AMFI-Trainig Abhi

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A Joint Venture with Standard Life Investments

AMFI Training- Advisors¶ Module



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 money in line with thecommon 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

No fixed maturity

Variable Corpus

Not Listed

Buy from and sell to

the Fund Entry/Exit at NAV

related prices

CLOSE-END

Fixed Maturity

Fixed Unit Capital

Generally Listed

Buy and sell in the

Stock Exchanges Entry/Exit at the

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

Convenience

Tax Benefits

Liquidity

Diversification



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 appropriatemix (Balance)

Equity or Equity Related

Funds



MUTUAL FUND - FRAMEWORK- India

FundManagement

Registrar Custody

MarketingOperations

Distribution

Trustee Company

Sponsor

Asset Management Company

Fiduciaryresponsibility to

the

InvestorsBank

Brokers

Markets



What is the Structure Here?

Trust

Trustee

Asset Management

Company

Scheme 1 Scheme 2 Scheme 3

Other Service

Providers

Sponsor Foreign

Partner

HDFC Ltd.

HDFC Trustee Co Ltd.

HDFC Asset Management Co. Ltd.

HDFC Mutual FundComputer Age Management

MFund

HDFC Bank

Standard Life Investments



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 boardsupervision 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.



SEBI

All Mutual Funds / AMC/ Trustee Companies to be

registered with SEBI

Responsible for protecting investors interest andpromote orderly growth of Mutual Fund Industry

Formulates regulations,monitors performance andconduct of Mutual funds and enforces compliance toregulations through reviewing reports and regular inspections

Regulators for MF industry



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 schemefeatures 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 companiesAct.



Mutual Fund - The Top Scorer

FDs FI Bonds MutualFunds

Accessibility Low LowH

ighT enor 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

T r ansparency 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 thefundamental 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.



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

Offer Document (OD)



Mandatory Information

Details of the Sponsor

Description of the scheme and investment objective/strategy

Terms of issue

Historical statistics

Investors Rights and Services

K ey Information Memorandum that is distributedwith 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 - SWPSystematic Transfer Plan - STP

Other

Nomination facility



INVESTMENT PLANS

Automatic Reinvestment plan

ARP is also called Growth option

Allows investor to reinvest in additional units theamounts 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 hasvoluntary self discipline

Investment accounts are maintained for both VAP and SIP

Benefit Benefit of of RupeeRupee cost cost AveragingAveraging



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 islevied 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 Investmentsactively 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 f ront ended l oad

Paid at the time of purchase

Sale Price = NAV / (1- Sales Load, if any) Exit Load or back ended l oad

Paid at the time of exit

Redemption Price = NAV/(1+ Exit Load)

Contingent Deferred S ales Load (CDSL)

Deferred exit load depending on the period

Also known as deferred load



PR ICING 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



Initial Issue

ExpensesTransaction Cost

Entry / Exit load

CDSC for no-load

schemes

FEES & EXPENSES

Annual RecurringExpenses

AMC Fee

Custodian Fee

Registry Exp.

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 Communications cost



Fees & Expenses

Amc can charge Investment management fee to the fundon weekly avg. net assets. It is a part of the RecurringExpenses 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 ( excludingentry 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%





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 havespecial requirements concerning accounting for the fundsassets, liabilities and transactions with investors and otheroutside constituents such as banks, securities custodiansand registrars.

Follows accounting policies laid down by SEBI regulations1996.

Unit Capital is mentioned as Unit Capital only and not asAssets



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-tradeddebt security.

Valuation of Non-traded Securities

Valuation of equity instrument is on the basis of capitalization of earnings solely or in combination with itsbalance sheet net asset value.

Capitalization rate will be determined by reference to thePrice or earning ratios of comparable traded securities withan 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 IncomeSlab) 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% withoutindexation,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 ² Rs. 4,000

Long-term tax liability of Mr. H: Rs. 4,000 * 20%= Rs. 800



Taxation

In case of individuals and Hindu UndividedFamilies a deduction upto Rs. 9000 from the

total income will be admissible in respect of income from investments specified in Section80L, including income from Units of the mutualFund.

Units of the scheme(s) are not subject toWealth-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 increasedto 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 allcos - 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 FundPerformance

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

F or NAV change in absolute terms =(NAV at end of period - NAV at beginning of period) * 100NAV at beginning of period

F or 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 allocationof 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./exROI = [(Units held + div./ex--d NAV)*end NAV]d NAV)*end NAV]--begin NAV /beginbegin NAV /beginNAV*100NAV*100

Accepted by MF tracking agencies(Credence and Value research)

Suitable for accumulation plans, monthly/quarterly income

schemes,debt funds distributing interim dividend.

Examples



Examples

1. Change in 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 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


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 )-day1nav))/ 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% SEBIs 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

I i h k



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 creditratings

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 maturitywith 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



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 inrelation to index and may be riskier

Beta:Measures sensitivity of the funds returns to changes inthe market index

Beta of 1: Fund moves with market (Index fund)

Beta of less than1: less volatile than market (conservativeportfolio)

more than 1: higher volatility than market (software fund)

Gross Dividend Yield: Funds reported yield gross beforeexpenses and net after expenses

Higher for value fundsthan growth funds



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

What your savings can generate ?

