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A presentation by

Joint Venture with Standard Life Investments

Mutual Funds

Concept and Role of a Mutual Fund

What is a Mutual Fund ?


A mutual fund is a collective investment that allows many investors, with a common objective, to pool individual investments and give to a professional manager who in turn would invest these monies in line with the common objective.

Operation flow chart


INVESTORS

RETURNS

FUND MANAGER

SECURITIES

Characteristics of Mutual Funds


Investors own the mutual fund. Professional managers (AMC) manage the fund for a small fee.
Fees charged is specified by SEBI and is expressed as a percentage of assets managed

The funds are invested in a portfolio of marketable securities in accordance with the investment objective. Value of the portfolio and investors holdings, alters with change in the market value of investments.

Mutual Funds: A Packaged Product


Professional Management Diversification

Convenience Liquidity Tax Benefits

Role of Mutual Fund


1. Assist investors in earning income or create wealth.
Supply funds to govt. and industry to invest. Keep a check on operations, corporate governance and ethical standards.

2. 3.

4.

Act as market stabilizer, counter large inflows or outflows.

Mutual Fund Operations


a. Announcement of investment objective
b. Marketing the scheme to public c. Allotment of units to the investor d. Earns income: Interest, Dividend, Capital gain or loss. e. Valuation Gains or loss, incur operational expenses.

Mutual Fund Operations


f. Profit increase the true worth of a unit (NAV), and loss decrease it. g. Profits may be distributed as dividends to the investors or may be retained for future growth. (Options: Dividend payout, dividend reinvestment, growth) h. Size of mutual fund companies is assessed by AUM, AUM is affected by Profitability metric, inflows and outflows.

Profitability Matrix
A. B. C. D. E. F. G. Interest Income + Dividend Income + Realized capital Gains + Valuation Gains - Realized Capital Loss - Valuation Losses - Scheme Expenses

Advantages of Mutual Funds


Professional Management Affordable Portfolio Diversification Economies of Scale : better terms with brokers, bankers etc. Liquidity : units are more liquid than shares Tax Deferral : returns are tax free Tax Benefits : ELSS, Sec 80 C benefits Convenient Options : Growth, Dividend etc. Investment Comfort : Little Documentation, ECS facility etc. Regulatory Comfort : Control of SEBI Systematic Approach to Investments : SIP, STP, SWP

Disadvantages of Mutual Funds


No control over costs for an investor No tailor made portfolios for an investor Issues relating to management of a portfolio of mutual funds
Note: These are just disadvantages of the concept of mutual fund. SEBI has taken adequate measures to overcome few of them.

Types of Mutual Funds


1) Open ended, Close ended and Interval Funds. 2) Actively Managed and Passively Managed Funds. 3) Debt, Equity and Hybrid Funds.

Open-End Funds
Schemes which sell/ buy units round the year Buying/ selling price is based on NAV Schemes under no obligation to keep selling units at all times Schemes have to repurchase units at all times Schemes corpus keeps changing due to portfolio performance & buying/ selling of units

Close-End Funds
Units are sold only once at the launch of the scheme (NFO) Investors money is locked in the scheme for a stipulated time Schemes are listed on exchanges to provide liquidity to investors Unit capital is fixed and corpus changes only on portfolio performance SEBI regulations ensure investors get exit option once or twice a year

Types of Debt Funds


a. b. Gilt Funds Invests only in Govt. Securities Diversified debt funds Invests in Mix of Govt. and Non-Govt., Debt securities Junk bond funds Invests in poor quality debt Fixed Maturity plans (FMPs) Investment portfolio is aligned with the maturity of the underline debt security

c.

d.

Types of Debt Funds


e. f. Floating Rate Funds Invests in Floating Rate Debt Liquid Schemes Invests in debt securities with tenure of upto 91 days.

Types of Equity Funds


a. b. c. d. e.
f.

Diversified equity funds Sector funds Thematic funds ELSS Dividend Yield schemes (less fluctuating shares) Arbitrage funds

Types of Hybrid Funds


a. b. Monthly Income Plans (MIP) Capital Protection Schemes (Close Ended)

Types of Gold Funds


a. b. Gold Exchange Traded Fund (Gold ETF) Gold sector fund

Types of other funds


a. b. Real Estate Funds Commodity Funds Commodity ETF and Commodity Sector Funds. (In India MFs can not invest in Commodities hence only Commodity sector Funds Exist) International Funds (Feeder Funds) Fund of Funds Exchange Traded Funds

c. d. e.

