AMFI Training- Advisors’ Module

A Joint Venture with Standard Life Investments

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 money in line with the
common objective.
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 (1993-95) Entry of Private players
 Phase IV (1996 onwards) SEBI regulation of
Mutual Funds
Types of Mutual Funds Schemes

Wide Range of Choices - to suit one and all

By Constitution

By Investment Objective

By Nature of Investments

By Constitution

OPEN-END CLOSE-END
 No fixed maturity  Fixed Maturity

 Variable Corpus  Fixed Unit Capital

 Not Listed  Generally Listed

 Buy from and sell to  Buy and sell in the

the Fund Stock Exchanges

 Entry/Exit at NAV  Entry/Exit at the

related prices market prices

By Constitution

 Load or non load funds

 Tax exempt or non tax exempt

 Nature of Investments
 Financial Assets (Equity/Debt/Money Market)
 Physical Assets (Metal/ Real Estate)
Investment objective / patterns

 Growth - Equity
 Income - Debt
 Balanced - Equity and Debt
 Money Market - Liquid Debt
 Tax Saving - Equity
 Specialised - Equity
 Assured Return - Equity and Debt
Aggressive Growth Funds

 Objective - Aggressive Capital Growth

 Investment Pattern
EQUITY OF
 Less researched Companies
 Speculative and momentum stocks
 Suitable for investors who are comfortable in
taking high risk.
 Diversified Growth Funds

 Objective - Capital Growth

 Investment Pattern - Weightage
EQUITY of
 Well researched and high market cap companies
 Debt
 Money market securities
 Minimum time recommended for investment to deliver
expected returns - 5 years +
 Suitable for investors looking at capital growth over a
longer period of time
Other variety of equity funds

 Specialised Funds
 Sector Funds
 Offshore Funds
 Small Cap Equity Funds
 Option Income funds - writes options
 ELSS - Indian Variety
 Equity Index Funds
 Value Funds
 Equity Income Funds - invest in co. with higher
dividend yields i.e. power/utilities
Other equity oriented funds ...

 Hybrid Funds
 Balanced Funds
 Growth & Income Funds
 Assets Allocation Funds

 Commodity Funds

 Real Estate Funds

 Debt Funds

 Diversified Debt Funds

 Focussed Debt Funds
 Sector / Specialised / Offshore
 Municipal bonds / infrastructure cos bond funds
 Mortgaged backed
 High yield debt funds
 Assured Return Funds - Indian variety
 Liquid Funds
Advantages of Mutual Funds

AFFORDABILITY
PROFESSIONAL MANAGEMENT
REDUCTION/DIVERSIFICATION OF RISK
REDUCTION OF TRANSACTION COSTS
LIQUIDITY
CONVENIANCE AND FLEXIBILITY
 Mutual Funds:
A Packaged Product

Professional
Management Diversification

Convenience
Liquidity
Tax Benefits
Your needs

 Short Term  Banks / Liquid Funds

 Medium Term  Debt or Debt Related

 ( 1 to 3 years) Funds
 (3 to 5 years)  Mix of Debt/Equity or
funds with an appropriate
mix (Balance)
 Long Term  Equity or Equity Related
Funds
MUTUAL FUND - FRAMEWORK- India
Sponsor

Trustee Company Asset Management Company

Fiduciary Fund Operations Marketing

responsibility to Management

the Distribution
Brokers Registrar
Custody
Investors
Markets Bank
 What is the Structure Here?

Foreign
Sponsor Trustee
Partner

Asset Management Other Service

Company
Trust Providers

Scheme 1 Scheme 2 Scheme 3

HDFC Mutual Fund Standard Life Investments

HDFC Ltd. Computer Age Management
HDFC Trustee Co Ltd. HDFC Bank
HDFC Asset Management Co. Ltd. MFund
 The MF Structure
TRUSTEE
 TRUSTEES:Manages the Mutual Fund and look after the operations
of the appointed AMC.
 The investments are held by the Trustee.
 The beneficiaries from the assets are the unit holders.
 The trustees have a fiduciary responsibility.
 Trustees approve each MF scheme floated by AMC.
 Trustees receive fees for their services.
 Trusts are formed through “Trust Deed”
 “Furnish report to SEBI on half yearly basis on AMC and Fund
functioning”
 AMC: Acts as investment manager of the trust under the board
supervision and direction of the trustees
The Sponsor & The AMC
 A sponsor appoints the asset management company.
 Sometimes, this power is given by the sponsor to the
trustees through the trust deed.
 The AMC acts as the Investment Manager of the MF
 At least 50% of directors on the board of asset
management company should be independent of the
sponsor.
 Asset management company shall not deal with any
broker/firm associated with sponsor beyond 5% of daily
gross business of the MF.
 Regulators for MF industry

