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Indian Institute of Capital Markets Presented By: Amar Ranu Presentation on: Mutual Funds

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Page 1: Presentation on Mutual Fund

Indian Institute of Capital Markets

Presented By:Amar Ranu

Presentation on:Mutual Funds

Page 2: Presentation on Mutual Fund

Indian Institute of Capital Markets

Retail Investors

Investment Objective

Risk Management

NAV

Factsheets

ReturnAUMs

Portfolio

Portfolio

Professional Management

Asset Allocation

Tax Saving

Growth

Fund Manager

Redemption

Open Ended

Investment

Dividend

Close Ended

Exit Load

Entry Load

Sale Price

Repurchase Price

Page 3: Presentation on Mutual Fund

Indian Institute of Capital Markets

Mutual Fund

Snapshot….

Page 4: Presentation on Mutual Fund

Indian Institute of Capital Markets

Page 5: Presentation on Mutual Fund

Indian Institute of Capital Markets

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.

Why did Mutual Funds come into existence?

Page 6: Presentation on Mutual Fund

Indian Institute of Capital Markets

Contents

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Page 7: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Flow Cycle of a Mutual Fund

Page 8: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Page 9: Presentation on Mutual Fund

Indian Institute of Capital Markets

Mutual Funds defined….a flow cycle

Flow Cycle of a Mutual Fund

Page 10: Presentation on Mutual Fund

Indian Institute of Capital Markets

• 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.

Flow Cycle explained…

Page 11: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Diff. b/w MF and Direct Investment

Page 12: Presentation on Mutual Fund

Indian Institute of Capital Markets

• Professional investment management

• Risk reduction through diversification

• Convenience

• Availability of alternative portfolio objectives

• Unit holders’ account administration and services

Mutual fund investing vs. Direct investing

Diff. b/w MF and Direct Investment

Page 13: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Balance sheet of a Bank and Mutual Fund

Page 14: Presentation on Mutual Fund

Indian Institute of Capital Markets

Difference between Bank and Mutual FundMutual Fund Balance Sheet

Liabilities Assets

Bank Balance Sheet

Liabilities Assets

Difference b/w Balance Sheets of MF and Bank

Page 15: Presentation on Mutual Fund

Indian Institute of Capital Markets

Difference between Bank and Mutual FundMutual Fund Balance Sheet

Liabilities Assets

Unit Capital Investment in Financial Securities

Bank Balance Sheet

Liabilities AssetsShare Capital Deposits

Loans and Advances

Difference b/w Balance Sheets of MF and Bank

Page 16: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Organizational Structure of Mutual Fund

Page 17: Presentation on Mutual Fund

Indian Institute of Capital Markets

Organizational Structure of Mutual Fund

Page 18: Presentation on Mutual Fund

Indian Institute of Capital Markets

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.

Trustees• 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.

Organizational Structure of Mutual Fund

Page 19: Presentation on Mutual Fund

Indian Institute of Capital Markets

Custodian • Holds the fund’s 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.

Organizational Structure of Mutual Fund

Page 20: Presentation on Mutual Fund

Indian Institute of Capital Markets

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.

Organizational Structure of Mutual Fund

Page 21: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Classification of Mutual Fund Schemes

Page 22: Presentation on Mutual Fund

Indian Institute of Capital Markets

Each category is classified into more sub-categories.

AMFI Classification of MF SchemesFund schemes

Portfolio objectives Growth & Income High Risk & High Return

Balanced Moderate Risk & Return Liquid & Money Market Fixed Return

Gilt Zero Risk ELSS Tax Saving

Fund of funds Additional diversification ETFs Market Driven

Classification of Mutual Fund Schemes

Page 23: Presentation on Mutual Fund

Indian Institute of Capital Markets

• 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)

Other classification of MF schemes

Classification of Mutual Fund Schemes

Page 24: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Risk-return structure of schemes

Page 25: Presentation on Mutual Fund

Indian Institute of Capital Markets

Risk –Return of different schemes

Risk-return structure of schemes

Page 26: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

History of Mutual Funds in India

Page 27: Presentation on Mutual Fund

Indian Institute of Capital Markets

1964

1987

1993

2009 ?

Phases of Mutual Fund Industry in India

History of Mutual Funds in India

Page 28: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Regulatory Aspects

Page 29: Presentation on Mutual Fund

Indian Institute of Capital Markets

• 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

Regulations

Regulatory Aspects

Page 30: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Portfolio Management Process

Page 31: Presentation on Mutual Fund

Indian Institute of Capital Markets

Portfolio Management Process

Portfolio Management Process

Page 32: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Risk Management

Page 33: Presentation on Mutual Fund

Indian Institute of Capital Markets

Risk Management FunctionRisk 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 & distribution

New product development, selling & distribution

Other business risk Critical knowledge loss, skills shortage, third party risk •Disaster recovery & business contingency plans.

•Insurance against third party loss (R&TA), arising from error & omission.

Risk Management

Page 34: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Investment Checklists

Page 35: Presentation on Mutual Fund

Indian Institute of Capital Markets

• Draw up your asset allocation– Financial goals & Time frame (Are you investing for retirement?

A child’s 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)

Investing Checklist

Investment Checklists

Page 36: Presentation on Mutual Fund

Indian Institute of Capital Markets

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.

Investment Checklists

Page 37: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Mutual Fund Comparison

Page 38: Presentation on Mutual Fund

Indian Institute of Capital Markets

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

Mutual Fund Comparison

Page 39: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Expenses

Page 40: Presentation on Mutual Fund

Indian Institute of Capital Markets

Expenses of Mutual FundAccounted for in FUND RETURN Not included in FUND RETURN

Management fee* Front end sales load Group fee* Back end sales load

Performance fee* Transaction fee Administrative fee* Redemption fee

Brokerage costs Account maintenance fee Interest costs Bid ask spreads

• An asterisk * indicates fee which is included in a fund’s expense ratio.• As per SEBI Rule, expense ratio should be 2.5% for equity & 2.25% for

debt fund of fund value.

Expenses

Page 41: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Tracking Mutual Funds

Page 42: Presentation on Mutual Fund

Indian Institute of Capital Markets

• 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

Keeping Track…

Tracking Mutual Funds

Page 43: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Warning Signals

Page 44: Presentation on Mutual Fund

Indian Institute of Capital Markets

• 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.

Warning Signals

Warning Signals

Page 45: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

AUM movements in India

Page 46: Presentation on Mutual Fund

Indian Institute of Capital Markets

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.

AUM movements in India

Page 47: Presentation on Mutual Fund

Indian Institute of Capital Markets

Indian Asset Management Industry - Growth in Assets

Total Assets Under Management as on March 2009 – Rs 493286 croresTotal No. of players - 36

AUM movements in India

Page 48: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

Penetration of Mutual Funds

Page 49: Presentation on Mutual Fund

Indian Institute of Capital Markets

Penetration vis-à-vis Other Financial Products

Note: Penetration of Mutual Funds is still low as compared to Banks and Insurance Companies.

Penetration of Mutual Funds

Page 50: Presentation on Mutual Fund

Indian Institute of Capital Markets

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemes

History of Mutual Funds

in India

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?

What Mutual Funds are not?

Page 51: Presentation on Mutual Fund

Indian Institute of Capital Markets

• 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’

What Mutual Funds are not?

Page 52: Presentation on Mutual Fund

Indian Institute of Capital Markets

Thank You