Evolution In India
Phase 1 1964 87 Growth of UTI
Phase 2 1987 93 Entry Of Public Sector Funds Phase 3 1993 86 Emergence Of Pvt. Funds

Evolution In India
Phase 4 1996 99 Growth & SEBI Regulations
Phase 5 1999 2004 Emergence Of A large & Uniform Industry Phase 6 2004 Onwards Consolidation & Growth

Fund of Funds
Investment of its corpus in other mutual fund schemes
Schemes of same mutual fund house Schemes of other mutual fund house

Is considered like a Debt scheme for tax purposes The effective expenses become higher as the investors have to bear the expenses of the invested schemes as well

Investment Options
Investors can achieve income and growth objectives in all funds
Dividend pay-out option Regular dvidend Ad-hoc dividend Growth option Re-investment option

Most funds provide multiple options and the facility to switch between options

Basics of Classification
Risk
Sectoral funds are most risky; money market funds are least risky

Tenor
Equity funds require a long investment horizon; liquid funds are for the short term liquidity needs

Investment objective
Equity funds suit growth objectives; debt funds suit income objectives

The Risk Return Trade-off Hedge Funds


Potential for return Debt Funds
Gilt Funds, Bond Funds, High Yield Funds

Growth Funds
Aggressive, Value, Growth

Sectoral Funds

Balanced Funds
Ratio of Debt : Equity

Liquid Funds

Risk

History of Indian Mutual Funds


Phase I (1964-87) Set up by RBI, de- linked later. Act of parliament First scheme US 64, still outside SEBI purview Phase II (1987-93) entry of PSU Banks/ FIs SBI in 87, LIC in 89, Indian Bank in 90 Phase III (1993-96) Entry of Private players Phase IV (1996-99) Growth & SEBI regulations Phase V (1999-2004)Emergence of large and uniform industry Phase VI (From 2004 Onwards) Consolidation & Growth

Fund Structure and Constituents


In UK Two alternative structure In USA Investment Companies structure In India 3 tier structure Sponsor Trust/Trustee AMC

MUTUAL FUND - FRAMEWORK- India


Sponsor

Trustee Company

Asset Management Company

Fiduciary responsibility to
the

Fund Management
Brokers

Operations

Marketing

Registrar

Distribution
Custody

Investors

Markets

Bank

SPONSOR : Role
Promoter of the mutual fund Creates a Trust under Indian Trusts Act, 1882 Appoints trustees Creates AMC under Companies Act, 1956 Fulfils necessary formalities and applies to SEBI for registration of the Trust as a Mutual Fund

Who is eligible to be a Sponsor?


Criteria Financial services business Sound track record Positive net worth in last five years 3 year profit making record in the last 5 years including the last year Atleast 40% contribution to AMC capital Sponsors net worth in the immediately preceding year is more than the capital contribution to the AMC

TRUSTEE
Fiduciary responsibility to the Investors. Directors to be approved by SEBI. Execution of trust deed by sponsor in favour of trustee. Trust deed is stamped and registered with SEBI Legally responsible for administering the Trust and Compliance with Regulations. Norms for Trustees:
Experience in Financial Services Minimum 4 members on the board and 2/3rd of the members not to be connected with the sponsor All major Decisions need trustee approval

ASSET MANAGEMENT COMPANY


Required to be registered with SEBI Responsible for : Launching Schemes Managing Funds for Schemes Performing Accounting Functions All day to day affairs of the Mutual Fund Quarterly reporting to Trustees Income of an AMC /Asset Management Fee 1.25% of weekly average NAV of each Scheme up to Rs.100 cr of assets managed 1.00% greater than Rs.100 cr Minimum 4 directors with 1/2 independent At least Rs 10 cr of net worth to be maintained at all times AMC cannot act as trustee for other MF AMC of one MF cannot be trustee of another MF 50 % of the directors on the board must be independent

TRANSFER AGENTS
Issue of Account Statements to Investors Arranges payment to Investors when they redeem Takes care of Non commercial transactions like change of address,loss of account statement etc. Should be registered with SEBI Appointed by Board of AMC

CUSTODIAN
Safe keeping of the assets held by the Fund Receives and Delivers Securities for payment Follow up on Corporate benefits Provide an independent means of control Independent of Sponsors Should be registered with SEBI Appointed by the Board of Trustee

Other Constituents
Broker -Purchase and sale of securities -Not more than 5% through a related broker
Auditor -Separate auditor for AMC and mutual Fund

Mergers and Acquistions


Scheme takeover -One AMC buys schemes of another AMC -Organic growth in assets -No change in AMC stakes AMC Merger -Two AMCs merge -Similar to merger of companies -Sponsor stakes change

Mergers and Acquisitions


AMC take-over -Stake of one sponsor in an AMC bought out by another sponsor -Change in AMC and sponsor Investor rights -No prior approval needed -Option to exit at NAV -Right to be informed