SEBI
 All Mutual Funds / AMC/ Trustee Companies to be
registered with SEBI

 Responsible for protecting investors interest and

promote orderly growth of Mutual Fund Industry

 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
 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.

Ministry of Finance

 Supervises both SEBI and RBI

 Ultimate policy making & supervising body

 Appellate Authority for any disputes over SEBI

guidelines
 Investor’s rights

 Proportionate ownership in scheme’s 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
 Investor’s rights & Obligations

 Rights - Legal Limitations

 Unit holder’s 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
 Beware of risk factors
 Must monitor investments regularly
Investor’s complaint redressal mechanism

 Client Servicing

 Compliance Officer

 Investors cannot be protected by companies

Act.
 Mutual Fund - The Top Scorer

FDs FI Bonds MutualFunds

Accessibility Low Low High

Tenor Fixed (Medium) Fixed (Long) No Lock-in
Min. Invest. Rs. 10000 Rs. 5000 Rs. 500
Tax Benefits None 80L,88 Depends

Liquidity Low Very Low Very High

Convenience Medium Tedious Very High
Transparency None None Very High
The Offer Document
What is offer documents

 Contains the details of scheme.

 Like Prospectus of an IPO
 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 describes the
fundamental attributes of schemes.
 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.
 Offer Document (OD)

 All ODs are to be approved by the trustees of a mutual

fund,ODs are prepared and issued by an asset
management company’
 All ODs are filed with SEBI with filing fees (Rs. 25,000)
 Modifications, if any, are advised by SEBI within 21
working days from the date of its filing
 Close ended fund: the time of issue
 Open ended fund: revision after every two years
 Mandatory Information
 Details of the Sponsor
 Description of the scheme and investment
objective/strategy
 Terms of issue
 Historical statistics
 Investors’ Rights and Services

Key Information Memorandum that is distributed

with the application form is an abridged version of
the offer document.
Investment Options & Features

 Options
Growth
Dividend and Dividend Reinvestment
Plans
Systematic Investment Plan - SIP
 Value Averaging Plan - VAP
 Systematic Withdrawal Plan - SWP
Systematic Transfer Plan - STP
 Other
 Nomination facility
 INVESTMENT PLANS

Automatic Reinvestment plan

ARP is also called Growth option

Allows investor to reinvest in additional units the
amounts of dividends or other distributions
They do not receive dividends
Reinvestment takes place at ex-div NAV
‘Investor reaps benefit of Compounding’
Some funds allow reinvestment in other schemes of
same fund family.
 Automatic & Voluntary Accumulation Plans

 To inculcate saving in a disciplined and phased manner

 Investor gets flexibility of the amount and frequency of
Investment in VAP while a fixed sum in AIP periodically.
 Through AIP & VAP Investment can only be in Open end
schemes
 AIP is a contractual obligation of the Investor to keep investing
 In VAP Investor is not obliged to keep investing, but has
voluntary self discipline
 Investment accounts are maintained for both VAP and SIP
 Benefit of Rupee cost Averaging
Systematic Withdrawal Plan

 Allows Investor to make Periodic withdrawals from Fund

Investment accounts
 Amount withdrawn is treated as redemption of units at the
applicable NAVs
 They are different from MIPs, because MIPs pay any
income generated on the capital.
 Hence, Dividend Tax is not levied on SWP, whereas it is
levied for MIPs with more than 50% in debt.
 Systematic Transfer Plans

 Allows investor to transfer on a periodic basis a specified

amount from one scheme to another within same fund
family.
 The redemption or investment will be at applicable NAV
 It is necessary to maintain a minimum balance under both
the schemes.
 The service allows the investor to manage his Investments
actively to achieve his objectives
 Who can Invest ?

