 14%

Value after 10 years 155,929 174,094 206,552 262,091

Value after 25 years 597,991 814,797 1,337,890 2,727,278

Past performance may or may not be sustained in future

The power of compounding

The Power of Compounding

The more you earn, makes a difference

#VALUE! Growth Rate 8% 10% 15% 20% Value after 10 years 184,166 206,552 278,657 382,364 Value after 25 years 957,367 1,337,890 3,284,074 8,626,708

Save for future

Savings is for Future Goals

Life objective- cost structure

The Arithmetic of Financing Life
Objective Build a house Son s MBA Daughter s marriage Retirement Fund Years to go 5 10 15 25 Current Cost 10 lacs 3 lacs 5 lacs 15 lacs Future Cost 13 lacs 5 lacs 9 lacs 40 lacs

Volatility- Cost averaging

Making Volatility Work for you Rupee Cost Averaging
Month 1 2 3 4 TOTAL Amount Invested (Rs.) 1000 1000 1000 1000 4000 Sale Price (Rs.) 12 15 9 12 48 No. of Units Purchased 83.333 66.667 111.111 83.333 344.444

Average Sales Price of Units : Rs. 12 ( i.e. Rs. 48/4 months) Average Purchase Cost of Units : Rs 11.61 ( i.e. Rs. 4000/344.444 units)

Sensex- and sensibilities

Time is important Time Matters not Timing

Scheme Reliance Growth Gr. Reliance Vision Gr. Sensex S & P Nifty Start Date 5/31/1996 5/31/1996 5/31/1996 5/31/1996 Total Invest 87000 87000 3724 1089 End Date 7/30/2003 7/30/2003 7/30/2003 7/30/2003 Value 215240 219620 3780 1183 CAGR(In%) 24.87 25.21 0.01 0.02

Its easy- convenient Unmatched Convenience

 Minimum investment of Rs.500 on a monthly or quarterly basis  Choice of post-dated cheques or direct debit with selected banks  Cheques payable anywhere in India accepted  Statement of account provided with each transaction

Note: Some of the above facilities are available with investments in select funds and/ or at select centres. Please refer to offer document for specific details.

Asset allocation- find the right combination What is Asset Allocation?

It s about diversifying one s portfolio among asset classes such as bonds, stocks, real estate, or cash. It s referred to in terms of the target percentages for each asset class. For example, a portfolio could have a mix of 60 percent stocks, 30 percent bonds and 10 percent cash . It s the financial representation of an investor s personality: the ideal asset allocation is one that best balances an investor s profile and objectives

Asset allocation- find the right combination Significance of Asset Allocation Significance Relative to Return
Brinson, Hood and Beebower : Determinants of Portfolio Performance, 1986, 1991: Asset Allocation helps explain over 93% of a portfolio s performance .

Asset allocation- find the right combination

Suggesting the Right Allocation
Profile the client for ability and willingness to take risk Match with client s objectives Iron out mismatches, if any

Asset allocation- find the right combination

Making Asset Allocation Work Review of objective - EXAMPLE
Periodic Review Years to goal TODAY After 5 yrs After 7 yrs After 9 yrs 10 5 3 1 Equity Allocation % 70% 60% 40% 10%

A periodic review of objectives can ensure an investor is not left at the mercy of the equity markets when he needs his money

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