About Mutual Fund

1. Concept of Mutual Funds,

2. Types of Mutual Funds,

3. Significance of Mutual Funds,

4. NAV,

5. Evolution & Growth of Mutual Funds,

6. Role of Registrar,

7. Underwriter according to SEBI guidelines.

1

Mutual Funds

EducationEducation Earning YearsEarning Years Post Retirement Years Post Retirement Years

Phase IPhase I Phase IIPhase II Phase IIIPhase III

Age- 22 yrsAge- 22 yrs Age- 60 yrsAge- 60 yrs

MarriageMarriageChild birthChild birth

Child’s EducationChild’s Education

Child’s MarriageChild’s Marriage

HousingHousing

22 yrs22 yrs 38 yrs38 yrs 10- 20 yrs10- 20 yrs

Human Life Cycle

3

60Retirement

40Middle Age

27Young Married

22Young Independent

Individual Investor: Life Stages

Earnings

Consumption

Savings

All individuals have a finite period to save for their investment goals

4

Value of Money over time

Impact of inflation on monthly expenses of Rs. 30,000 today

Value of Rs. 100,000 over time

At inflation of 5%

Investors need to beat inflation

30,000

38,288

62,368

79,599

Today 5 years 15 years 20 years

100,000

78,353

48,102

37,689

Today 5 years 15 years 20 years

5

OPTIONS FOR INVESTING

• Deposit in Bank – SB, RD, FD’s, Locker ;)

• Loan a Friend/Relative on Interest

• Property Investments

• Invest in Bullion - Gold, Silver..

• Investment in Capital Markets -- Direct - Equity Share Markets

- Debt & Bonds Market- Indirect - Mutual Funds

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So what are my alternatives?

• Fixed Interest Products –

– Bank Deposits– Corporate Deposits– RBI Bonds– Corporate Bonds

• Rates of Return?

• Returns – Net of tax?

• Won’t Inflation eat into the return?

Returns – net of tax/ inf lat ion is poor hedge against inf lat ion

4.54%

1.95%

0.01%

4.54%

2.10%

0.36%

4.54%

2.40%

1.06%

4.54%

2.25%

0.71%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Bank FD Company FD RBI Bond Co Bonds

I nf lat ion Tax @ 30% Net Ret urns

7

Why Equities

7.47% 7.12%

10.64% 10.27%

18.25%

Inflation Gold G Secs Bank FD Equities

Source : CLSACumulat ive annualised returns (1980 - 2004)

Equities – the most attractive asset class

Equities produce highest long-term returns

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EQUITIES-RISKY & VOLATALIE

BSE SENSEX IN LAST TWO YEARS

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How To Invest In Equities

• Direct Equity» High risk, high return category.» Needs a lot of time & expertise.» Substantial initial capital required.

• Mutual Funds– One-Time Investment– Systematic Investment Plan (SIP)

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What is Mutual Fund

• An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

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• One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.a

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Unit-1 Topic #1Concept of Mutual Funds,

• A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

• Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds.

• These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy.

• The money collected is invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme’s stated objectives.

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

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14

GROWTH IN ASSETS UNDER MANAGEMENT

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Organization of a Mutual Fund

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Organization of a Mutual Fund• Mutual Funds in India follow a 4-tier structure.• The first tier is the sponsor who thinks of starting the

fund. • The second tier is the trustee. The Trustees role is not to

manage the money. Their job is only to see, whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund.

• Trustees appoint the Asset Management Company (AMC) who form the third tier, to manage investor’s money. The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them

• The forth tier is the custodian 17

Sponsor:

• Establishes a MF, obtains Certificate of Registration from SEBI, forms a trust, appoints board of trustees & AMC, appoints Custodian

• Any corporate body which initiates the launching of a mutual fund is referred to as “The sponsor”.

• The sponsor is expected to have a sound track record and experience in financial services for a minimum period of 5 years and should ensure various formalities required in establishing a mutual fund.

