New Amfi Material

8/8/2019 New Amfi Material

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AMFI Certification Program


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Mutual Funds

Conceptual Framework


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What is a Mutual Fund ?

A mutual fund is a collective investment thatallows many investors, with a common

objective, to pool individual investments and

give to a professional manager who in turn

would invest these monies in line with thecommon objective.


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What Is a Mutual Fund?

The money thus collected is then invested in Financialmarkets, both Money market instruments like Bonds,

T.Bills & Call Money etc and Capital market instruments

such as shares, debentures and other securities.

The income earned through these investments and thecapital appreciation realized are shared by its unit

holders in proportion to the number of units owned by

them.

A Mutual Fund is a trust that pools the savings of a

number of investors who share a common financial

goal


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Investors

Fund

Manager

Pool their

money with

Securities

Returns

Invest inGenerates

Passed

back to

MF Operation Flow Chart


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Mutual Funds Interesting Statistics

3/4th of all U.S households invest in Mutual funds

There are 3,400 Mutual funds with 30,000 schemes and 50 millionshare holder accounts

The Mutual fund industry in U.S. occupies the premier position inthe financial sector followed by Banking and Insurance.

Japan has 5,400 funds; U.K has 1,400 funds and France has about1,000 funds.


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Mutual Funds THE INDIA STORY

The idea of a first Mutual fund was born out of the vision of

Sri.T. KrishnamachariFinance Minister under Jawaharlal Nehru

U.T.I Act was passed in 1963 leading to the formation ofUnit TrustOf India.

The first open ended scheme was launched in 1964, popularly known

as U.S. 64.

The period 1987 1992 saw the birth of public sector Mutual funds,

S.B.I and Canara bank [1987], LIC [1989], Bank of India and PNB

[1990] , Indian bank [1991]. Private both domestic and foreign players were allowed entry in

1992-1993.

The first private sector Mutual fund was Kothari Pioneer, launchedin 1993 followed by Morgan Stanley in 1994


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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 SEBIpurview

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 (1993 onwards) SEBI regulation of

Mutual Funds


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Types of

Mutual Funds -

Wide Range of Choice


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Types of Mutual Funds Schemes

By Constitution

By Investment Objective

By Nature of Investments


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By Constitution

OPEN-ENDED

No fixed maturity

Variable Corpus

Not Listed

Buy from and sell to

the Fund Entry/Exit at NAV

related prices

CLOSE-ENDED

Fixed Maturity

Fixed Corpus

Generally Listed

Buy and sell in the

Stock Exchanges Entry/Exit at the

market prices


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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)


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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


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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.


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Diversified Growth Funds

Objective - Capital Growth

Investment Pattern

EQUITY of

Well researched and high market capcompanies

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


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Other variety of equity funds

Specialised Funds

Sector Funds

Offshore Funds/International funds

Small Cap Equity Funds ELSS

Equity Index Funds

Value Funds

Equity Income Funds - invest in co. with

higher dividend yields i.e. power/utilities


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Other equity oriented funds ...

Hybrid Funds

Balanced Funds

Growth & Income Funds

Commodity Funds

Real Estate Funds(REITs)


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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

Liquid Funds


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Types ofSchemes

Mutual

Fund Types

Who Should

Invest?

Objective Investment

Portfolio

RISK Ideal

Investment

Horizon

Diversified

Equity

Funds

Large Cap

Mid Cap

Small Cap

Moderate

and

aggressive

investors

Aggressive

investors

High growth

High

Growth

Equity Shares

Equity Shares

High

Very

High

1-3 Years

3- 5 Years

SectorFunds

Thematic

Funds

Contra

Fund

Aggressive

investors

High growth Equity Shares Very high 3-5 Years


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Index

Funds

Moderate

investors

To Generate

returns which

are similar the

returns of therespective index.

Portfolio index

like BSE

Sensex, Nifty

etc.

Returns of

NAV vary

with index

performance

1-3

years

Equity

Linked

Saving

Scheme(ELSS)

Balanced

funds

Moderate and

aggressive

investors

Moderate

investor

Long term

growth with tax

saving

Long term

Equity Shares

Debt & Equity

High

Moderate

1-3 Years

1-3 years

Arbitrage

Fund

Moderate

investor

Short term Equity (Deri-

Vaties)

Moderate Below

1 year


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Bond Funds

Gilt Funds

Short-term

Funds

Salaried and

conservative

investors

Salaried and

conservative

Investors with

surplus short-

term funds

Regular

income

Security

and income

Liquidity

and

moderate

income

Predominantl

y debentures,

Govt.