 Resident Indian Individuals

 Indian Companies
 Trusts / charitable institutions / PFs
 Banks/ FIs / NBFCs
 Insurance Companies
 NRIs/ OCBs/ FIIs
 Partnership firms etc.
 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
 An Example

 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 is influenced by Purchase and Sales of Securities,
Valuation of Investment Securities, Sale and Redemption of Units
and Other Assets and liabilities
 Loads

 Entry Load or front ended load

Paid at the time of purchase
Sale Price = NAV / (1- Sales Load, if any)
 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 not more than 107% of the 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
Example1: NAV= Rs 100, Sales Price= Rs 105
OES- Min. Rep Price= Higher of 93 and 105*0.93=97.65
 CES- Min. Rep Price= Higher of 95 and 97.65
Example 2: NAV= Rs 100, Sales Price= Rs 102
OES- Min. Rep Price= Higher of 93 and 102*0.93=94.83
CES- Min. Rep Price= Higher of 95 and 94.83
MUTUAL FUND ACCOUNTING &
VALUATION
 FEES & EXPENSES

Initial Issue
Transaction Annual Recurring Expenses
Cost Expenses
Entry / Exit load AMC Fee
Custodian Fee
CDSC for no-load Registry Exp.
schemes Trustee Fee
Audit Fee
Mktg. & Selling Exp.
Brokerage Exp.
Others
 Fees & Expenses
 Initial Issue expenses
For launching of the scheme
Can charge up to 6%
Amortized in 5 Years for OES & over the period of
scheme for CES
 Recurring Expenses
Mkt & selling exp including brokerage
Transaction cost
R&T cost
Custodian Fees
Audit fees etc
Investor Communication’s cost
 Fees & Expenses

 Amc can charge Investment management fee to the fund

on weekly avg. net assets. It is a part of the Recurring
Expenses with its own limits:

 The limits are: (Subject to overall limit of 6%)

1.25% for up to Rs.100 cr Of weekly avg net assets
1% for amount in excess of Rs.100 cr.
No Load schemes can charge an additional fee of 1%
 Fees & Expenses

Total Expenses that can be charged to the Fund ( excluding

entry and exit loads):
Other Sch. Pure- Debt
On the first Rs.100 cr 2.50% 2.25%
On the next Rs.300 cr 2.25% 2.00%
On the next Rs.300 cr 2.00 % 1.75%
On the balance assets 1.75% 1.50%

Based on average weekly net assets

 MUTUAL FUNDS - FEES

 Initial issue expenses

Can Charge to the scheme capped at 6% of the initial resources
raised under that scheme

 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%
 AMORTISATION

Initial Expenses amortisation for load schemes -

 For close-ended schemes - on a weekly basis over the period of

the scheme
 For open-ended schemes - annually over a period not greater
than 5 years
 Un-amortised portion to be added to other assets for
computation of NAV- No AMC fees on this
 Amortization not part of normal recurring expenses
 MF Balance Sheet

 MF BS is different from a bank or a company. MF have

special requirements concerning accounting for the fund’s
assets, liabilities and transactions with investors and other
outside constituents such as banks, securities custodians
and registrars.
 Follows accounting policies laid down by SEBI regulations
1996.
 Unit Capital is mentioned as Unit Capital only and not as
Assets
 Accounting Policies
Investments to be marked to market.
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 ex-dividend / ex-
bonus dates and not on declared dates.
Income receivable on Invst NOT accrued for more than 3
months , should be provided for.
For determining gain/ loss on investments - avg cost is to be taken
 Provision for NPAs

3 months after classification as NPA: 10%

6…………………………………… : 30%
9…………………………………… : 50%
12………………………………… : 75%
15………………………………… :100%
 Mutual Fund Valuation

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
 Thinly traded debt security

 Traded value < Rs. 15 crores in a month.

 Add value traded on all exchanges to compute this figure.
 Such security to be valued using the method for non-traded
debt security.