• According to SEBI, the sponsor should have professional competence, financial soundness and reputation for fairness and integrity. The sponsor contributes 40% of the net worth of the AMC. The sponsor appoints the trustee, The AMC and custodians in compliance with the regulations. 18

Trustees:• MF managed by body of individuals or a trust company (corporate

body). Guardians of assets of Unit holders. Responsible.• Sponsor creates a public trust and appoints trustees. Trustees are

the people authorized to act on behalf of the Trust. They hold the property of mutual fund.

• Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund. The Trustees role is not to manage the money but their job is only to see, whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund.

• A minimum of 75% of the trustees must be independent of the sponsor to ensure fair dealings.

• Trustees appoint the Asset Management Company (AMC), to manage investor’s money.

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Asset Management Company (AMC)

Investment Manager of Trust. Under the supervision of Board of Directors, Trustees, SEBI. Floates & manages different schemes.

• Trustees appoint the Asset Management Company (AMC), to manage investor’s money. The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them.

• The AMC’s Board of Directors must have at least 50% of Directors who are independent directors. The AMC has to be approved by SEBI. The AMC functions under the supervision of it’s Board of Directors, and also under the direction of the Trustees and SEBI.

• It is the AMC, which in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities. In order to do this the AMC needs to follow all rules and regulations prescribed by SEBI and as per the Investment Management Agreement it signs with the Trustees.

• Mutual Fund: Formed under Indian Trusts Act, 1982. Invites subscriptions to units. 20

Asset Management Company (AMC) cont…

• The role of the AMC is to manage investor’s money on a day to day basis. Thus it is imperative that people with the highest integrity are involved with this activity.

• The AMC cannot deal with a single broker beyond a certain limit of transactions.

• The AMC cannot act as a Trustee for some other Mutual Fund. • The responsibility of preparing the OD lies with the AMC.• Appointments of intermediaries like independent financial advisors

(IFAs), national and regional distributors, banks, etc. is also done by the AMC.

• Finally, it is the AMC which is responsible for the acts of its employees and service providers.

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Custodian:• For safekeeping of securities, participating in clearing system• A custodian’s role is keeping custody of the securities that are

bought by the fund manager and also keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested.

• The Custodian is appointed by the Board of Trustees. The custodian also participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities.

• Only the physical securities are held by the Custodian. The deliveries and receipt of units of a mutual fund are done by the custodian or a depository participant at the instruction of the AMC and under the overall direction and responsibility of the Trustees. Regulations provide that the Sponsor and the Custodian must be separate entities.

• Transfer agents: Issue and Redemption of units

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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

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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 fund’s objective.

• Fund Offer Document– Document with investment objectives, risk factors, expenses summary, how to

invest etc.

• 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.

• Per unit NAV = Net Asset Value No. of Units Outstanding on Valuation date

• Entry Load/Front-End Load (0-2.25%)– 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%)– 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– 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– Price at which close-ended scheme repurchases its units

• Redemption Price– Price at which open-ended scheme

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TYPES OF MUTUAL FUNDS

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Based on the structure

• Open-ended Fund An open-ended fund is a fund that is available for subscription and can be redeemed on a continuous basis. It is available for subscription throughout the year and investors can buy and sell units at NAV related prices. These funds do not have a fixed maturity date. The key feature of an open-ended fund is liquidity.

• Close-ended FundA close-ended fund is a fund that has a defined maturity period, e.g. 3-6 years. These funds are open for subscription for a specified period at the time of initial launch. These funds are listed on a recognized stock exchange. 27

• Interval FundsInterval funds combine the features of open-ended and close-ended funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals on the prevailing NAV.

• Conservative fund Scheme: a scheme that aims at providing a reasonable rate of return, protecting the value of investment and achieving capital appreciation is called a conservative fund scheme. It is also known as middle of road funds as it offers a blend of the above features. Such funds divide their portfolio in stocks and bonds in such a way that it achieves the desired objective

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Based on investment objectives• Equity/Growth Funds

Equity/Growth funds invest a major part of its corpus in stocks and the investment objective of these funds is long-term capital growth. When you buy shares of an equity mutual fund, you effectively become a part owner of each of the securities in your fund’s portfolio. Equity funds invest minimum 65% of its corpus in equity and equity related securities. These funds may invest in a wide range of industries or focus on one or more industry sectors. These types of funds are suitable for investors with a long-term outlook and higher risk appetite.