Fund Mergers & Take overs


Mergers of two AMC
Provisions of Cos Act Approval of high court and SEBI 75% unit holders consent

Scheme takeover
Unit holders permission - 75% SEBIs permission

Fund Mergers & Take overs


AMC taken over by other sponsor (a. Zurich - 20th Century b. ITC Threedneedle - Zurich c. FT - Kothari HFCL)
No high court approval No unit holders consent , only info with rights to exit from scheme without any load SEBI clearance is compulsory

Legal & Regulatory Environment


SEBI - Capital Markets Regulator RBI - Money Markets Regulator MOF - Policies CLB, DCA, ROC Stock Exchanges Office of the Public Trustee

SEBI
All Mutual Funds / AMC/ Trustee Companies to be registered with SEBI Responsible for protecting investors interest promote orderly growth of Mutual Fund Industry and

Formulates regulations,monitors performance and conduct of Mutual funds and enforces compliance to regulations through reviewing reports and regular inspections

Reserve Bank of India & SE


RBI
Dual supervision for bank sponsored AMCs Issue concerning ownership bank promoted AMC falls with RBI Regulates investments pertaining to Money Market Instruments

Stock Exchange (SE)


Close ended MF listed of SE. Needs to comply with listing guidelines.

Office of public Trustee


MF being public trustee - governed by Indian

Trust Act , 1882

Trustee Co or Board of Trustee accountable to office of Public Trustee Public trustees reports to Charity Comm.

Trustee and AMC to comply with Cos Act 1956


Registrars of Companies (ROC)

Department of Company Affairs

Company Law Board (CLB)

Ministry of Law & Justice

Ministry of Finance
Supervises both SEBI and RBI
Ultimate policy making & supervising body Appellate Authority for any disputes over SEBI guidelines

Self regulatory Organizations


Derive powers from regulator Ability to make bye laws Example : Stock Exchanges (NSE, BSE) Industry Associations -Collective Industry opinion -Guidelines and recommendation -Example : Association of Mutual Funds in India

Investors rights
Proportionate ownership in schemes assets Rights of information from Trustee To received dividend warrants, inspect major docs (Trust deed, investment management agreement, R&T A Agreement, custodian services agreement) with 75% voting rights and approval of SEBI can close the scheme, change the AMC. Rights of info for fundamental change in the scheme features and also an opportunity to redeem units without any load. Receive annual report and a/c statement

Investors rights & Obligations


Rights - Legal Limitations
Unit holders are not distinct from trust, they cannot sue trust. Sponsor do not have any legal obligations (Limited to initial contribution) No rights to prospective investors

Obligations
Must read offer doc AOD (Abridged Offer Document) Beware of risk factors Must monitor investments regularly

Investors complaint redressal mechanism


Client Servicing

Compliance Officer
Investors cannot be protected by companies Act

Investing in Mutual Funds Understanding the Process


Offer Document Key Information Memorandum Application and form of holding Distribution channels Investors rights Taxation of Income and Capital gain NAV and Load

The Offer Document

What is an offer document ?


Legal offer from AMC to investor Contains vital information about Fund and schemes SEBI approved format Key Information Memorandum (KIM) contains vital information pertaining to the Scheme and it is mandatory to attach KIM to the application forms Investor has no recourse for not having read the OD/KIM

Significance
Legal document that protects and governs the right of the investor to information Is the primary vehicle for the investment decision Is the operating document and fundamental attributes of schemes. describes the

One of the most important sources of information for the prospective investor Is a reference document for the investor to look for relevant information at any time

Fundamental Attributes
Scheme type Investment objective Investment pattern Terms of the scheme with regard to liquidity Fees and expenses Valuation norms and accounting policies Investment restrictions

Changes in Fundamental Attributes


Approval from trustees Approval from SEBI Public announcement by AMC Investors to be informed and option given to exit at NAV without any exit load New offer document

OD: Contents
Details of the Sponsor & the AMC Description of the Scheme & the investment objective/ strategy Terms of issue Historical statistics Investor Rights & services

Period of Validity
For New Schemes: 6 months from the date of receipt. Updated every 2 years for Open Ended Funds Regular Addendum for modification Updated for every major change -Change in the AMC or Sponsor of the mutual fund -Changes in the fundamental attributes of the schemes -Changes in the investment options to investor; inclusion or deletion of options

Contents of Offer Document


Preliminary information Summary information about the mutual fund, the scheme and terms of offer Mandatory disclaimer clauses as required by SEBI Glossary of terms in the offer document, which defines the terms used Standard and scheme specific risk factors pertaining to the scheme being offered

Fund Specific Information


Constitution of fund, details of sponsor, trustees and AMC Financial history of sponsor (s) for 3 years, in summary form Director of boards of the trustees and the AMC Details of key personnel of the AMC Details of fund constituents

Details of the Scheme Being Offered


Dates of NFO
Details regarding sale and repurchase

Minimum subscription and face value Initial issue expenses


Current scheme and the past schemes

Special facilities to investors Eligibility for investing


Documentation required

Procedure for applying, and subsequent operations relating to transfer, redemption, nomination, pledge and mode of holding of units

Who can invest ?