 Valuation of Non-traded Securities

 Valuation of equity instrument is on the basis of
capitalization of earnings solely or in combination with its
balance sheet net asset value.
 Capitalization rate will be determined by reference to the
Price or earning ratios of comparable traded securities with
an appropriate discount for lower liquidity to be used.
 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 totalling more than 10% of total
Large account holdings- More than 25% of NAV
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
MF’s and Tax Benefits

 Income Tax Benefits

 Equity funds - 10% TDS, 2% surcharge
 Debt Funds - Dividends are taxable
 Benefit up 20%/15% (depending on your Income
Slab) of investments up to Rs. 10,000/- invested
under ELSS (section 88)
 Capital Gain Benefits - Section 112 (1)
 Long term capital gain tax of 10% without
indexation,or
 Long term capital tax of 20% with indexation
 There is 2% surcharge
 Indexation

Mr. X invests Rs. 2,00,000 in FY 97-98 MF units

After 1 year, he liquidates the asset to get Rs. 2,40,000.
His tax returns would be:
Without Indexation- 40000*10% = Rs 4,000
CII 99-00 : 389, CII 97-98 : 331, Ratio : 389/331 = 1.18
Indexed Cost (2,00,000 x 1.18) = Rs. 2,36,000
Capital Gains – Rs. 4,000
Long-term tax liability of Mr. H: Rs. 4,000 * 20%= Rs. 800
 Taxation

 In case of individuals and Hindu Undivided

Families a deduction upto Rs. 9000 from the
total income will be admissible in respect of
income from investments specified in Section
80L, including income from Units of the mutual
Fund.
 Units of the scheme(s) are not subject to
Wealth-Tax and Gift-Tax.
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 Co’s - 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

 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
 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.
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
Change in NAV
For NAV change in absolute terms =
(NAV at end of period - NAV at beginning of period) * 100
NAV at beginning of period

For NAV change in annualised terms =

( NAV change in % in absolute terms) * (365 / No. of days )

 Applicable for the Growth and Automatic Reinvestment

Plans.
Does not account for Dividend Distributions and allocation
of units against the dividends
 Total Return
 Takes into account the dividends distributed by the fund
 [(Distribution+Change in NAV)/NAV at the beginning]*100
 Suitable for all categories of funds,more accurate than first
method
 Ignores the possibility of reinvestment of dividend

Return on Investment (R.O.I)

Computes the total return with reinvestment of dividends in the fund at

ex-dividend date.
ROI = [(Units held + div./ex-d NAV)*end NAV]-begin NAV /begin
NAV*100
Accepted by MF tracking agencies(Credence and Value research)
Suitable for accumulation plans, monthly/quarterly income
schemes,debt funds distributing interim dividend.
 Examples
1. Changein NAV
Nav on day 1 = Rs.10
Nav on day x = Rs.12
% Change in nav = dayx-day1/day1 * 100
= 2/10 *100 = 20 %

2. 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%
3.Return on Investments - most suitable

Nav on day 1 = Rs.20

Dividend = Rs.4 per unit. Ex-Div. 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
Return = ((Nav on year end*total units )-day1
nav))/ day 1 NAV* 100

= ((22*1.19)- 20))/20*100 = 3 0.9%

 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
All these information are available from Fund Factsheet,
Newsletter, Sales meet / Mailers etc
 Fund Mergers & Take overs

 Mergers of two AMC

Provisions of Cos Act
Approval of high court and SEBI
75% unit holders consent
 Scheme takeover (Apple and Birla)
Unit holders permission - 75%
SEBI’s permission
 Fund Mergers & Take overs

 AMC taken over by other sponsor

 (a. Zurich - 20th Century b. ITC Threedneedle - Zurich c.
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
 Instruments in the market

 Equity
 Ordinary shares
 Pref. shares
 Equity warrants
 Convertible Debentures
 P/E Ratio
 Dividend Yield
 Cyclical / Growth / Value Stocks
 Market Capitalisation = Sum total of
 CMP of shares * no. of shares outstanding
Approach/Strategy to Fund Management

 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
 Debt instruments

 Corporate Debentures
 Zero coupon bond
 Floating rate bonds
 G-Sec, CP, T-Bills
 Commercial Deposits
 Banks/ FIs/ PSU Bonds
 Risk in a Debt Fund

