mutual fund and investment strategy
TRANSCRIPT
To understand:
1. Meaning and benefits of mutual funds
2. History of mutual funds
3. Growth of mutual funds in India
4. Types of mutual fund schemes
5. Net asset value
6. Organisation of a mutual fund
7. SEBI guidelines relating to mutual funds
8. Association of mutual funds in India
9. Unit Trust of India and US-64
10. Growth and performance of mutual funds in India
Chapter Objectives
Mutual FundsMeaning - A financial intermediary that pools the savings of investors for
collective investment in a diversified portfolio of securities
Benefits:
- Professional management
- Portfolio diversification
- Reduction in transaction cost
- Liquidity
- Convenience
- Flexibility
- Tax benefits
- Transparency
- Stability of the stock market
- Equity research
Difference between Stock IPO and
MF IPOStock IPO MF IPOa. Share allotted at a price arrived at a. Units are issued at a face value
through the book building process of Rs. 10
b. The post- issue price is linked to theb. The NAV is linked to the market
demand-supply forces price
of underlying assets
c. The listing price may differ from the c. The NAV of the scheme opens
cut off (subscription) price lower than the
par value
History of Mutual funds
- Dates back to 19th century Europe
- Robert Fleming set up the first investment trust in 1868
- First Mutual fund set up in the US in March 1924
- First international stock mutual fund introduced in the US in 1940
- In 1979, the first money market mutual fund created
Growth of Mutual funds in India:
In four phases:
Phase I (1964-87) – Setting up of the UTI, launch of US-64 and Master share
Phase II (1987-92) – Entry of mutual fund companies sponsored by banks and insurance companies; popularity of assured return schemes
Phase III (1992-97) – Entry of private sector mutual funds, 1995 – the beginning of the sluggish phase
Phase IV – (beyond 1997) – Significant growth till 2001,
- trend reversed in 2000-01, due to debacle of US-64 – UTI lost to private sector players, record growth from new offerings during 2004-05, Cumulative assets under management as on March 31, 2006, Rs. 2,17,707 crore.
Types of Mutual fund schemesType of
Mutual Fund
Schemes
StructureInvestment
Objective
Special
Schemes
Open Ended
Funds
Close Ended
Funds
Interval Funds
Growth Funds
Income Funds
Balanced Funds
Money Market
Funds
Industry Specific
Schemes
Index
Schemes
Sectoral
Schemes
Comparison of Open-ended and
Close-ended schemes Open- ended scheme Close- ended
schemea. Continuous offer to sell and a. Scheme remains
open for a fixed
repurchase units at NAV period and has a
stipulated
maturity period
b. Do not have to be listed on the b. Listed on the stock
exchange
stock exchange
c. Do not have a fixed corpus c. Have a fixed
corpus
Types of Mutual Funds
Income funds :Invest predominantly in income bearing instruments
Growth funds: Invest predominantly in equity shares with growth potential
Balanced funds: Investment divided between equity shares and fixed interest bearing instruments
Money market mutual fund: Invest in short- term money market instruments
Domestic funds: Invest in securities issued and traded in the domestic financial markets
Types of Mutual FundsOffshore funds: Invest in securities of foreign companies
Sectoral funds: Invest in specific core sectors
Tax- saving schemes : Close- ended and carry special tax incentives
Equity- linked savings scheme: Open- ended, diversified, tax-
saving schemes with a lock- in period of three years
Gilt funds: Invest in government securities
Load funds: Charge selling expenses known as ‘load’
It is of two types: Front- end load and Back- end load
No load schemes – do not charge a load
P/E ratio fund: The proportion of the investment determined by on- going
price- earning multiple
Index funds
Invests in securities in the index on which it is
based
Follows a passive investment strategy
Mirrors the performance of its benchmark index
Tracking error can occur but gains over the index
owing to stock- lending and index arbitrage
Exchange-traded Funds
Hybrid of open- ended mutual funds and listed individual stocks traded on stock exchanges
Passively managed funds
Advantages :
1. Allow for intraday trading
2. Simple to understand
3. Provide benefits of diversification
4. Used as an arbitrage opportunity
5. Low operating expenses
6. Beneficial for financial institutions
First ETF – Nifty BeES
Types of Mutual FundsFund – of – Funds : Invests in other mutual fund schemes. Kotak Mutual fund, Standard Chartered
Mutual fund and Prudential ICICI Mutual fund offer this scheme.
