WELCOME TO THE WEALTH MANAGEMENT COURSE S G Raja Sekharan

MUTUAL FUNDS

WHAT IS MUTUAL FUND?

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities like stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals

WHAT IS MUTUAL FUND?

The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective

The income earned through these investments and the capital appreciation realized are shared by its unit holders(investors) in proportion to the number of units owned by them

WHY INVEST IN A MUTUAL FUND?

Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost

ADVANTAGES OF MUTUAL FUNDS Affordable Professional Management Diversification Liquidity Tax benefits Well regulated and low cost Transparency Flexibility Choice of schemes

DISADVANTAGES OF INVESTING THROUGH MF

NO TAILOR-MADE PORTFOLIO

Mutual Fund Operation Flow Chart

HISTORY OF MF IN INDIA

MF INDUSTRY STARTED IN INDIA IN 1963 WITH FORMATION OF UTI

DIFFERENT PAHSES : PHASE -1(UTI) PHASE-2 (ENTRY OF PUBLIC SECTOR MFs) PAHSE-3 (ENTRY OF PRIVATE MFs) PHASE-4 (UNDER SEBI REGULATION)

PHASE-1 (1963 -1987) -

ESTABLISHMENT OF UTI IN 1963 LAUNCH OF FIRST SCHEME US-64 FOLLOWED BY ULIP IN 1971,CGGF(1986),

MASTERSHARE(1987) UTI WAS THE ONLY PLAYER IN THE MARKET

WITH MONOPOLY POWER HUGE MOBILIZATION OF FUNDS

PHASE-2 (1987 -1993) - ESTABLISHMENT OF SBI-MF---THE FIRST NON-

UTI MF THAT STARTED IN 1987 FOLLOWED BY CANBANK-MF, LIC-MF,BOI-MF CHANGE IN THE MIND SET OF THE

INVESTORS UTI STILL THE UNDISPUTED LEADER OF THE

MARKET THERE WERE NO PRIVATE SECTOR PLAYERS

AT THIS STAGE

PHASE-3(1993 -1996) - ENTRY OF THE PRIVATE SECTOR FUNDS IN

1993 JV OF FOREIGN FUND MANANGEMENT

COMPANIES WITH INDIAN PROMOTERS MORE COMPETITIVE PRODUCT INNOVATION,

INVESTMENT MANAGEMENT TECHNIQUES, INVESTORS SERVICING TECHNIQUES CAME INTO INDIA

INVESTORS STARTED BECOME SELECTIVE

PHASE-4 ( 1996 ONWARDS ) SEBI- THE REGULATORY AUTHORITY SEBI MF

REGULATION 1996 UTI CAME UNDER SEBI REGULATION

VOLUNTARILY GOVT.’S STEPS FOR INVESTORS’ PROTECTION

TYPES OF MUTUAL FUNDS – BY STRUCTURE

Open ended -theses schemes do not have a fixed maturity period –they are available for subscription and repurchase on a continuous basis

Close ended –these have a stipulated maturity period of 5-7 years – they are open to subscription only during the period of launch. They can be bought and sold in stock exchanges where they are listed. Exit routes are also provided by the fund through repurchase at specific points of time.

TYPES OF MUTUAL FUNDS – BY INVESTMENT OBJECTIVES

Growth equity schemes –they provide capital appreciation over medium to long term – they carry risk of equity exposure.

Income /Debt schemes –these aim at providing regular income to the investors by investing in debt instruments like bonds, corporate debentures, govt securities, money market instruments etc.

Balanced funds –these provide a mix of regular income and capital appreciation –these invest in a mix of equity and debt instruments

TYPES OF MUTUAL FUNDS – BY INVESTMENT OBJECTIVES

Money market /liquid schemes –these provide easy liquidity, preservation of capital and moderate income – they invest in safe short instruments such as treasury bills, inter bank call money, commercial paper etc – they give returns of about 5-8% per year

Gilt funds – they invest in govt securities only and have no default risk –they return about 3-5% p.a.

TYPES OF MUTUAL FUNDS – OTHER CLASSIFICATIONS

Index funds -they replicate specific indices – like BSE sensex. They invest in securities in the same weightage as the index

Tax saving schemes – these schemes give tax rebates under specific provisions of IT act eg Equity linked tax saving scheme, Pension schemes etc – these are growth oriented and predominantly invest in equities

TYPES OF MUTUAL FUNDS – OTHER CLASSIFICATIONS

Commodity funds – there are funds today that invest in Gold as a commodity and closely mirror the rate of gold.

