Presentation on:

Mutual Funds

Presented By: Amar Ranu

Indian Institute of Capital Markets

Investment Retail Investors Risk Management Return Portfolio Tax Saving

NAV Exit Load Factsheets Open Ended Growth Redemption Investment Objective Portfolio Dividend

Fund Manager Repurchase Price AUMs Close Ended Professional Managemen t

Sale Price

Entry Load

Asset Allocation

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Snapshot.

Mutual Fund

Indian Institute of Capital Markets

Indian Institute of Capital Markets

Why did Mutual Funds come into existence?

An old Axiom :

It is not wise to put all eggs into one basket

was probably in the minds of those who formed the first mutual fund.
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Contents
Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Mutual Funds defined.a flow cycle

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Flow Cycle explained

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a 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.

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Diff. b/w MF and Direct Investment

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Diff. b/w MF and Direct Investment Mutual fund investing vs. Direct investing
Professional investment management Risk reduction through diversification Convenience Availability of alternative portfolio objectives Unit holders account administration and services

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Flow Cycle of a Mutual Fund Regulatory Aspects

Diff. b/w MF and Direct Investmen t History of Mutual Funds in India

Balance sheet of a Bank and Mutual Fund Organizati

Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Risk Manageme nt

Investmen ts Checklists Tracking Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Difference b/w Balance Sheets of MF and Bank

Difference between Bank and Mutual Fund Mutual Fund Balance Bank Balance Sheet
Sheet Assets Liabilities Liabilities Assets

Indian Institute of Capital Markets

Difference b/w Balance Sheets of MF and Bank

Difference between Bank and Mutual FundBalance Sheet Mutual Fund Balance Bank
Sheet Assets Liabilities Liabilities Share Capital Deposits Assets Loans and Advances Unit Capital Investment in Financial Securities

Indian Institute of Capital Markets

Organizational Structure of Mutual Fund

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Organizational Structure of Mutual Fund

Indian Institute of Capital Markets

Organizational Structure of Mutual Fund

Sponsor
Akin to the Promoter of the company, Contribution of minimum 40% of net worth of AMC, Posses sound financial record over five years period, Establishes the Fund, Gets it registered with the SEBI, Forms a trust, & appoints Board of trustee. Holds assets on behalf of unit holders in trust, Trustees are caretaker of unit holders money, Two third of the trustees shall be independent persons (not associated with the sponsor), Trustees ensure that the system, processes & personnel are in place, Resolves unit holders GRIEVANCES, Appoint AMC & Custodian, & ensure that all activities are accordance with the SEBI regulation.

Trustees

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Organizational Structure of Mutual Fund

Custodian
Holds the funds securities in safekeeping, Settles securities transaction for the fund, Collects interest & dividends paid on securities, Records information on corporate actions.

Asset Management Company

Floats schemes & manages according to SEBI, Can not undertake any other business activity, other than portfolio mgmt services, 75% of unit holders can jointly terminate appointment of AMC, At least 50% of independent directors, Chairman of AMC can not be a trustee of any MF.

Distributor / Agents
Sell units on the behalf of the fund, It can be bank, NBFCs, individuals.

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Organizational Structure of Mutual Fund

Banker
Facilitates financial transactions, Provides remittance facilities.

Registrar & Transfer Agent

Maintains records of unit holders accounts & transactions Disburses & receives funds from unit holder transactions, Prepares & distributes a/c settlements, Tax information, handles unit holder communication, Provides unit holder transaction services.

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Classification of Mutual Fund Schemes

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Classification of Mutual Fund Schemes

AMFI Classification of MF Schemes

Fund schemes
Growth & Income Balanced Liquid & Money Market Gilt ELSS Fund of funds ETFs Portfolio objectives High Risk & High Return Moderate Risk & Return Fixed Return Zero Risk Tax Saving Additional diversification Market Driven

Each category is classified into more sub-categories.

