Mutual Funds

What, Why and How

Mutual Fund- Know now

What is a Mutual Fund?

Mutual Funds pool money from many small
investors with similar (one could say mutual)
objectives, to achieve Economies of Scale and
Diversification in the investment of these
funds.
This can result in higher returns at lower risk

Mutual Fund- Know now

Graphically speaking...
Step 1 : Make investments

MF

Step 5: Returns provided to investors

Investor community

Step 4: Expenses
deducted
from the returns

Earnings to the
Fund House/ Distributor

Various Assets

Mutual Fund- Investment

Where is the money invested

Your money is invested in various securities depending
on the objectives of the scheme you choose.

STOCKS

BONDS

MONEY MARLKET

Mutual Fund- Types

What are the types of mutual funds ..(1)

Open end schemes: You can invest or redeem in these schemes at any time
Closed end schemes: You can invest during the initial issue period and your
money is locked in for a stipulated period (ranging from 2 to 15 years)

What are the types of mutual funds ..(2)

Based on the investment objective
Growth schemes: Invest in shares of companies. Have the potential to deliver
better returns over the long term as compared to other mutual fund schemes

Mutual Fund- Types

What are the types of mutual funds ..(3)

Types of growth funds
Diversified Funds
Sector Funds
Index Funds

What are the types of mutual funds ..(4)

Income schemes: Invest in fixed income securities such as bonds issued by
corporate and other government agencies
Gilt Funds invest exclusively in government securities for added safety

Mutual Fund- Types

What are the types of mutual funds ..(5)

Balanced schemes: Invest in both shares and bonds,
thereby receiving income that can moderate the effects
of price fluctuations due to stocks
Money market schemes: Invest in short term
instruments such as certificates of deposits and short
term bonds

Mutual Fund- Other Schemes

Other types of schemes

Need based schemes
Tax-Saving schemes
Equity Linked Savings Schemes
Pension Schemes
Future needs schemes
Childrens Savings Plans
Retirement benefit schemes

Risk and Investment

The risk return trade-off..

Investment horizon
Sector funds
Growth Funds

Index, Active diversified

Balanced Funds

Ratio of Debt : Equity

Debt Funds
Liquid Fund

Risk

Risk and Investment

Investment Pyramid
Investor Portfolio Composition
Capital Growth
Risk: Medium to High
Period: 3 to 5 years
Income
Risk: Medium to Low
Period: 1 to 3 years
Capital Preservation
Risk: Low to Medium
Period: Less than 1 year

Stocks
Growth
Funds
Bonds
Debentures
Income/Bond Funds
Company Fixed Deposits
Money Market Funds
Short-term Deposits /Government Paper

Why Mutual fund?

Why invest in a mutual fund?..(1)

Professional Management:
Experience and resources to thoroughly analyze the
economy/markets to spot good investment opportunities

Why invest in a mutual fund?..(2)

Diversification:
Reduces the risk to which you would've been exposed
by investing in a single stock/bond Invests in a broad
cross section of industries or companies - negative
performance of one security will not have as much
of an impact on the fund

Why Mutual fund?

Why invest in a mutual fund?..(3)

Liquidity & Convenience:
You will be able to get your money back within a short period as
compared to other securities

Very little paperwork

Helps avoid problems such as bad deliveries, delayed
payments and unnecessary follow up with brokers and
companies

Why Mutual fund?

Why invest in a mutual fund?..(4)

Tax Efficiency:
Some mutual fund schemes offer tax benefits under
Section 80(C ) .
Dividends declared under mutual fund schemes
are tax free in the hands of the investor*
Mutual funds offer favorable post tax returns
Subject to Dividend Distribution tax
in Non Equity Funds

How you make money in Mutual fund?

How do I make money from a mutual fund?..(1)

Capital appreciation:
As the value of securities in the fund increases, the fund's unit price will
also increase. You can make a profit by selling the units at a price higher
than at which you bought

Income Distribution:

The fund passes on the profits it has earned

in the form of dividends

The right scheme

How to choose the right scheme

Determine your financial goals and your time horizon
Determine your tolerance for risk
Study the objectives of the funds available
and match them with your need

The right Fund house

How to choose the right fund house

Look for:
Professional management
Performance track record
Quality of service
Choice of schemes

The winning combination

How to make the winning mutual fund investment(1)

Start Early
Save regularly
Use a portfolio approach spread your investments across sectors
and asset classes
See that your portfolio contains both short term and long term investments

How to make the winning mutual fund investment(2)

Monitor your investment portfolio periodically in light of market changes and
changes in your life
Stay calm, steady and disciplined keep your goals firmly in sight do not get
carried away by emotions or temporary market fluctuations

Basics of Systematic Investing

& Asset Allocation
Systematic Investing

Systematic Investing

What is Systematic Investing?

The term systematic investing, applies to the process
of investing regularly i.e. at fixed intervals, say, monthly
or quarterly.

Why should one systematically invest?

When chasing a financial goal, the simplest form of
planning is to invest regularly
Most of us calculate our earnings, expenses and savings
monthly. The easiest way to plan our investments,
therefore, is on a monthly basis

Systematic Investing- Basic Issues

Why don't most people save regularly?

1.
2.
3.
4.

