IFS Talk Show on MUTUAL FUNDS

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INTRODUCTION

Mutual Fund is 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. When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder.

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Flow / Process of Mutual Funds

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Organization of a Mutual Fund

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SEBI Regulations
The mutual funds are registered and regulated under the SEBI (MF) regulation, 1996

These regulations deal with

Launching of schemes Disclosures in the offer documents

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Investment objectives

Pricing of units
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The SEBI (Mutual Fund) Regulation 1996, contains 11 schedules.

No. Of schedule First schedule Second schedule Third schedule Fourth schedule Fifth schedule Sixth schedule Seventh schedule Eighth schedule Ninth schedule Tenth schedule Eleventh schedule Particular Proforma of various forms to be used Various fees payable by mutual funds Content of the trust deed Content of investment management agreement Code of conduct Advertisement code Restriction on investment Investment valuation norms Accounting policies and standards Initial issue expenses Annual report
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Registration of Mutual Fund

Every mutual fund shall be registered with SEBI through an application to be made by the sponsor in the prescribed profoma, accompanied by a non refundable application fee of Rs.2500.
Every mutual fund shall pay Rs.25 lakh towards registration fee and Rs.2,50,000 p.a. as service fees Registration will be granted by the Board on fulfilment of conditions such as Sponsor having a sound track-record of five years The net worth of the immediately preceding year being more than the capital contribution of the sponsor in AMC and the sponsor showing profits after providing for depreciation
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Regulations as to the Trust

A mutual fund shall be constituted in the form of a trust under the provision.....
Indian Registration Act, 1908(U/S 16 of 1908) and trust deed containing the provisions laid down by SEBI.

What percent of the trustees shall be independent trustees

At least two-third of the trustees shall be independent trustees(who are not associated with an associate, subsidiary or sponsor in any manner).
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Regulations as to AMC
The AMC shall have a minimum net worth of....
Rs.10 crore

What percent of the directors of the Board of Management of the AMC should not be associated with the sponsor or its subsidiaries or the trustees
At least 50 percent
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 Borrowings It shall not borrow more than 20% of the NAV of the scheme and for a maximum period of 6 month
Income distribution All Mutual Funds must distribute a minimum of 90% of their profits in a given year. Underwriting of securities Mutual Funds are permitted to enter into an underwriting agreement after obtaining a Certificate of Registration from SEBI. The underwriting obligation of a Mutual Fund shall not exceed the total NAV of the scheme.
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Pricing of units
Particular Repurchase price Sale price Open end scheme Not less than 93% of NAV Not less than 95% of NAV Close end scheme Not higher than 107% of NAV The difference between repurchase and sales price should not exceed 7%

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Mutual Fund Concepts

Net Asset value Net Asset Value is the market value of the assets of the scheme minus its liabilities on day of valuation. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date.

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Expense Ratio

It is ratio of expenses incurred by a mutual fund for managing a fund to net assets of the fund. The expense represent the proportion of the funds assets that means the expense of the running fund. Expense ratio is charged as a percentage of net assets & subtracted from the investors investment every year.

Entry and Exit Load

Mutual fund incur certain expenses such as brokerage, marketing expenses, communication expenses.These expenses are known as Load and are recovered by fund when it sells the unit to the investors or repurchases units from with holders.

Front End Load

When investors enter into scheme

Back End Load

When investor get out of the scheme

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Assets Under Management (AUM)

Total market value of the assets managed by the investment company on behalf of the investors is known as Assets Under Management. AUM of a scheme is calculated by multiplying the net assets value of scheme by the number of units issued by the scheme.
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Mutual Fund Classification

By Structure

By Investment Objective

Open-Ended schemes Closed-Ended schemes Interval schemes

Growth / Equity Oriented Schemes Income / Debt Oriented Schemes Balanced Funds Money Market / Liquid Schemes

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Special Schemes

Index Fund Schemes Sector Specific Fund Schemes Tax saving Schemes, for ex: ELSS

Other Schemes Fixed Maturity Plans (FMP) Exchange Traded Funds (ETF) Capital Protection Oriented Schemes Gold Exchange Traded Funds (GETF) Quantitative funds Fund of Funds (FOF) Funds Investing Abroad Real Estate Mutual Funds
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Return & Risk in different type of Mutual Funds

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ADVANTAGES
Professional Management Diversification Convenient Administration Potential of giving handsome returns Liquidity Flexibility Well Regulated

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Cont
Low Costs Variety of Schemes Transparency

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DISADVANTAGES
Management Risk Too Much Diversification Taxes Fees & Commissions

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Distribution Channel
Banks

Direct Selling

Customer

Organised Distributors

Financial Advisors

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Association of Mutual Funds in India (AMFI)

AMFI was established in 1993, realising the demand for a common forum for Mutual Fund Industry. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders. AMFI interacts with SEBI and works according to SEBIs guidelines in MF industry. AMFI represent the Government of India, the RBI and other related bodies on matters relating to the Mutual Fund Industry. AMFI undertakes investor awareness programme to promote proper understanding and working of MFs.
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Investment Strategies

Systematic Investment Plan (SIP): Under this a fixed sum is invested each month on a fixed date of a month. Systematic Transfer Plan (STP): Under this plan an investor 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): As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval.
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Advantages of SIP
Habit of investing regularly Power of Compounding Rupee Cost Averaging (RCA) Convenience

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Power of Compounding in SIP

Started Investing At the age of Investment Period Total Amount Invested Corpus at the age of 60 14,17,613 9,14,839

Person A

1000/month

30 35

30 25

3,60,000 3,00,000

Person B 1000/month

Note: Rate of return of 8% compounded has been assumed.

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HDFC Growth Fund

Investment Objective: To provide long term capital appreciation Investment Pattern: 80-100% in Equity 0-20% in Debt & Money Market Benchmark Index: SENSEX Past performance:
PERIOD Last 1 Year Last 5 Years Returns (%) 18.04 16.35 Benchmark returns (%) 10.94 11.50

Since Inception

22.87

14.41

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HDFC Arbitrage Fund

Investment Objective: To generate income through arbitrage opportunities between cash and derivative market Investment Pattern:
Type of instruments Asset allocation (Arbitrage available) 65-90 65-90 Asset allocation (Arbitrage not available) 0-65 0-65

Equity Derivatives (Futures & Options)

Debt Securities & Money market instruments

10-35

35-100

Benchmark Index: CRISIL Liquid Fund Index

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Cont
Benchmark Index: SENSEX Past performance:

PERIOD Last 1 Year Last 3 Years Since Inception Returns (%) 7.80 6.48 6.89 Benchmark returns (%) 6.21 6.22 6.28

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HDFC Monthly Income Plan

Investment Objective: To generate regular returns through investing in Debt & money market instruments Investment Pattern:

25% in Equity 75% in Debt & Money Market Instruments

Benchmark Index: CRISIL MIP Blended Index Past performance:

PERIOD Last 1 Year Last 5 Years Returns (%) 9.11 11.06 Benchmark returns (%) 6.17 7.41

Since Inception

12.18

7.09

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THANK YOU
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