Basics of Mutual Funds - RAJ (2)

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Mutual FundsWhat, Why and How



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...Graphically speaking...MFStep 1 : Make investments

Investor community

Step 5: Returns provided to investors

Earnings to the

Fund House/ Distributor

Step 4: Expenses

deducted

from the returns

Various Assets

Mutual Fund- Know now



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- Investment



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)


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




Types of growth funds

Diversified Funds

Sector Funds

Index Funds


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




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- Types



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

Mutual Fund- Other Schemes



The risk return tradeThe risk return trade--off..off..

Risk

Investment horizon

Liquid Fund

Debt Funds

Balanced FundsRatio of Debt : Equity

Growth FundsIndex, Active diversified

Sector funds

Risk and Investment



Investment PyramidInvestment Pyramid

Capital Preservation

Risk: Low to Medium

Period: Less than 1 year

Income

Risk: Medium to Low

Period: 1 to 3 years

CapitalGrowth

Risk: Medium to High

Period: 3 to 5 years

Investor Portfolio Composition

GrowthFunds

Stocks

Income/Bond FundsCompany Fixed Deposits

Bonds

Debentures

Money Market Funds

Short-term Deposits /Government Paper

Risk and Investment



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?




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?




Tax Efficiency:

Some mutual fund schemes offer tax benefits under

Section 88 Dividends declared under mutual fund schemesare tax free in the hands of the investor*

Mutual funds offer favorable post tax returns

�However, some funds are required to pay

dividend distribution tax

Why 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

How you make money in Mutual fund?



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 availableand match them with your need

The right scheme



How to choose the right fund house

Look for:

Professional management

Performance track record

Quality of service

Choice of schemes

The right Fund house



How to make the winning mutual fund investment(1)

Start Early

Save regularly

Use a portfolio approach spread your investments across sectors

and asset classesSee 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 andchanges 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

The winning combination



Basics of Systematic Investing

& Asset Allocation

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




Why don't most people save regularly?

1. Lack of awareness/ concern/ planning for financial goals

2. No money left after monthly expenses

3. Hassle of keeping track of investments4. Unaware of power of compounding

Systematic Investing- Basic Issues



FV = PV (1 + r)n

FV = Future Value

PV = Present Value

r = Rate of Return/ Coupon Rate

n = No. of compounding periods

The mother of all equations




FV = PV (1 + r)n

Enhancing Future Value

The more youThe more you

save, makes asave, makes a

differencedifference

The soonerThe sooner

you start,you start,

makes amakes a

differencedifference

PV nr

The moreThe more

you earn,you earn,

makes amakes adifferencedifference




The more you save, makes a differenceThe Power of Compounding

Past performance may or may not be sustained in future

Growth rate of 7% p.a.Total Amount

Saved

Value after 25

yearsAmount saved permonth

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

The power of compounding



The sooner you start, makes a difference

The Power of Compounding


#VALUE!Total Amount

Saved

Value at the

age of 60Starting Age

25 420,000 2,309,175

30 360,000 1,500,295

35 300,000 957,367

40 240,000 592,947





The more you earn, makes a difference


#VALUE!Value after 10

years

Value after 25

yearsGrowth Rate

5% 155,929 597,991

7% 174,094 814,797

10% 206,552 1,337,89014% 262,091 2,727,278





The more you earn, makes a difference

#VALUE! Value after

10 years

Value

after 25

yearsGrowth Rate

8% 184,166 957,367

10% 206,552 1,337,890

15% 278,657 3,284,074

20% 382,364 8,626,708





Savings is for Future Goals

Save for future



The Arithmetic of Financing Life

Objective Years to go Current Cost Future Cost

Build a house 5 10 lacs 13 lacs

Sons MBA 10 3 lacs 5 lacs

Daughters

marriage

15 5 lacs 9 lacs

Retirement Fund 25 15 lacs 40 lacs

Life objective- cost structure



Making Volatility Work for you

Rupee Cost Averaging

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)

Month Amount Invested

(Rs.)

Sale Price (Rs.) No. of Units

Purchased

1 1000 12 83.333

2 1000 15 66.667

3 1000 9 111.111

4 1000 12 83.333

TOTAL 4000 48 344.444

Volatility- Cost averaging



Sensex- and sensibilities



Time Matters not Timing

Scheme Start DateTotal

InvestEnd Date Value CAGR(In%)

Reliance Growth Gr. 5/31/1996 87000 7/30/2003 215240 24.87

Reliance Vision Gr. 5/31/1996 87000 7/30/2003 219620 25.21

Sensex 5/31/1996 3724 7/30/2003 3780 0.01

S & P Nifty 5/31/1996 1089 7/30/2003 1183 0.02

Time is important



Unmatched ConvenienceMinimum 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.

Its easy- convenient



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 eachasset 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 aninvestors profile and objectives

Asset allocation- find the right combination



Brinson, Hood and Beebower :

Det er minants of Por tfolioPer for mance, 1986, 1991: Asset

Allocation helps explain over

93% of a portfolios

performance.

Significance Relative to ReturnSignificance of Asset Allocation




Suggesting the Right Allocation

Profile the client for ability and willingness to take risk

Match with clients objectives

Iron out mismatches, if any




Periodic Review

Making Asset Allocation WorkReview of objective - EXAMPLE

Years to goal Equity Allocation %

TODAY 10 70%

After 5 yrs 5 60%

After 7 yrs 3 40%

After 9 yrs 1 10%

A periodic review of objectives can ensure an investor is not left atthe mercy of the equity markets when he needs his money




THANK YOU

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Ahmedabad - 380 006. Gujarat. INDIA.

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Basics of Mutual Funds - RAJ (2)

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