Securities,

CorporateBonds

Govt

Securities

Call money,

commercial

papers, T-

Bills, Short-

term G-Secs

Credit risk

and interest

rate risk

Interest rate

risk

Little

interest rate

risk

Over 9-12

months

Over 12

months

3 weeks-3

months

LiquidFunds

Investors whopark their funds

in current

account or short

term bank fixed

deposits

Liquidity +moderate

income +

preservatio

n of capital

T-Billscertificate of

deposits,

commercial

papers, call

money

Negligiblerisk

2 days- 3weeks


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Mutual FundsNew Fund Ideas

International Funds

Gold Funds

- ETFs

- Stocks of Gold Mining/Trading companies Real Estate Funds


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Mutual FundsDebt Funds

These are like Fixed Deposits and comes in varying tenors of

30 days, 60 days, 90 days, 180 days,370 days,3 years and soon. The returns are superior to Fixed Deposits due to twofactors.

1. Indexation Benefit

2. Lower incidence of tax

.


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Advantages of

Mutual Funds


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Why Mutual funds?

Stock markets are very sophisticated

Free pricing and integration with world markets

Time , knowledge and luck

Substantial capital for diversification


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Mutual Funds:

A Packaged Product

Professional

Management

Convenience

Tax Benefits

Liquidity

Diversification


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Advantages of Mutual fund

A packaged product

Professional Management

Diversification

Convenient Administration

Return Potential

Low Costs

Liquidity

Transparency

Flexibility

Choice of

Schemes

Tax Benefits

Well Regulated


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Convenience

Easy Way to Invest

Reduces excessive paperwork

Outsourcing of expertise


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Liquidity

Open-ended:

Assures liquidity

As liquid as the banks.

Close-ended:

Buying and selling can be done throughthe stock exchange


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Affordability

Provides an opportunity for a small investor

Invest as less as an amount of

Rs.5000/Rs.500 and in multiples of

Rs.1000/100 depending on the Scheme

(micro SIP) - discuss


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Wide Choice

Offers a VARIETYOF SCHEMES

Meet the investment needs of all Investors


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Your needs

Short Term

Medium Term

( 1 to 3 years) (3 to 5 years)

Long Term

Banks / Liquid Funds

Debt or Debt Related

Funds

Mix of Debt/Equity or

funds with an appropriate

mix (Balance)

Equity or Equity Related

Funds


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MFs and Tax Benefits

Income Tax Benefits in Equity funds(ELSS)

Investment upto 1 lakh underSec 80C


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Capital GainsShort Term Long Term

Equity 15%*(16.995%) NIL

Debt 30%*(33.99%) 20%**/10%***

*plus surcharge(@ 10% + 3%)

**with indexation

***without indexation


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Well regulated

Governed by Multiple agencies

MOF/ CLB/ ROC

SEBI

RBI

Trustees

Auditors

Board of Directors


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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 performanceand conduct of Mutual funds and enforces

compliance to regulations through reviewing

reports and regular inspections


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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.


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Office of publicT

rustee

MF being public trustee - governed by Indian

Trust Act , 1882

Trustee Co or Board ofTrustee accountable

to office of Public Trustee

Public trustees reports to Charity Comm.


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Trustee and AMC to comply with Cos Act 1956

Ministry of aw Justice

Company aw oard (C )

epartment of Company Affairs

e istrars of Companies ( C)


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Ministry of Finance

Supervises both SEBI and RBI

Ultimate policy making & supervising body

Appellate Authority for any disputes over

SEBI guidelines


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Investors rights & Obligations

Rights - Legal Limitations Unit holders 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


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Investors complaint redressal mechanism

Client Servicing

Compliance Officer

Investors cannot be protected by companiesAct.


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The Offer Document


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What is offer documents

Contains the details of scheme.

Filed with SEBI

Like Prospectus of an IPO

Close ended scheme - One Time

Open ended Scheme - Perpetual - keptupdated from time to time.


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Significance

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.


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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.


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Who can invest ?

Resident Indian Individuals

Indian Companies

Trusts / charitable institutions / PFs

Banks/ FIs / NBFCs

Insurance Companies

NRIs/ OCBs/ FIIs

Partnership firms etc.


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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 dateImp :

Day of NAV Calculation is known as valuation day


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HOW NAV IS COMPUTED

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


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NAV Nav is influenced by

Purchase and sale of Investment

Valuation of Investment

Other assets and Liabilities

Units sold or redeemed.