 Interest Rate Risk

 Credit Risk (Asset quality)
 Reinvestment Risk
 Call Risk
 Liquidity
 Inflation
 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.
 Terms used in MFs

 Par Value or face value

 Coupon
 Maturity
 Call or put option
 Current Yield
 Yield Spread
 Duration - % change in bonds’ price with change in the
yields by 1%.
 ExMark:Funds performance in relation to the benchmark index
 It is from 0-100. With 100% meaning highest relation
 An index fund has Ex Mark of 100%
 If Ex Mark is lower than 80% fund is less predictable in
relation to index and may be riskier
 Beta:Measures sensitivity of the fund’s returns to changes in the
market index
 Beta of 1: Fund moves with market (Index fund)
 Beta of less than1: less volatile than market (conservative
portfolio)
 more than 1: higher volatility than market (software fund)
 Gross Dividend Yield: Funds reported yield gross before
expenses and net after expenses
 Higher for “value funds”than “growth funds”
 What your savings can generate ?
--------------- Rate of return
One - time 8% ---------------
10% 12%
investment
(in Rs.) (at the end of 15 yrs.)*

200,000 6,34,434 8,35,450 10,94,713

100,000 3,17,217 4,17,725 5,47,357

50,000 1,58,608 2,08,862 2,73,678

20,000 63,443 83,545 1,09,471

10,000 37,722 41,772 54,736

* for an initial one time investment compounded annually for a 15 year period
 What your savings can generate ?
--------------- Rate of return
Savings Total amount 8% ---------------
10% 12%
per month invested
(for 15 yrs.) (in Rs.) (at the end of 15 yrs.)*

5000 9.0 lacs 17.5 lacs 20.9 lacs 25.2 lacs

4000 7.2 lacs 13.9 lacs 16.8 lacs 20.2 lacs

3000 5.4 lacs 10.4 lacs 12.6 lacs 15.1 lacs

2000 3.6 lacs 6.9 lacs 8.4 lacs 10.1 lacs

1000 1.8 lacs 3.5 lacs 4.2 lacs 5.0 lacs

* monthly instalments, compounded monthly, for a 15 year period

 REGULAR SAVINGS
THE SIMPLEST WAY TO COMBAT INCREASING HOUSEHOLD
EXPENDITURE

35.12
28.31
22.8

Rs. In Lacs
15.01

8% 10% 11% 12%

% Per annum
Rs. 1000 saved every month for 30 years can grow to
a sizeable amount of wealth
depending on the return generated on these savings
 THE POWER OF COMPOUNDING

2 year old Charu’s parents

Rs. 10.6 lacs
invests Rs. 5,000 monthly for 5
years. They do not withdraw
any money.

12 year Rahul’s parents invest a

similar amount i.e. Rs. 5,000. They
invests for 5 years and they too do Rs. 3.9 lacs
not withdraw any money

0 2 5 8 11 14 17
 So, how do we
plan our investments ?
First, consider your….

 Financial goals
 Risk-taking ability
 Expected Return
 Investment Period
 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 client’s
-- 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
 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

 Financial Planning. . . . . Elaborated

 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
 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 Investment Need

To protect living Financial needs served
standards, current and through investments
survival requirements and savings
- Regular Income - Children education
- Retirement Income - Housing
- Insurance Cover - Children professional
growth
Asset Allocation and Model Portfolio
 Recommended Model
Portfolios . .

 Accumulation Stage:

- Investible surplus available

- Financial goals are not near term

• Diversified Equity 65 – 80%

• Income & Gilt 15 – 30%
• Liquid Funds & Bank Deposits 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 70 – 80%
• Diversified Equity or Balanced Funds Balance

- LOWER RISK APPETITE:

• Income , Gilt and Liquid Funds 70 – 80%
• Diversified Equity or Balanced Funds 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 50%
- Govt. securities fund 25%
- High grade corporate bond fund 25%

 Basic Indexed Portfolio

- Stock market index fund 50%
- Bond market index fund 50%
 Asset Allocation Strategies
 Simple Managed Portfolio
- Balanced Fund 85%
- Medium term bond fund 15%
 Complex Managed Portfolio
- Diversified equity fund 20%
- Aggregate growth fund 20%
- Specialty Funds 10%
- Long term bond funds 30%
- Short term bond funds 20%
 Readymade Portfolio
- Single Index
- Equity 60%
- Debt 40%
 Bogle’s Strategic Allocation