Advantages: (a) Provides diversification benefits through a single product and higher returns with
low risk.
(b) In-built rebalancing feature ensures a steady asset allocation.
© Simplifies the investment process for investors in a tax-efficient manner
:Factors restraining growth : a. Dividend distribution tax and Capital gains taxes
b. Major investment in own schemes
Floating rate funds: Invest in floating rate instruments
Coupon rate linked to a benchmark rate.
38 floating rate fund schemes. Templeton floating rate fund – the largest
Theme based mutual fund: Popular three broad schemes – Leadership, Valuation
and sector specific
Real estate mutual funds: Will invest in shares and debentures of property related
companies and mortgaged based securities
Risks in Mutual funds
Equity- oriented mutual fund more risky
compared to a debt mutual fund.
Proportion of risk varies from scheme to
scheme
Net Asset Value
Reflects the performance of the scheme
on a day- to- day basis
NAV = Market price of securities + other
assets – total liabilities / Units
outstanding as at the NAV date
Mutual Fund Investors
a. Residents : Resident Indian individuals,
Indian companies, Indian trusts/
Charitable Institutions, Banks, NBFCs,
Insurance companies and Provident
funds
b. Non- residents
c. FIIs registered with SEBI
Some Mutual fund Regulations
- Each mutual fund shall have at least 20 investors and no single investor should hold more than 25% of the total corpus of the scheme
- The daily schedules for sales and redemption fixed
- MFs advised to collect bank account number and PAN from investors
- Investors can issue their demat accounts for buying and selling units
- MFs allowed to invest in securitised paper
Association of Mutual funds in India
(AMFI)- Established in 1993
- Dedicated to developing MF industry protecting
and promoting the interests of mutual funds and
their unit holders
- Catalyst for setting new standards
- Maintains a liaison with different regulators
- Launched market indices
- Conducts investor awareness programmes
Role of Intermediaries in MF
Industry Offer two levels of services:
Value- added
Basic
UTI: First mutual fund organisation
: Single largest mutual fund
: Set up in 1964 as a trust
: 54 branch offices, 266 chief representatives, 67000 agents, 72 schemes, 20.02 mn investors
UTI’s associates :
UTI bank limited
UTI Securities Exchange Limited
UTI Institute of Capital Markets
UTI Investment Advisory Services Ltd
UTI International Limited
UTI promoted institutions such as:
ILFS, CRISIL, SHCIL, TDCIL, OTCEI, NSDL & NEDFCL
US - 64
- The flagship open- ended scheme
- Around 20 mn investors
- Launched as a debt fund
- Administered pricing and high dividend payments depleted reserves
- A bail out package in the form of SUS – 1999
- Failure to implement recommendations of Deepak Parekh Committee
- Repurchase and Sale of US – 64 units freezed in July 2001. NAV dipped to a low of Rs. 9.60. Government set up two committees- Tarapore and Malegam Committee
- US 64 moved to NAV basis on Jan 1, 2002
- In 2002, problems of liquidity and redemption pressures surfaced again
- UTI bifurcated into UTI-I and UTI-II on Feb 1,2003
- UTI I – all the assured return schemes
- UTI II – other schemes and under the regulatory ambit of SEBI
- US 64 shortfall wiped out by stock market rally in Oct, 2003.
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)
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
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
Systematic Investing, An Example
9.40
6.936.46
7.578.31
9.108.938.018.12
8.759.35
7.60
23456789
10
Jan-04 Feb-04 M ar-04 Apr-04 M ay-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
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
15.16 6.77 2.79
-
20
40
60
80
100
120
140
160
25 30 35 40 45 50
Investment Wealth at 60
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)
Errors
◦ Invest in only top performing funds
◦ These cannot go wrong
◦ Replicate past performance in future
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)
Investing in Equity Funds
Tired of your savings account?
Extra Cash in savings A/c?? Consider Cash Funds
Liquidity: Savings account wins◦ b/w a savings account and a fixed deposit, no ATM (Now- Rel
Regular Savings Fund)
Safety: Savings account wins◦ All mutual funds are subject to market risks
Returns: Cash funds win◦ Upto about 17.5% return
Performance: Cash funds win◦ Interest rate fluctuations covered by quick maturation
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)[email protected]
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.
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
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 [email protected]
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
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
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.