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CHANGE IN NAV

FORMULA :

For NAV change in absolute terms =

(NAV at end of period - NAV at beginning of period) * 100NAV at beginning of period

For NAV change in annualised terms =

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


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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


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PRICING OFUNITS

Sale price not greater 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 cannot be more than 7% of the sale price


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Sale Price

Sale Price is the price at which units are sold to

investors.

Sale Price = NAV + Entry load

Formula for computation of Sale Price =

NAV/(1-Load)

Assuming an entry load of 2% in the earlier

NAV computation example

Sale Price = 14.80/(1- 0.02)

= 15.10


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MUTUAL FUND ACCOUNTING &MATHEMATICS


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Initial Issue

ExpensesTransaction Cost

Entry / Exit load

CDSC for no-load

schemes

FEES & EXPENSES

Annual Recurring

Expenses

AMC Fee

Custodian Fee

Registry Exp.

Trustee Fee

Audit Fee

Mktg. & Selling Exp.

Brokerage Exp.

Others


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Fees & Expenses

Initial Issue expenses For launching of the scheme

Can charge up to 6%

Recurring Expenses Mkt & selling exp including brokerage

Transaction cost

R&T cost

Custodian Fees

Audit fees etc

Investor Communications cost


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F

ees & Expenses Amc can charge Investment management fee to

the fund on weekly avg. net assets.

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

1.25% for up to Rs.100 cr Of weekly avg net assets

1% in excess of Rs.100 cr. No Load schemes can charge an additional fee of 1%


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Fees & Expenses

Total Expenses that can be charged to the

Fund ( excluding entry and exit loads):

Equity 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


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MUTUAL FUNDS - FEES

Initial issue expensesCharge to the scheme capped at 6% of the initial resources

raised under that scheme

Entry/Exit Loads - Transaction costs

Sale price not greater than 107% / Re-purchase price not lowerthan 93% (95% for close-ended schemes) of the NAV

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%


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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 notgreater than 5 years

Un-amortised portion to be added to other assets for

computation of NAV

Amortisation not part of normal recurring expenses


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Accounting, Valuation & Taxation

A ti P li i


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Accounting Policies

Investments to be marked to market on market prices.

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 returnthrough 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


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Mutual Fund Valuation

Marking to Market

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


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Disclosures and Reporting

Audit by independent auditor

Audited Annual report every year

Un-audited accounts to be published within 1 month

after March 31 & September30

Within 6 months of closure, publish abridged summary

of report scheme-wise in newspapers

Summary to be forwarded to SEBI & unit holdersFull portfolio disclosure to be made within a month from

the half-year ended March 31 & September30


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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 objectivesof scheme

Max. Investment in listed shares of Group Cos - 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.


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Investment Restrictions as a % of Net Assets -Debt

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 belowinvestment 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


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Max. Investment in Equity/Equity relatedinstruments of single Co. - 10%

No restrictions in case of Index Fund

Max. Investment in Unlisted Cos. - 10% in closeended & 5% in open ended funds

Buy & Sell securities on Delivery position , No

short selling/ carry forward allowed.

Security should be transferred to schemesimmediately. Cannot remain in general a/c

Investment Restrictions as a % of Net Assets -Equity


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Mutual Fund - Legal Structure

In USA

Investment Companies structure

In UK Two alternative structure


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What is the Structure Here?

Trust

Trustee

Asset ManagementCompany

Scheme 1 Scheme 2 Scheme 3

Other ServiceProviders

SponsorForeign

Partner

HDFC Ltd.

HDFC Trustee Co Ltd.

HDFC Asset Management Co. Ltd.

HDFC Mutual FundComputer Age Management

HDFC Bank

Standard Life Investments


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MUTUAL FUND - FRAMEWORK- India

Fund

Management

Registrar Custodi

an

MarketingOperations

Distribution

Trustee Company

Sponsor

Asset Management Company

Fiduciary

responsibility to

the

InvestorsBank

Brokers

Markets


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SPONSOR

Main Promoter

Approval by SEBI

Sound track record

Experience in Financial Services

Professional Competence, Financial Soundness,

Reputation, etc.

Contribution to AMC Capital 40% minimum Minimum AMC capital of Rs. 10 Cr


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TRUSTEE

Fiduciary responsibility to the Investors.

Directors to be approved by SEBI.

Execution of trust deed by sponsor in favour of

trustee. Trust deed is stamped and registered with SEBI

Legally responsible for administering the Trust and

Compliance with Regulations.