Resident Indian Individuals/HUF Indian Companies/Partnership Firms Trusts / charitable institutions / PFs Banks/ FIs / NBFCs Insurance Companies NRIs/ FIIs Partnership firms etc.

Verification and Due Diligence


SEBI : format and content Trustee approval Compliance office certifies that
Information contained therein is true and fair Is in accordance with SEBI regulations Constituents of the fund are all SEBI registered entities.

The AMC is responsible for the contents and the accuracy of information

Distribution Channels
Individual Agents Distribution Companies Banks and NBFCs Direct marketing channels

Sales Practices
Advertising:
Divd declared to be mentioned in Rs. Per unit along with NAV Only CAGR if the scheme has been in existence for more than 1 yr.Less than 1 year to be on absolute basis For liquid schemes simple annualisation of yields possible if performance figure is available for more than 30 days

For funds in existence for more than 1 yr. annualized return have to be furnished for 1,3,5 yr and since inception

NAV - COMPUTATION
NAV = Net assets of scheme / No of units Outstanding i.e. Market value of investments+ Receivables+ Other accrued income+ Other assets- accrued expenses- Other Payables- Other liabilities No. of units outstanding as at the NAV date Imp : Day of NAV Calculation is known as valuation day NAV is computed for each business day

HOW NAV IS COMPUTED


Market value of Equities - Rs.100 crore - Asset Market value of Debentures - Rs.50 crore - Asset Dividends Accrued - Rs.1 crore -Income Interest Accrued - Rs.2 crore - Income Ongoing Fee payable - Rs.0.5 crore - Liability Amt.payable on shares purchased -Rs.4.5 crore - Liability No. of units held in the Fund : 10 crore units NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10 = [153-5]/10 = Rs. 14.80

NAV - Other information


Open end funds to declare NAV daily NAV to be published at least weekly Close end Schemes (which are not listed) may publish NAV monthly/qt with prior approval from SEBI (MIP) NAV has to consider up to date transactions Non - recorded transactions not to affect NAV calculation by more than 2%

NAV
NAV is influenced by
Purchase and sale of Investment Valuation of Investment Other assets and Liabilities Units sold or redeemed.

Loads
Entry Load or front ended load Paid at the time of purchase
Sale Price = NAV * (1+ Sales Load, if any)

** Not applicable now

Exit Load or back ended load Paid at the time of exit


Redemption Price = NAV*(1- Exit Load)

Contingent Deferred Sales Load (CDSL)


Deferred exit load depending on the period Also known as deferred load

PRICING OF UNITS
Sale price = NAV
Re-purchase price to be not lower than 93% (95% for close-end funds) of the NAV Difference between the repurchase & sale price can not be more than 7% of the sale price

For example
If the NAV is Rs 10, Sale price = Rs. 10 Repurchase price cannot be lower than Rs 9.3

MUTUAL FUND ACCOUNTING & VALUATION

FEES & EXPENSES

Transaction Cost
Entry / Exit load

Annual Recurring Expenses


AMC Fee

Initial Issue Expenses

CDSC for no-load schemes

Custodian Fee
Registry Exp. Trustee Fee Audit Fee Mktg. & Selling Exp. Brokerage Exp. Others

Fees & Expenses


Initial Issue expenses only for closed ended equity fund
For launching of the scheme Can charge up to 6%

Recurring Expenses
Mkt & selling exp including brokerage Transaction cost R&T cost Custodian Fees Audit fees etc Investor Communications cost

Fees & Expenses


Amc can charge Investment management fee to the fund on weekly avg. net assets. The limits are( subject to limit of 2..5% for equity & 2.25% for debt
1.25% for up to Rs.100 cr of weekly avg net assets 1% in excess of Rs.100 cr. No Load schemes can charge an additional fee of 1%

Limits on Fees & Expenses


Total Expenses that can be charged to the Fund ( excluding entry and exit loads): Equity Debt
On On On On the the the the first Rs.100 cr next Rs.300 cr next Rs.300 cr balance assets 2.50% 2.25% 2.00 % 1.75% 2.25% 2.00% 1.75% 1.50%

Based on average weekly net assets

Fees and Expenses contd..


