Understanding Investment through Mutual Funds

“When it Comes to Investing, We believe person who speaks well has the better view.”

Myth 1: Mutual Funds are Complex in Nature

“I WOULD RATHER NOT TALK ABOUT THEM AND MIND MY OWN BUSINESS”

Reality: Lets Understand the Concept

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.

Mutual Fund Operation Flow Chart

Structure of a Mutual Fund

Why you should go for Mutual Funds?• Expert on your side: When you invest in a mutual fund, you buy into the

experience and skills of a fund manager and an army of professional analysts.

• Limited risk: Mutual funds are diversification in action and hence do not

rely on the performance of a single entity.

• More for less: For the price of one blue chip stock for instance, you could get yourself a number of units across a number of companies and industries when you invest in a fund!.

• Easy investing: You can invest in a mutual fund with as little as Rs. 5,000. Salaried individuals also have the option of investing in a monthly savings plan.

• Convenience: You can invest directly with a fund house, or through your bank or financial adviser, or even over the internet.

Contd…..• Investor protection: A mutual fund in India is registered with SEBI, which

also monitors the operations of the fund to protect your interests.

• Quick access to your money: It's good to know that should you need your money at short notice, you can usually get it in four working days.

• Transparency: As an investor, you get updates on the value of your units, information on specific investments made by the mutual fund and the fund manager's strategy and outlook.

• Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry out cost-effective brokerage transactions.

• Tax benefits: Over the years, tax policies on mutual funds have been favorable to investors and continue to be so.

Types of Schemes

Myth 2: Mutual Fund Means Equity

Reality: Mutual Funds have debt scheme too.• Debt schemes invest in Corporate and Govt.

Bonds.• They are usually consider safe.• Some of India’s well known entities find it

suitable to invest in bonds.

Risk Return Profile

Myth 3: I need a lot of Money to invest in Mutual Funds

If I ask you to think what is the most common character between Warren Buffet, Rakesh Jhunjunwala, Ramdeo Agarwall ?

Its Actually……DISCIPLINE!!

The answer is Systematic Investment Plan?

An investment plan to invest a fixed amount regularly at a specified frequency say, monthly or quarterly.

You can start SIP for just Rs 1000 a month.

You get Fewer units when the share prices are high, and more units when the share prices are low. And Average cost price tends to fall below the average NAV.

SIP is a simple method of investing used across the world as a means to creating wealth

Start Early : SIPRs. 1000 invested per month @15% p.a. till the age of 60 yrs (Rs

in Lakhs)

4.20 3.60 3.00 2.40 1.80 1.20

148.61

70.10

32.84

15.166.77 2.79

-

20

40

60

80

100

120

140

160

25 30 35 40 45 50

Investment Wealth at 60

• Systematic Transfer Plan (STP) – Invest in debt oriented fund and give instructions to

transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.

• Systematic Withdrawal Plan (SWP)

Tired of your savings account?

• Extra Cash in savings A/c?? Consider Cash Funds

• Liquidity: Savings account wins– No cash withdrawls, no ATM (Now- Rel Regular Savings Fund).

• Safety: Savings account wins– All mutual funds are subject to market risks

• Returns: Cash funds win– Upto about 8-10% return

• Performance: Cash funds win– Interest rate fluctuations covered by quick maturation

• Invest when surplus money in savings a/c based on expense ratio.

• COSTS OF INVESTING

• There are four costs associated with mutual fund investing:

• Initial Issue Expenses

• Entry Load

• Exit Load

• Annual Recurring Expenses

Newly Introduced Direct Plans can reduce this Cost- Even a 0.5% Diff in NAV can make

significant Difference in Returns

How to evaluate a Mutual Fund

• Based on the Investment Objective & Investment Goals of the Clients, we consider following parameters:

• Past Performance- Look at 1 Year, 3 Years, 5 Years ranking- www. Valueresearchonline.com

• Past Performance- Look at the QoQ performance for the last 2-3 years.

• Look at the Alpha rather than Absolute performance- Sell a fund if it is not generating alpha for consequently 2-3 quarters.

Contd……..

• Look at the changes in Fund Manager- Frequent changes are not good.

• Most importantly, look at the expense ratio- It will eat up the returns.

• Look at Portfolio Diversification- too much diversification reflects lack of conviction of Fund Manager.

• Is your Fund taking too much risk?

Mutual Funds V/s Investing at your own

• Invest on your own if you:• Have fairly strong speculative instincts• Find the game of investing enjoyable• Have the time to manage your investments• Can earn superior returns

Invest through a mutual fund if you:• Have a small amount to invest • Hold fewer than five stocks • Think that you need better advice on investing • Have difficulty in deciding when to sell• Find the paperwork relating to investments

cumbersome.

Thank You&

Start Investing Now!!!