Norms for Trustees

- Experience in Financial Services

- Minimum 4 members on the board and 2/3rd of the

members not to be connected with the sponsor


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ASSETMANAGEMENT COMPANY

Responsible for : Launching Schemes

Managing Funds for Schemes

Performing Accounting Functions

All day to day affairs of the Mutual Fund

Income of an AMC /Asset Management Fee

1.25% of weekly average NAV of each Scheme up

to Rs.100 cr of assets managed

1.00% greater than Rs.100 cr

Minimum 4 directors with 1/2 independent

AMC cannot act as trustee for other MF


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TRANSFERAGENTS

Issue of Account Statements to Investors

Arranges payment to Investors when they

redeem Takes care of Non commercial transactions

like change of address,loss of account

statement etc.

should be registered with SEBI

Appointed by Board of Trustee


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Legal & Regulatory Environment

SEBI - Capital Markets Regulator

RBI - Money Markets Regulator

MOF - Policies

CLB, DCA, ROC

Stock Exchanges

Office of the Public Trustee


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Evaluating Fund Performance

Should be judged in light of:

Investment Objectives

Current Market Conditions

Alternative investment returns


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Performance Evaluation

Different valuation methods

Change in Nav

Total Return

Total Return with dividend reinvested at NAV


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Change in Nav - The most common

Nav on day 1 = Rs.10

Nav on day x = Rs.12

% Change in nav = dayx-day1/day1 * 100

= 2/10 *100 = 20 %

Limitations:

Does not account for dividend

Suitable only for growth plans


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Performance Evaluation Return on Investments - most suitable

Nav on day 1 = Rs.20

Dividend = Rs.4 per unit 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

Total Return = (Nav on year end*total units )-day1nav)/ day 1 NAV* 100

= ((22*1.19)- 20))/20*100

= 30.9%


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Other Parameters

Expense ratios - indicates fund efficiency and costeffectiveness

Portfolio Turnover ratio - measures amount of buying and

selling done by the fund

Transaction cost

Fund size

Cash holdings


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Fund Literature

Fund Factsheet

Newsletter

Sales meet / Mailers etc


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Fund Mergers & Take overs

Mergers of two AMC

Provisions of Cos Act

Approval of high court and SEBI

75% unit holders consent

Scheme takeover

Unit holders permission - 75% SEBIs permission


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Fund Mergers & Take overs

AMC taken over by other sponsor

(a. Zurich - 20th Century b. ITC Threadneedle

- 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


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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


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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 ofchanges in credit ratings

Prepayment predictions


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Debt instruments

Commercial Deposits

Issued by SCB and RRBs

Unsecured Promissory Notes

91 to 365 days Issued by FIs can be 1-3 years

Corporate Debentures

Zero coupon bond

Floating rate bonds


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Debt instruments

Commercial papers (CPs)

Short term- 3-12 months and unsecured

Issued by corp bodies

Govt Securities

T - bills (7- 364 days)

Banks/ FIs/ PSU Bonds


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Risk in a Debt Fund

Interest Rate Risk

Credit Risk (Asset quality)

Reinvestment Risk

Call Risk

Liquidity

Inflation

Basic Terminologies:


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Net Asset Value (NAV)

Open-ended Fund

Close-ended Fund

Portfolio

Corpus

Unit

Load

g

Expense Ratio


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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.


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Start

Investments

Early


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Charu is 2 years old

Her parents investRs. 5,000/- every month

for the next 5 years

Total Investment :

Rs. 3 lacs

Invest Early


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Invest Early

Rahul is 12 years old

His parents investRs. 5,000/- every month

for the next 5 years

Total Investment :

Rs. 3 lacs


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Invest Early

Who do you think has

more money at theage of 17 ?


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At the age of 17

Charu has

Rs. 10.6 lacs*

The delay of 10 years, cost Rahul Rs. 6.7 lacs

Rahul has

Rs. 3.9 lacs*

* compounded monthly, @ 10% p.a.


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0 2 5 8 11 14 17

2 year old Charus parents

invests Rs. 5,000 monthly for 5

years. They do not withdraw

any money.

12 year Rahuls parents invest a

similar amount i.e. Rs. 5,000. They

invests for 5 years and they too do

not withdraw any money

Rs. 10.6 lacs

Rs. 3.9 lacs

THE POWEROF COMPOUNDING


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So, how do weplan our investments ?


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Financial goals

Risk-taking ability

Expected Return

Investment Period

First, consider your.