Initial issue expenses Charge to the scheme capped at 6% of the initial resources raised under that scheme Entry/Exit Loads - Transaction costs Sale price not greater than 107% / Re-purchase price not lower than 93% (95% for close-ended schemes) of the NAV Contingent Deferred Sales Charge ( For No-Load Schemes) Ceiling For redemption within 1year 4% For redemption within 2years 3% For redemption within 3years 2% For redemption within 4years 1%

Disclosures and Reporting


Audit by independent auditor Audited Annual report every year Un-audited accounts to be published within 1 month after March 31 & September 30 Within 6 months of closure, publish abridged summary of report scheme-wise in newspapers Summary to be forwarded to SEBI & unit holders Full portfolio disclosure to be made within a month from the half-year ended March 31 & September 30

Expenses that cannot be charged


Penalties and fines for infraction of laws. Interest on delayed payments to unit holders Legal marketing and publication expenses not attributable to any scheme Expenses on investment and general management Expenses on general administration corporate advertising and infrastructure costs Expenses on fixed assets and software development expenses. Such other costs as may be prohibited by SEBI.

Accounting Policies
Investments to be marked to market on market prices. Unrealised appreciation cannot be distributed. Purchase & sale of investments to be recognised on the trade date and not on settlement date. Investments to be taken as NPA if it gives no return through interest for more than 6 months Dividend / Bonus/ rights to be recognised on exdividend / ex-bonus dates and not on declared dates. Income receivable on Invest NOT accrued for more than 3 months , should be provided for. For determining gain/ loss on investments - avg cost is to be taken

Disclosure and Reporting


Reporting to SEBI Annual audited accounts Six monthly unaudited a/cs Half yearly statement of movements in net assets of each scheme Qtr portfolio statement Monthly amount mobilized

Communication to investor
Qtr portfolio Annual report

Non Performing Asset


An asset is classified as an NPA, if the interest and/or principal amount remain outstanding for one quarter from the due date. After classification as NPA:
Accrual should be stopped. Income accrued till date needs to be accounted for Principal due needs to be accounted for either in a graded manner after 3 months of classification or as a write off in totality in 15 months after classification.

Taxation
Mutual fund is exempt from paying taxes (section 10 (23D)) Income for investors -Dividend -Capital Gain Present position -Dividend exempt from tax in the hands of Investor -Funds with >65% in Indian equity pay no DDT -Other funds pay DDT (14.025% for individual and HUF and 22.44% for others including companies)

Taxation
Securities Transaction Tax(STT) of 0.25% sale on Equity Mutual Fund Scheme As per Section 80C of the Finance Act Investor can claim a rebate for maximum of Rs 1 lakh in ELSS. Mutual Funds units are not included under wealth tax

Treatment of Capital Gains


Long Term : > 12 months Short Term : =< 12 months Funds with > 65% in Indian Equity - Short term gain taxed at 10% -Long Term gains taxed at Nil Other Funds -Short term gains taxed at marginal rate of tax -Long Term gains * 20% + surcharge after indexation *10% + surcharge without indexation

Indexation
Investor buys on March 31, 1999 and sells on April 1, 2000. What is the indexation adjustment factor?
1998-99 351 1999-00 386 2000-01 406

Investor buys on April 1, 1998 and sells on March 31, 2001. What is the indexation adjustment factor?

Valuation
Marking

to Market Equity Valuation Norms - Listed, Unlisted, NPA, Un-traded Debt valuation norms - Listed, Unlisted, Illiquid Money Market Instruments - valuation norms Effect of Buybacks, Mergers Valuation Models - CRISIL

Valuation
TRADED SECURITIES Last quoted closing price on the SE where principally traded If Not traded on any SE on a particular day, then earliest previous day price is taken (not more than 30 days) Valuation = MP * current holding

NON - TRADED SECURITIES Stocks which are not traded for more than 30 days on any SE are valued on good faith basis by AMC within following parameters Debt - YTM basis Equity
Capitalisation of earning or NAV or combination of both

Risk Parameters
Standard Deviation is used to measure total risk. Beta co-efficient is used to measure market risk.

Benchmarks
As per SEBI guidelines,
benchmark should reflect asset allocation Funds with 65% and more in Equity to use a broad based index (Sensex, S&P CNX 500) Bond fund with more than 65% in bonds to use a bond market index Balanced funds to use a tailor-made index (Crisil Balanced Fund index) Liquid funds to use money market instruments.