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Classification of Mutual Fund Schemes Other classification of MF schemes

By Structure
Open-Ended anytime enter/exit Close-Ended Schemes listed on exchange, redemption after period of scheme is over.

By Investment Objective
Equity (Growth) only in Stocks Long Term (3 years or more) Debt (Income) only in Fixed Income Securities Liquid/Money Market Short-term Money Market (CPs, CDs, Treasury Bills) Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years) Gilt Funds primarily in G-Sec

Other Schemes
Tax Saving Schemes such as ELSS Special Schemes (ETFs, foreign funds)
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Risk-return structure of schemes

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Risk-return structure of schemes Risk Return of different schemes

Indian Institute of Capital Markets

History of Mutual Funds in India

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

History of Mutual Funds in India Phases of Mutual Fund Industry in India

1964 1987 1993 2009 ?

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Regulatory Aspects
Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Regulatory Aspects 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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Portfolio Management Process

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Portfolio Management Process Portfolio Management Process

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Risk Management
Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Risk Management Risk Management Function Risk category Risk factors

Fund management Volatility in performance, portfolio concentration, Interest rate movement, liquidity risk & credit risk. Operations Deal error, settlement problem, NAV & fund pricing error, inaccurate financial reporting, fraud. Customer Error in deal processing, fraud . Marketing & New product development, selling & Disaster recovery & business contingency plans. distribution distribution Insurance against third party loss (R&TA), arising from error Other business risk Critical knowledge loss, skills shortage, & omission. third party risk

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Investment Checklists
Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Investment Checklists Investing Checklist

Draw up your asset allocation Financial goals & Time frame (Are you investing for retirement? A childs 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)
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Investment Checklists Checklist continued..

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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Mutual Fund Comparison

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Mutual Fund Comparison Mutual Fund 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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Expenses
Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Expenses Expenses of Mutual Fund

Accounted for in FUND RETURN
Management fee* Group fee* Performance fee* Administrative fee* Brokerage costs Interest costs

Not included in FUND RETURN

Front end sales load Back end sales load Transaction fee Redemption fee Account maintenance fee Bid ask spreads

An asterisk * indicates fee which is included in a funds expense ratio. As per SEBI Rule, expense ratio should be 2.5% for equity & 2.25% for debt fund of fund value.

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Tracking Mutual Funds

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Tracking Mutual Funds 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 such as www.valueresearchonline.com, www.mutualfundsindia.com, www.morningstar.in, www.lipperweb.com et al. Newspapers Professional advisor

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Warning Signals
Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Warning Signals 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.

Indian Institute of Capital Markets

AUM movements in India

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

AUM movements in India

Movement of AUMs in different categories over a period of time

Stock Funds have become a mainstream product. Liquid Plus Funds and FMPs have seen aggressive inflows due to regulatory changes. New asset classes like ETFs and FoFs have emerged.

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AUM movements in India Indian Asset Management Industry Growth in Assets

Total Assets Under Management as on March 2009 Rs 493286 crores Total No. of players - 36
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Penetration of Mutual Funds

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

Penetration of Mutual Funds Penetration vis--vis Other Financial Products

Note: Penetration of Mutual Funds is still low as compared to Banks and Insurance Companies.
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What Mutual Funds are not?

Flow Cycle of a Mutual Fund Regulatory Aspects Diff. b/w MF and Direct Investmen t History of Mutual Funds in India Risk Manageme nt Balance sheet of a Bank and Mutual Fund Riskreturn structure of schemes Investmen ts Checklists Tracking Mutual Funds Organizati onal Structure of a Mutual Fund Classificati on of Mutual Fund Schemes Mutual Fund Compariso n

Portfolio Manageme nt Process AUM movement s in India Penetratio n of Mutual Funds

Warning Signals What Mutual Funds are not?

Expenses

Indian Institute of Capital Markets

What Mutual Funds are not? MFs are not get rich quick investments MFs are not risk free investment MFs are not assured return investment MFs are not a universal solution to all investment needs

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Thank You
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