• Debt/Income Funds Debt/ Income funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds invest minimum 65% of its corpus in fixed income securities. By investing in debt instruments, these funds provide low risk and stable income to investors with preservation of capital. These funds tend to be less volatile than equity funds and produce regular income. These funds are suitable for investors whose main objective is safety of capital with moderate growth.

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• Balanced Funds Balanced funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These funds provide both stability of returns and capital appreciation to investors. These funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth. They generally have an investment pattern of investing around 60% in Equity and 40% in Debt instruments.

• Money Market/ Liquid FundsMoney market/ Liquid funds invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for a period of less than 91 days. The aim of Money Market /Liquid Funds is to provide easy liquidity, preservation of capital and moderate income. These funds are ideal for corporate and individual investors looking for moderate returns on their surplus funds.

• Gilt FundsGilt funds invest exclusively in government securities. Although these funds carry no credit risk, they are associated with interest rate risk. These funds are safer as they invest in government securities.

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• Special Schemes

• Tax-Saving (Equity linked Savings Schemes) FundsTax-saving schemes offer tax rebates to investors under specific provisions of the Income Tax Act, 1961. These are growth-oriented schemes and invest primarily in equities. Like an equity scheme, they largely suit investors having a higher risk appetite and aim to generate capital appreciation over medium to long term.

• Index FundsIndex schemes replicate the performance of a particular index such as the BSE Sensex or the S&P CNX Nifty. The portfolio of these schemes consist of only those stocks that represent the index and the weightage assigned to each stock is aligned to the stock’s weightage in the index. Hence, the returns from these funds are more or less similar to those generated by the Index. 31

• Sector-specific FundsSector-specific funds invest in the securities of only those sectors or industries as specified in the Scheme Information Document. The returns in these funds are dependent on the performance of the respective sector/industries for example FMCG, Pharma, IT, etc. The funds enable investors to diversify holdings among many companies within an industry. Sector funds are riskier as their performance is dependent on particular sectors although this also results in higher returns generated by these funds.

• Leverage funds: the funds that are created out of investments with not only the amount mobilized from investors but also from borrowed money from the capital markets are known as leveraged funds. Fund managers pass on the benefit of leverage to the mutual fund investors. Additional provisions must be made for such funds to operate. Leveraged funds use short sale to take advantage of declining markets in order to realize gains. Derivative instruments like options are used by such funds.

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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 Rs40bnMid cap funds: Funds that invest in companies whose market cap is between Rs20-40bnSmall cap funds: Funds that invest in companies whose market cap is below Rs20bn

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Significance of MUTUAL FUNDS• Expert on your side: When you invest in a mutual fund, you buy into the

experience and skills of a fund manager and an army of professional analysts

• Limited risk: Mutual funds are diversification in action and hence do not rely on the performance of a single entity.

• More for less: For the price of one blue chip stock for instance, you could get yourself a number of units across a number of companies and industries when you invest in a fund!

• Easy investing: You can invest in a mutual fund with as little as Rs. 5,000. Salaried individuals also have the option of investing in a monthly savings plan.

• Convenience: You can invest directly with a fund house, or through your bank or financial adviser, or even over the internet.

• Investor protection: A mutual fund in India is registered with SEBI, which also monitors the operations of the fund to protect your interests.

• Quick access to your money: It's good to know that should you need your money at short notice, you can usually get it in four working days.

• Transparency: As an investor, you get updates on the value of your units, information on specific investments made by the mutual fund and the fund manager's strategy and outlook.

• Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry out cost-effective brokerage transactions.