Capital markets and Mutual Funds


Equity
Market and products Asset classes Investment styles Value indicators Debt markets Terminology Yield and duration Investment styles

Debt

Investment restrictions

Equity investment
Options

Ordinary shares Pref. shares Equity warrants Convertible Debentures

Investment Strategies
Growth and value Active and passive Large and small cap Cyclical stock Stock selection
P/E ratio Dividend yield Undervalued companies

Fundamental analysis Technical analysis Quantitative analysis

Debt Markets
Tenor
Short and long Put and call options

Interest payment
Fixed and floating Periodic vs discounted

Credit quality
Gilt, guaranteed and others

Traded and non-traded

Debt instruments
Commercial Deposits
Corporate Debentures Zero coupon bond

Floating rate bonds

Debt instruments
Commercial papers (CPs)
Govt Securities T - bills (7- 364 days)

Banks/ FIs/ PSU Bonds

Risk in a Debt Fund


Interest Rate Risk
Credit Risk (Asset quality)

Reinvestment Risk
Call Risk

Liquidity
Inflation

Price and Yield


Increase in yield reduces value of existing bonds. Decrease in yield increases value of existing bonds. Price and yield are inversely related. The relationship between yield and tenor can be plotted as the yield curve.

Terms used in MFs


Yield Curve
Graph which shows yields of various maturities using a bench mark usually upward - some time inverted

Yield to Maturity (YTM)


Annual rate of return expected of a bond over its maturity with the assumption that all coupon payment will be recd on time and reinvested at the same rate and principal recd on maturity.

Current Yield and YTM


Coupon as a percentage of current market price. If we bought a 8 % bond at Rs 110, the current yield is :
= (8/110)*100 = 7.27%

Interest Rate Sensitivity


Measured by a number called duration. If duration is 3 years, and interest changes by 1%, price of the bond will change in the opposite direction, by 3%

Example
Duration of a bond is 4 years. Yield spread increases by 1.5% What is the change in price
= 1.5*4 = - 6%

Credit Risk
Probability of default by the borrower Change in credit rating:
Downgrade increases the yield and decreases the price Upgrade decreases the yield and increases the price

Portfolio Management Styles


Equity Passive - Index Active - (a) Growth (b) Value

Debt
Buy and hold - Passive Duration management - Active Credit Selection - in anticipation of changes in credit ratings Prepayment predictions

Evaluating Fund Performance


Should be judged in light of

Investment Objectives Current Market Conditions Alternative investment returns

Performance Evaluation
Different valuation methods Change in Nav Total Return Total Return with dividend reinvested at NAV CAGR

Performance Evaluation
Change in Nav - The most common Nav on day 1 = Rs.10 Nav on day x = Rs.12 % Change in nav = dayx-day1/day1 * 100 = 2/10 *100 = 20 % Limitations: Does not account for dividend Suitable only for growth plans

Annualizing Rate of Return


NAV on Day 1: Rs 10 Nav after 6 months : Rs 12
Percentage change in NAV : (12-10)/10 * 100 = 20% To annualize : 20 *12/6 = 40%

Performance Evaluation
Total Return Nav on day 1 = Rs.20 Nav on day x = Rs.22 Dividend = Rs.4 per unit Total Return = (( Distribution + Change in nav)/day1 nav)* 100 = ((4+(22-20)/20)*100 = 30% Limitation: does not account for reinvestment

Performance Evaluation
Return on Investments - most suitable Nav on day 1 = Rs.20 Dividend = Rs.4 per unit Nav at Rs. 21 Div reinvested = Rs (4 /21) = 0.19 units allotted Total units = 1.19 (original +new allotted) NAV at year end = Rs.22 Total Return = (Nav on year end*total units )-day1 nav)/ day 1 NAV* 100
= ((22*1.19)- 20))/20*100

= 30.9%

Compounded Annualized Growth Rate


CAGR is defined as the rate at which an investment has grown on an annual compounding basis

Formula : A = P (1+r/100) ^n Where A is the total amount at the end of the investment period, P is the principal amount invested, r is the rate of return and n is the time period of the investment.

Performance Evaluation
Other Parameters Expense ratios - indicates fund efficiency and cost effectiveness Portfolio Turnover ratio - measures amount of buying and selling done by the fund Transaction cost Fund size Cash holdings

How MF Scheme Returns are Calculated


Growth option : Returns calculated using CAGR on NAVs Dividend option : Returns calculated using CAGR on ex-dividend NAVs, assuming dividends re-invested. Less than 1 year, returns are calculated using Change in NAV method.

Investment Restrictions as a % of Net assets - AMC


Max. Investment under all schemes of the AMC in paid up capital carrying voting rights in single Co. - 10 % Max. Inter scheme investments of the same AMC - 5 % (no AMC fee payable) Inter scheme transfers at CMP and within the objectives of scheme Max. Investment in listed shares of Group Cos - 25 % for each scheme. No investments allowed in unlisted/private placement of group/associate cos. Can borrow only to meet liquidity requirements. Max for 6 months & not more than 20% of NAV of scheme.