 Combines investors age, risk profile and

preference in asset allocation
 Older investors in distribution phase
- 50% Equity, 50% Debt
 Younger investors in distribution phase
- 60% Equity, 40% Debt
 Older investors in accumulation phase
- 70% Equity, 30% Debt
 Younger investors in accumulation phase
- 80% Equity, 20% Debt
 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 50%
- High yield bond, growth & income funds 25%
- Conservative money market funds 25%

 Young Couple: Double income, 2 Children

- Money Market Funds 10%
- Aggressive Equity Funds 30%
- High Yield Bond & Long Term Growth Funds 25%

- Municipal bond funds 35%

 Recommended Model
Portfolios . .
 Older couple single income
- Short term municipal funds 30%
- Long term municipal funds 35%
- Moderately aggressive funds 25%
- Emerging growth equity 10%

 Recently retired couple

- Conservative equity funds 35%
- Moderately aggressive equity funds 25%
- Money market funds 40%
Fund Selection
 Equity Fund Selection . . . . . .

 Form categories based on risk-return profile

- Diversified , Index , Sectorial & Specialised

 Form categories based on fund manager’s 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
 Equity Fund Selection . . . . . . . .

 High R Squared , Low Beta And High

Dividend yield 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 Growth Income Liquidity

(Years) (Equity) (Bonds) (Banks)
25- 40 75% 15% 10%

41- 50 50% 35% 15%

51- 60 35% 45% 20%

Above 60 25% 50% 25%

The Risk Return Trade-off
Hedge Funds

Growth Funds Sectoral Funds

Potential
Aggressive, Value,
for Growth
return
Debt
Funds Balanced Funds
Gilt Funds, Bond Ratio of Debt : Equity
Funds, High
Yield Funds

Liquid Funds
Risk
 Equities are the best long term bet
percentage of studied period in which

Other 14%
investment
outperformed 37%
44%
Stocks
outperformed
56% 86%
63%
1 year 3 year 5 year
Source : RBI Report on Currency and Finance (1997-98)
BSE Sensitive Index of Equity Prices - BSE
Equities are the best long term bet
Cumulative annualised returns (1980 - 98)
25.0%
20.16%

20.0%
14.47%
15.0%
9.2% 9.74%
7.62%
10.0%

5.0%

0.0%
Inflation Gold Bank FD Co. FD Equities

Inflation Gold Bank FD Co. FD Equities

Source: RBI report on Currency & Finance (1997-98); BSE Sensitive index of Equity prices - BSE
Remember :

1. Investment Decision Are Long Term Decision

2. 1% Superior Return Can Make 20%
Difference in 25 Years.
3. Understand the Virtues of Rupee Cost
Averaging
4. Discipline Is More Important Than
Intelligence.
5. Avoid Wastage, Look at Returns Net of Taxes
The Final Lap
 Important Features

70 questions to be answered in 120 mins

Key Area - Financial Planning (60-70%)

DANGER AREA : Negative marking

(0.25% )
 Examination, why ?????

Mandatory requirement

Believe that Mutual Funds will be the

product of the future

Desire to be in this business for the years

to come
 Main Reasons for Failure

1st Online Examination in Life : FEAR PSYCHOSIS

(Appearing for an examination after ???? Years)

Trying to attempt all the 70 questions

QUESTIONS ARE TRICKY ( Nobody has a

solution to Offer)
How to cross this BRIDGE ????

 Be thorough with the Numericals

 Ex. Calculating Loads, Expenses etc. etc.. (NUMERICALS ARE EASY TO SOLVE) - Attempt these questions
First (CONFIDENCE BUILDS UP)

 THEN, Attempt ONLY those questions which you are sure about

 While answering, write the marks of the attempted questions in the paper provided by NSE & TOTAL
IT UP every 30 mins

 When YOUR TOTAL is close to 70-75%, recheck the answers you have marked. If you are confident
of the TOTAL, please STOP Answering further
All the Best !!!!!!
Thank You