Lack of awareness/ concern/ planning for financial goals

No money left after monthly expenses
Hassle of keeping track of investments
Unaware of power of compounding

Systematic Investing

The mother of all equations

FV = PV (1 + r)n
FV = Future Value
PV = Present Value
r = Rate of Return/ Coupon Rate
n = No. of compounding periods

Systematic Investing

Enhancing Future Value

n
n
FV = PV (1 + r)

The more you

save, makes a
difference

The more
you earn,
makes a
difference

The sooner
you start,
makes a
difference

The power of compounding

The Power of Compounding

The more you save, makes a difference

Growth rate of 7% p.a.

Total Amount
Saved

Value after 25
years

5,000

1,500,000

4,073,986

3,000

900,000

2,444,391

1,500

450,000

1,222,196

1,000

300,000

814,797

Amount saved per

month

The above example is just for the explanation purpose.

The Power of Compounding

The power of compounding
The Power of Compounding

The sooner you start, makes a difference

Rs. 1000 invested p.m. @8%
CAGR

Total Amount
Saved

Value at the
age of 60

25

420,000

2,309,175

30

360,000

1,500,295

35

300,000

957,367

40

240,000

592,947

Starting Age

The above example is just for the explanation purpose.

The power of compounding

The Power of Compounding

The more you earn, makes a difference

Rs. 1000 invested pm
Growth Rate

Value after 10
years

Value after
25 years

8%

184,166

957,367

10%

206,552

1,337,890

15%

278,657

3,284,074

20%

382,364

8,626,708

The above example is just for the explanation purpose.

Save for future

Savings is for Future Goals

Life objective- cost structure

The Arithmetic of Financing Life

Objective

Years to go

Current Cost

Future Cost

Build a house

25 lacs

32 lacs

Sons MBA

10

5 lacs

7.5 lacs

Daughters
marriage

15

5 lacs

12 lacs

Retirement Fund

25

40 lacs

100 lacs

Volatility- Cost averaging

Making Volatility Work for you

Rupee Cost Averaging
Month

Amount Invested
(Rs.)

Sale Price (Rs.)

No. of Units
Purchased

1000

12

83.333

1000

15

66.667

1000

111.111

1000

12

83.333

TOTAL

4000

48

344.444

Average Sales Price of Units : Rs. 12 ( i.e. Rs. 48/4 months)

Average Purchase Cost of Units : Rs 11.61 ( i.e. Rs. 4000/344.444 units)

SENSEX - and Sensibilities

Time Matters not Timing

Scheme

Date

NAV

Date

NAV

CAGR(In%
)

Franklin India Bluechip

5/31/1996

15.65

7/30/2003

30.39

10.12

Franklin India Prima Fund

5/31/1996

13.21

7/30/2003

45.75

19.47

HDFC Equity Fund

5/31/1996

7.19

7/30/2003

32.214

23.9

Reliance Growth

5/31/1996

11.14

7/31/2003

43.75

22.1

Reliacne Vision

5/31/1996

11.23

7/31/2003

37.58

19.03

HDFC Top 200

5/31/1996

7/30/2003

24.433

Sensex

5/31/1996

3724

7/30/2003

3780

0.01

S & P Nifty

5/31/1996

1089

7/30/2003

1183

0.02

CNX Midcap

5/31/1996 N.A.

7/30/2003

1402

Time Matters not Timing

No.

Particulars

Value
Investment on
as on
14-Feb-2000
21-Sep-2001

Value
Absolute
as on
Growth
23-Nov-2004

SENSEX

5924.32

2600.12

6009.86

1.44%

HDFC Equity Fund

1,00,000

51,179

2,12,360

112 %

Franklin Blue Chip

1,00,000

66,222

2,02,540

102 %

Reliance Vision Fund

1,00,000

41,240

2,55,610

155 %

HDFC Prudence Fund

1,00,000

71,651

2,35,370

135 %

Tata Pure Equity

1,00,000

43,927

1,82,630

82 %

Franklin India Prima

1,00,000

45,550

2,56,670

156 %

HDFC Top 200

1,00,000

46,002

1,69,780

69 %

Pru ICICI Power

1,00,000

45,433

2,21,220

121 %

Reliance Growth

1,00,000

26,818

2,21,750

121 %

Its easy- convenient

Unmatched Convenience
Minimum investment of Rs.500 on a monthly or quarterly basis
Choice of post-dated cheques or direct debit with selected banks
Cheques payable anywhere in India accepted
Statement of account provided with each transaction

Note: Some of the above facilities are available with investments in select funds and/ or at select
centres. Please refer to offer document for specific details.

Asset allocation- find the right combination

What is Asset Allocation?

Its about diversifying ones portfolio among asset
classes such as bonds, stocks, real estate, or cash.
Its referred to in terms of the target percentages for each
asset class. For example, a portfolio could have a mix of 60
percent stocks, 30 percent bonds and 10 percent cash.
Its the financial representation of an investors personality:
the ideal asset allocation is one that best balances an
investors profile and objectives

Asset allocation- find the right combination

Significance of Asset Allocation

Significance Relative to Return
Brinson, Hood and Beebower :
Determinants of Portfolio
Performance, 1986, 1991: Asset
Allocation helps explain over
93% of a portfolios
performance.

Asset allocation- find the right combination

Suggesting the Right Allocation

Profile the client for ability and willingness to take risk
Match with clients objectives
Iron out mismatches, if any

Asset allocation- find the right combination

Making Asset Allocation Work

Review of objective - EXAMPLE
Periodic Review
Years to goal

Equity Allocation %

TODAY

10

70%

After 5 yrs

60%

After 7 yrs

40%

After 9 yrs

10%

A periodic review of objectives can ensure an investor is not left at

the mercy of the equity markets when he needs his money

THANK YOU

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