Investment Restrictions as a % of Net Assets Debt


Max. Investment in Rated paper in single Co - 15% (can be increased to 20% with approval by Board of AMC/Trustee) Max.Investment in Unrated/ Rated but below investment grade in single issuer- 10% of NAV Max. Investment in Unrated/Rated but below investment grade in all cos - 25% (subject to approval of Board of AMC /Trustee). Restrictions not applicable to Govt. Securities/Money Market Can only invest in marketable securities - no loans

Investment Restrictions as a % of Net Assets -Equity


Max. Investment in Equity/Equity related instruments of single Co. - 10% No restrictions in case of Index Fund Max. Investment in Unlisted Cos. - 10% in close ended & 5% in open ended funds Buy & Sell securities on Delivery position , No short selling/ carry forward allowed. Security should be transferred to schemes immediately. Cannot remain in general a/c

Financial Management

Financial Planning
Financial Goals
identifying various needs for money

Converting needs into specifics


amount of money time frame for requirement of money

Planning saving & investment to achieve these goals

Professional Financial Planners


Understands investment universe Understands risk and return profile of various investment alternatives

Assist clients in choosing the right investment mix keeping in mind clients -- saving ability -- risk appetite -- cash flow requirements -- tax status

Why become a Financial Planner?


Ability to recommend financial products based on suitability of investor rather than product features Ability to build mutually beneficial long term relationship with investors Ability to profit from their expertise and value addition to investors

Ability to act as financial intermediaries relied upon by investors and issuers

Attributes of Financial Planners


Understanding of the investment universe -- risk & return profile of investment alternatives -- past performance -- behaviour of asset classes Expertise in tax planning & estate planning Ability to correlate investors life cycle with matching financial products Highly organised in their professional lives Excellent communication and interpersonal skills

Steps involved in Financial Planning


Establish & define relationship with client Define Clients Financial Goals Specific Goals and their timings Appreciate clients ability to save and cash flow requirements Appreciate clients disposition to risk Appreciate tax liability and focus on post-tax returns to client

Recommend appropriate asset allocation


Execute the Plan Review Periodically

Create asset allocation plan - tailor make portfolio suiting client needs Enable actual performance - role of an intermediary Review and Rebalance continually - periodic review of performance - take corrective action, if required

Financial Planning. . . . . Elaborated

Client Responsibilities
Set measurable goals Appreciate effect of financial decisions on cash flows Be open to review and re-balance portfolio on an ongoing basis Start early

Be systematic, consistent and disciplined

Investors Needs
Protection Need To protect living standards, current and survival requirements - Regular Income - Retirement Income - Insurance Cover Investment Need Financial needs served through investments and savings - Children education - Housing - Children professional growth

Asset Allocation and Model Portfolio

Recommended Model Portfolios . .


Accumulation Stage:
- Investible surplus available - Financial goals are not near term
Diversified Equity Income & Gilt Liquid Funds & Bank Deposits 65 80% 15 30% 5%

Recommended Model Portfolios . .


Transition Stage:
- Closer to Financial Goals - Transition from Growth to Income - Near Retirement , Children Education or Marriage - Increase Asset Allocation to Income Component

Recommended Model Portfolios . .


Distribution Or Reaping Stage:
- Require Income as Dependence on Investment - Income Grows for Regular Expenses - Investors Start Liquidating Portfolio For Current Requirements
Diversified Equity & Balanced Funds 15 30% Income Funds 65 80% Cash Funds 5%

Recommended Model Portfolios . .


Inter-generational Or Transfer Stage: - Focus on Serving Needs of Heirs - Growth and Income Funds in balance - Higher percentage in Growth Funds if heirs are Young - Income Funds suitable if heirs are Trusts and Charities

Recommended Model Portfolios . .


Affluent Investors:
- HIGHER RISK APPETITE:
Sectorial and Growth Funds Diversified Equity or Balanced Funds 70 80% Balance

- LOWER RISK APPETITE:


Income , Gilt and Liquid Funds Diversified Equity or Balanced Funds 70 80% Balance

Asset Allocation
Process of deciding portfolio composition
Allocate funds across equity, debt and other asset classes based on risk-return profile

Asset Allocation Strategies


Basic Managed Portfolio - Diversified equity value funds - Govt. securities fund - High grade corporate bond fund 50% 25% 25%