• Tax benefits: Over the years, tax policies on mutual funds have been favourable to investors and continue to be so. 34

NAV

• Net Asset Value (NAV) is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day. In order to calculate the NAV of a mutual fund, you need to take the current market value of the fund's assets minus the liabilities, if any and divide it by the number of shares outstanding. NAV is calculated as follows:

• For example, if the market value of securities of a Mutual Fund scheme is 500 lakh and the Mutual Fund has issued 10 lakh units of 10 each to investors, then the NAV per unit of the fund is 50.

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UNIT-5 (TOPIC#5)

Evolution & Growth of Mutual Funds,• The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual FUND industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual FUND industry in India can be better understood divided into following phases:

First Phase – Phase 1. Establishment and Growth of Unit Trust of India - 1964-87

Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years.

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Second Entry of Public Sector Funds - 1987-1993 marked the entry of non- UTI, public sector mutual funds

set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Emergence of Private Sector Fund - 1993-961993 was the year in which the first Mutual Fund

Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

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• Fourth Phase – Growth and SEBI Regulation - 1996-2004 the mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilisation of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds.

• Phase V. Growth and Consolidation - 2004 OnwardsThe industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

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Unit-5 Topic # 6Role of registrar

The organization, usually a bank or a trust company, that maintains a registry of the share owners and number of shares held for a mutual fund, bond or stock, and makes sure that more shares are not issued than are authorized.

• The registrar and transfer agents are appointed by the AMC. AMC pay compensation to these agents for their services. They carry out the following functions

• Receiving and processing the application forms of investors• Issuing unit certificates

• Sending refund orders• Giving approval for all transfers of units and maintaining records• Repurchasing the units and redemption of units• Issuing dividend or income warrents

•

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Fund Accountants• Fund accountants are appointed by the AMC. The

are in charge of maintaining proper books of accounts relating to the fund transactions and management. The perform the following functions

• Computing the net asset value per unit of the scheme on a daily basis

• Maintaining its books and records• Monitoring compliance with the schemes,

investment limitations as well as SEBI regulations• Preparing and distributing reports of the schemes

for the unit holders and SEBI and monitoring the performance of mutual funds custodians and other service providers.

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Lead Manager

• Lead manager carry out the following functions:– Selecting and coordinating the activities of

intermediaries such as advertising agency, printers, collection centers.

– Carrying out extensive campaign about the scheme and acting as marketing associates to attract investors.

– Assisting the AMC to approach potential investors through meetings, exhibitions, contacts, advertising, publicity and sales promotion.

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Investment Advisors

• Investment advisors carry out market and security analysis.

• Advising the AMC to design its investment strategies on a continuous basis.

• They are paid for their professional advice regarding fund investment on the average weekly value of the fund’s net assets.

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Legal Advisors

• Legal advisors are appointed to offer legal guidance about planning and execution of different schemes.

• A group of advocates and solicitors may be appointed as legal advisors.

• Their fee is not associated with net assets of the fund.

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Unit-5 Topic # 7Underwriter according to SEBI guidelines

Who is underwriter• Underwriting refers to the process that a large financial service

provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital,insurance, mortgage, or credit)

• Mutual funds also undertake the activities of underwriting issues. Such activities generate an additional source of income for mutual funds. Prior approval from SEBI is necessary for undertaking such activity

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SEBI Mutual Fund Regulations

• The regulations governing the functioning of mutual funds in India were introduced by SEBI in Dec 1996. The objectives of these regulations was to bring in existence the regulatory norms for the formation, operation and management of mutual funds in India. The regulations also laid down the broad guidelines on investment valuation, investment restriction, advertising code and code of conduct for mutual funds and AMCs.

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Registration of mutual funds

• Every mutual fund shall be registered with SEBI through an application to be made by the sponsor in a prescribed format accompanied by an application fee of Rs.25000.

• Every mutual fund shall pay Rs.25lakhs towards registration fee and Rs:2.5lakhs per annum as service fees.

• Registration shall be granted by the board on fulfillment of conditions such as sponsor’s, sound track record of 5yrs integrity, net worth etc. 47

Regulations for the trust• Mutual fund shall be constituted in the form of a trust under the

provisions of Indian Registrations Act and provisions laid down by SEBI.