* for an initial one time investment compounded annually for a 15 year period

--------------- 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





What your savings can generate ?

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

--------------- Rate of return ---------------



15.01

22.8

28.31

35.12

8% 10% 11% 12%

REGULAR SAVINGSTHE SIMPLESTWAY TO COMBAT INCR EASING HOUSEHOLD

EXP

ENDITUR

E

R s. 1000 saved every month for 30 years can grow to

a sizeable amount of wealth

depending on the return generated on these savings

% Per annum



0 2 5 8 11 14 17

2 year old Charu¶s parents

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

not withdraw any money

Rs. 10.6 lacs

Rs. 3.9 lacs

THE POWER OF COMPOUNDING



So,h

ow do weplan our investments ?



Financial goals

Risk-taking ability

Expected Return

Investment Period

First, consider your«.



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 investmentmix 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 onsuitability of investor rather than product features

Ability to build mutually beneficial long termrelationship with investors

Ability to profit from their expertise and value

addition to investors

Ability to act as financial intermediaries relied uponby 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 flowrequirements

Appreciate clients disposition to risk

Appreciate tax liability and focus on post-tax returnsto 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 anongoing basis

Start early

Be systematic, consistent and disciplined



Investors Needs

Protection NeedProtection Need Investment NeedInvestment Need

To protect living Financial needs served

standards, current and through investmentssurvival requirements and savings

- Regular Income - Children education

- Retirement Income - Housing

- Insurance Cover - Children professionalgrowth



Asset Allocation and Model Portfolio

R d d M d l



Recommended Model

Portfolios . .

Accumulation Stage:

- Investible surplus available

- Financial goals are not near term

� Diversified Equity 65 ± 80%

� Income & Gilt 15 ± 30%

� Liquid Funds & BankDeposits 5%

R d d M d l



Recommended Model

Portfolios . .

Transition Stage:

- Closer to Financial Goals

- Transition from µGrowth to Income¶

- Near Retirement , Children Education or Marriage

- Increase Asset Allocation to Income Component

R d d M d l



Recommended Model

Portfolios . .

Distribution Or Reaping Stage:

- Require Income as Dependence on Investment

- Income µGrows 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



Recommended Model

Portfolios . .

Inter-generational Or Transfer Stage:

- Focus on ServingNeeds of Heirs

- Growth and Income Funds in balance

- Higher percentage in Growth Funds if heirs are µYoung¶

- Income Funds suitable if heirs are µTrusts andCharities¶

Recommended Model



Recommended Model

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



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%





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



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



Fixed Asset Allocation Strategy

Maintain fixed ratio between chosen asset classes

Disciplined approach that ensures profit bookingand purchases at lower prices

Example

- 50% Equity and 50% Debt- Equity markets rise ensuring profit booking

- 50:50 Ratio maintained

Flexible Asset Allocation



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 horizonin 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



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



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

E it F d S l ti



Equity Fund Selection . . . . . .

Form categories based on risk-return profile

- Diversified , I ndex , 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

B d F d S l ti



Bond Fund Selection . . . . . .

Fund Age and Size

Relative yield: YTM

Expense Ratio

Portfolio Quality

� Credit Rating of portfolio holdings

Average maturity� Duration

M M k t F d S l ti



Money Market Fund Selection

Expense Ratio

Credit Quality

Yield

Principal is safe due to lower duration

Income can be volatile

Strategy To Smart Investing



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

(Years)

Growth

(Equity)

Income

(Bonds)

Liquidity

(Banks)

25- 40 75% 15% 10%

41- 50 50% 35% 15%

51- 60 35% 45% 20%

Above 60 25% 50% 25%

Need Based Investment Strategy

The Risk Return Trade-off



R isk

Potential

for

return

Liquid Funds

DebtFunds

Growth FundsAgg ressive, 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



56%

63%

86%

37%

14%

44%

1 year 3 year 5 year

Equities are the best long term bet

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





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 ThanIntelligence.

5. Avoid Wastage, Look at Returns Net of Taxes



The Final Lap

Important Features



Important Features

70 questions to be answered in 120 mins

Key Area - Financial Planning (60-70%)

DANGER AREA : Negative marking

(0.25% )



Main Reasons for Failure



1st Online Examination in Life : FEARPSYCHOSIS (Appearing for an examination

after ???? Years)

Trying to attempt all the 70 questions

QUESTIONS ARE TRICKY ( N obody has a solution to Offer)

How to cross this BRIDGE ????



How to cross this BRIDGE ????

Be thorough with the N umericals

Ex. Calculating Loads, Expenses etc. etc.. (NUMERICALS ARE EASY TOSOLVE) - Attempt these questions First (CONFI DENCE BUILDS UP)

THEN, Attempt ONLY those questions which you are sure about

While answering, write the marks of the attempted questions in thepaper provided by NSE & TOTAL I T 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, pleaseSTOP Answering further



All the Best !!!!!! Thank You

Documents

AMFI-Trainig Abhi