Real estate funds –Real estate funds are those that invest their corpus in real estate projects and provide returns to investors based on appreciation of the asset over a period of 5-8 years. There are also few real estate funds that provide regular quarterly returns based on leasing out of the real estate properties

TYPES OF MUTUAL FUNDS – OTHER CLASSIFICATIONS

Load funds and No load funds – load funds charge an entry and exit fee –the No load funds do not charge any entry and exit fees

TYPES OF EQUITY FUNDS AGGRESSIVE GROWTH FUNDS:Investment in less

researched or speculative/non-blue chip stocks GROWTH FUNDS: Investment in stocks with above

average growth prospects over 3-5 years.Ex:Tech Stock

SPECIALITY FUNDS: Sector, Offshore, Small-cap equity, Option income funds

DIVERSIFIED EQUITY FUNDS: ELSS. EQUITY INDEX FUNDS VALUE FUNDS: Invest in fundamentally sound

companies with low P/E ratio. EQUITY INCOME FUND: Invest in sectors where low

fluctuation in stock price and high dividend is expected.

GROUND RULES FOR INVESTING

Have a long term investment plan – early in life, you can have a higher exposure to equities or equity based MF’s

Keep a small amount liquid /debt funds for contingencies or planned expenses over 2/3 years

Spend time in educating yourself in investment areas

Ignore hot tips, hot stocks etc Start early Invest regularly –look at Systematic investment

plans offered by Mutual funds Buy and hold

WHAT TO LOOK FOR BEFORE INVESTING IN A MF

Compare the performance between the same types of funds

Risk assesment - most of the well known funds are rated - Value research ratings and Money control.com’s ratings are fairly comprehensive

Go with funds that have a large corpus of funds – these are mostly safer than the ones with low corpus

Management - look at the fund manager’s record and go with fund managers who have a good past performance record

BUILD WEALTH THROUGH SYSTEMATIC INVESTMENT PLAN

A Systematic Investment Plan (SIP) is an option that allows you to invest a fixed sum at periodic intervals on specific dates.

A Systematic Investment Plan works for you in three ways:-

It helps you to save regularly and thus inculcates a sense of discipline

It harnesses the power of compounding It is the best possible way you to reign in impulsive

buys-and-sells that otherwise one is gripped by in times of market volatility. - Rupee cost averaging

You are free to choose any amount (minimum Rs 500 and in multiples of Re 1/-) and any date as per your convenience.

OFFER DOCUMENT

OFFER DOCUMENT (OD) A legal document

issued by AMC or Sponsor

OD describes the product

Very important document from the perspective of prospective investor

Primary vehicle for investment decision

CONTENTS OF THE OFFER DOCUMENT Summary information Definitions Risk Factors Legal and Regulatory Compliance Financial Information Constitution of the Mutual Fund Investment objectives and policies Management of the Fund Offer Related information

WHO CAN INVEST IN MF’S IN INDIA

Residents : Resident Individuals, Indian Companies, Indian Trusts/ Charitable Institutions, Banks / NBFCs, Insurance Companies, Provident funds

Non Residents : NRIs

Foreign Entities: FIIs registered

with SEBI

ACCOUNTING AND NAV CALCULATION

Net Asset Value (NAV) Investors’ subscriptions are not accounted as

liabilities or deposits but as Unit Capital Investments made on behalf of the investors are

reflected on the assets side. Liabilities also form part of the balance sheet NAV is asset minus liabilities and divided by total

number of outstanding units.

AV = Assets - Liabilities

NAV = Net assets value of the scheme /Number of units outstanding

Market value of investments + receivables + accrued income + other assets -accrued expenses-payables- liabilities

No.of units outstanding on NAV date

Daily NAV for open-end schemes Weekly NAV for close-end schemes A fund’s NAV is affected by

Purchase and sale of investment securities

Valuation of all investment securities held

Other assets and liabilitiesUnits sold or redeemed

Valuation of investment securities must be at their market prices.

LEGAL AND REGULATORY ENVIRONMENT

Organization of a Mutual Fund

LEGAL STRUCTURE

IN INDIA ISSUE OF OPEN AND CLOSE END FUNDS IN SAME

LEGAL STRUCTURE FOLLOW THE SEBI REGULATION TRUST FORM

SPONSOR: ESTABLISHES THE MUTUAL FUND Must contribute 40% of the net worth of the AMC Need to have sound financial track record Appoint trustees

REGULATORS IN INDIA

SEBI SEBI regulates MFs All MFs have to be registered with SEBI

RBI Bank-owned MFs are under RBI and SEBI

Ownership of AMC by the bankGuarantees issued by the bank as sponsor

Permission to access inter-bank call money market

AMFI

Promote the interests of the mutual funds and unit-holders

Set ethical, commercial, and professional standards in the industry

Increase the public awareness of MF industry

INVESTORS OBLIGATIONS / COMPLAINT REDRESSAL Investors should: Read Offer Document Understand Risk

factors Monitor Investments Ask for information

required “Monitoring is

entirely your responsibility”

SEBI intervention For issue of due

diligence certificate for new scheme by compliance officer

Companies Act cannot protect investors as fund investors are neither shareholders in the AMC nor depositors

THANK YOU