Fi i l Pl i


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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

P f i l Fi i l Pl


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Professional Financial Planners

Understands investment universe

Understands risk and return profile of variousinvestment alternatives

Assist clients in choosing the right investmentmix keeping in mind clients-- saving ability

-- risk appetite

-- cash flow requirements

-- tax status

Why become a Financial Planner?


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Why become a Financial Planner?

Ability to recommend financial products based onsuitability of investor rather than product features

Ability to build mutually beneficial long term

relationship with investors

Ability to profit from their expertise and valueaddition to investors

Ability to act as financial intermediaries relied uponby investors and issuers

Attributes of Financial Planners


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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


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Financial Planning

Establish & define relationship with client

Define Clients Financial Goals Specific Goals and their timings

Appreciate clients ability to save and cash flowrequirements

Appreciate clients disposition to risk

Appreciate tax liability and focus on post-tax returnsto client

Financial Planning Elaborated


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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


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Investors Needs


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Investors Needs

Protection NeedProtection Need Investment NeedInvestment NeedTo 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


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Asset Allocation and Model

Portfolio

Recommended Model


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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


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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


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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


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Portfolios . .

Inter-generational OrTransfer Stage:

- Focus onServing Needs of Heirs

- Growth and Income Funds in balance

- Higher percentage in Growth Funds ifheirs are Young

- Income Funds suitable ifheirs are Trusts and Charities

Recommended Model


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Portfolios . .

Affluent Investors:

-- HIGHER RISK APPETITE:HIGHER RISK APPETITE:

Sectorial and Growth Funds 70 80% Diversified Equity or Balanced Funds Balance

- LOWER RISK APPETITE:LOWER RISK APPETITE:

Income , Gilt and Liquid Funds 70 80%

Diversified Equity or Balanced Funds Balance


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Asset Allocation Strategies


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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%



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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%

Bogles Strategic Allocation


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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


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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


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Strategy

No portfolio re-balancing

Ensures riding bull wave if markets are rallying

Ratio changes as per market changes

Model Portfolio


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Model Portfolio

Set long term goals keeping risk-return profileand time horizon in mind

Asset allocation exercise based on growth,income and liquidity criteria

Sector Distribution exercise- Allocation of funds across various Mutual Fundproducts

Fund manager selection- Which scheme? Which Fund house?

Recommended Model


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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


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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%


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Fund Selection

Equity Fund Selection


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Equity Fund Selection . . . . . .

Form categories based on risk-return profile- Diversified , Index , Sectorial & Specialised

Form categories based on fund managers style

- Value and Growth

Evaluate Performance

- Peer Group and Benchmark comparison

Equity Fund Selection . . . . . . . .


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qu ty u d Se ect o 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 . . . . . . . .


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q y

High R Squared , Low Beta And High

Dividend yield preferred

Bond Fund Selection . . . . . .


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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


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Money Market Fund Selection

Expense Ratio

Credit Quality

Yield

Principal is safe due to lower duration

Income can be volatile


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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


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Age roup

( ears)

ro th

( quity)

Income

( onds)

iquidity

( anks)

25-40 7

5 15 10%

41- 50 50% 35% 15%

51- 60 35% 45% 20%

Above 60 25% 50% 25%

gy

The Risk Return Trade-off


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Risk

Potential

for

return

Liquid Funds

DebtFunds

GrowthFundsAggressive, Value,

Growth

Balanced Funds

Sectoral Funds

Gilt Funds, Bond

Funds, High

Yield Funds

Ratio of Debt : Equity

Hedge Funds

Equities are the best long term bet

f di d i d i hi h


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56%

63%86%

37%

14%

44%

1 year 3 year 5 year

percentage of studied period in which

Other

investment

outperformed

Stocks

outperformed

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)


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9.2%

7.62%

9.74%

14.47%

20.16%

0.0%

.0%

10.0%

1 .0%

20.0%

2 .0%

Inflation Gold Bank FD Co. FD Equities


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

Cumulative annualised returns (1980 - 98)

9.2%

7.62%

9.74%

14.47%

20.16%

0.0%

.0%

10.0%

1 .0%

20.0%

2 .0%




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Myths and Reality about savings


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y y g

I am not a natural saver Saving is a skill and like most skill it gets better

with practice.

Savings mean putting big amount aside Its the little drops that make mighty ocean

My earnings are not enough

If you have little now, you will have lesser later.

Saving is all about discipline.

Budgeting is unnecessary

You need budgeting to cut expenses.


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I earn enough

Nothing is permanent

Never spend saved money

for specific goals

emergencies



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I earn enough

Nothing is permanent

Never spend saved money

for specific goals

emergencies

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