• A trustee should be person of integrity, ability, and should not have been found guilty or being convicted of any economic offence or violation of securities law.

• At least 50% of the trustees shall be independent trustees.• The trustees and the AMC with SEBI’s prior approval shall

enter into an investment management agreement.• The trustees shall ensure the AMC has the necessary

infrastructure and personnel. • The trustees shall ensure that AMC is monitoring security

transaction with brokers.• The trustees shall ensure that the EMC has been managing the

scheme independently. • The trustees should fulfill all its duties in order to protect the

interest of the investors.

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Regulations for AMC• It should have a sound track record, reputation and fairness in

transaction.• The sponsor or trustee shall appoint an AMC with SEBI’s

approval.• The appointment of the AMC can be terminated by majority of

trustees or by 75% of unit holders.• The directors of AMCs should have adequate professional

experience. • At least 50% of the director’s of the AMC should not be

associated with the sponsors or it’s subsidiaries or the trustees.

• The chairman of the AMC should not be trustee of any other mutual fund.

• The AMC shall have a minimum net worth of Rs.10 crores.• The AMC shall not act as an AMC for any other mutual funds.

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Regulations for custodians

• The mutual fund shall appoint a custodian to carry out the custodian services for the schemes of the fund.

• The agreement with the custodian shall be entered into with prior approval of trustees.

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Regulations for Schemes of mutual funds

• All the schemes to be launched by the AMC should be approved by the trustees and are to be filed with SEBI.

• The offer document should contain adequate disclosures to enable the investors to make informed decisions.

• Advertisement of schemes should be in conformance with SEBI’s code.• The listing of closed ended schemes is mandatory and it should be listed

on a recognized stock exchange within 6 months of its subscriptions.• Units of close ended schemes can be opened for redemption at a fixed

interval.• The AMC shall specify in the offer document the minimum subscription to

be raised under the scheme.• The AMC may repurchase, reissue the units of close ended schemes.• The units of close ended schemes can be converted into open ended

schemes.• Any scheme on mutual fund shall not be opened for subscription after 45

days.• The mutual fund and AMC shall be liable to refund the application money

to the applicants if minimum subscription is not received.

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Investment strategies

• Systematic Investment Plan (SIP) – Invest a fixed sum every month. (6 months to 10 years-

through 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)52

What is a Systematic Investment Plan?

An investment plan to invest a fixed amount regularly at a specified frequency say, monthly or quarterly.

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

• Power Of Compounding• Rupee Cost Averaging• Forced saving

• Helps you overpower the temptation to spend fully• Helps you build for the future

• Automated• Completely automated process• No hassles of writing cheque every month

• Light on the wallet• Investment amount can be so small that you do not even feel the pinch

of it being directly deducted, yet the small amount is powerfully working towards your financial security

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Systematic Investing, An Example

9.40

6.93

6.46

7.578.31

9.108.93

8.018.12

8.75

9.35

7.60

2

3

4

5

6

7

8

9

10

Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04

106.39 units

154.75 units

When the price is highest,you buy the least number of

units

When the price is lowest,you buy the highest number of units

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Simple plotting of closing price of BSE Sensex for the first of every month. The time period considered here is from 1/1/1990 to 02/12/2005 Source: Credence Analytics

Investing at Peak – SIP is the way

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Start Early : SIP

A gap of 5 only years can result in a lot of difference in wealth creation !

Rs. 1000 invested per month @15% p.a. till the age of 60 yrs

4.20 3.60 3.00 2.40 1.80 1.20

148.61

70.10

32.84

15.166.77 2.79

-

20

40

60

80

100

120

140

160

25 30 35 40 45 50

Investment Wealth at 60

57

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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) 59

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.

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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

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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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Buying Mutual Funds• Contacting the Asset Management Company directly

– Web Site– Request for agent

• Agents/Brokers– Locate one on AMFI site

• Financial planners– Bajaj Capital etc.

• Insurance agents• Banks

– Net-Banking – Phone-Banking – ATMs

• Online Trading Account– ICICI Direct– Motilal Oswal, Indiabulls- Send agents

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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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