Basic Indexed Portfolio - Stock market index fund - Bond market index fund

50% 50%

Asset Allocation Strategies


Simple Managed Portfolio - Balanced Fund - Medium term bond fund Complex Managed Portfolio - Diversified equity fund - Aggregate growth fund - Specialty Funds - Long term bond funds - Short term bond funds Readymade Portfolio - Single Index - Equity - Debt 85% 15% 20% 20% 10% 30% 20%

60% 40%

Bogles Strategic Allocation


Combines investors age, risk profile and

preference in asset allocation


- 50% Equity, 50% Debt - 60% Equity, 40% Debt - 70% Equity, 30% Debt - 80% Equity, 20% Debt

Older investors in distribution phase Younger investors in distribution phase Older investors in accumulation phase

Younger investors in accumulation phase

Fixed Asset Allocation Strategy


Maintain fixed ratio between chosen asset classes

Disciplined approach that ensures profit booking and purchases at lower prices Example - 50% Equity and 50% Debt - Equity markets rise ensuring profit booking - 50:50 Ratio maintained

Flexible Asset Allocation Strategy


No portfolio re-balancing
Ensures riding bull wave if markets are rallying

Ratio changes as per market changes

Model Portfolio
Set long term goals keeping risk-return profile and time horizon in mind Asset allocation exercise based on growth, income and liquidity criteria

Sector Distribution exercise - Allocation of funds across various Mutual Fund products
Fund manager selection - Which scheme? Which Fund house?

Recommended Model Portfolios . .


Young unmarried professional - Aggregate Equity funds - High yield bond, growth & income funds - Conservative money market funds Young Couple: Double income, 2 Children - Money Market Funds - Aggressive Equity Funds - High Yield Bond & Long Term Growth Funds - Municipal bond funds 50% 25% 25%

10% 30% 25% 35%

Older couple single income - Short term municipal funds - Long term municipal funds - Moderately aggressive funds - Emerging growth equity

Recommended Model Portfolios . .


30% 35% 25% 10%

Recently retired couple - Conservative equity funds - Moderately aggressive equity funds - Money market funds

35% 25% 40%

Other Useful Strategies


Rupee Cost Averaging
Invest regularly a pre-determined amount Thus, purchase of more units at lower market levels and less units at higher levels. Thereby, reducing the average cost of purchase.

Value Averaging
Invest regularly to achieve a pre-determined value

Fund Selection

Equity Fund Selection . . . . . .


Form categories based on risk-return profile - Diversified , Index , Sectorial & Specialised Form categories based on fund managers style - Value and Growth Evaluate Performance - Peer Group and Benchmark comparison

Equity Fund Selection . . . . . . . .


Consider Structural Characteristics - Size of the Fund - Fund History - Portfolio Manager Experience - Cost of Investing: Expense Ratio Consider Portfolio Characteristics - Percentage Cash - Portfolio Concentration - Market Capitalisation of Fund - Portfolio Turnover: Churn - Portfolio Risk Characteristics
R-squared Beta Dividend Yield

High R Squared low beta and high dividend yield is preferred

Bond Fund Selection . . . . . .


Fund Age and Size Relative yield: YTM Expense Ratio Portfolio Quality
Credit Rating of portfolio holdings

Average maturity
Duration

Money Market Fund Selection


Expense Ratio Credit Quality Yield Principal is safe due to lower duration Income can be volatile

Strategy To Smart Investing


Identify Objective
Start early
Focus long-term and stay invested

Beware of the effects of inflation & taxes

Need Based Investment Strategy


Age Group (Years) 25- 40 41- 50 51- 60 Above 60 Growth (Equity) 75% 50% 35% 25% Income (Bonds) 15% 35% 45% 50% Liquidity (Banks) 10% 15% 20% 25%

Remember :
1. Investment Decision Are Long Term Decision

2.

1% Superior Return Can Make 20% Difference in 25 Years.


Understand the Virtues of Rupee Cost Averaging Discipline Is More Important Than Intelligence. Avoid Wastage, Look at Returns Net of Taxes

3.

4.

5.

Business Ethics
Business Ethics are rules of acceptable and good conduct in business.
All persons involved with business should follow ethical codes of conduct. Business ethics are made by managers or operators of business. Business ethics are hard to enforce, hence ideally should be self-imposed.

Objectives of Business Ethics


Honest and transparent dealings with customers.
Protect clients from being cheated and exploited.

To ensure level playing field among all participants.


To ensure healthy competition for the benefit of all customers.

Business Ethics for MF


Fund Structure
Separation of functions Independence of organization Independence of personnel Fund Governance Exercise of voting rights by funds Fund operations

Ethics Related Regulations


Guidelines for good conduct of trustee and AMC. Regulations of personal trading Regulations of insider trading Regulations of fund advertisement Compliance officer Code of conduct for distributors

All the Best !!!!!! Thank You

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