Mutual Funds as an investment vehiclePresented by Gajendra Kothari, CFA July 24, 2010

Jagoinvestor Mumbai Meet

INDEX

1. Mutual Fund Concept

2. Organization of a Mutual Fund

3. Advantages / Disadvantages of Mutual Funds

4. Types of Mutual Fund Schemes

5. Computing Net Asset Value

Mutual Fund Investment Strategies6. Mutual Fund Investment Strategies

7. Myths / Facts about Mutual Funds

8. Mutual Funds Vs. Direct Equity Investments

9. Factors to consider before choosing a fund

10. Worldwide MF Industry

11. Mutual Funds – Performance

12. Mutual Fund Investment Blunders

13. Mutual Funds Taxation

“What is good for the client is

also good for the firm”also good for the firm”

T Rowe Price Investment Services

6th largest fund house in the USA

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 � 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.

Basics of Investments:

Risk Aversion Risk Management

INVESTOR PERSPECTIVE

Bank Deposits, PPF, NSC, Insurance,

Kisan Vikas Patra etc.Mutual Funds

Low Risk/Low Return Managed Risk/High Return

MUTUAL FUND OPERATION FLOW CHART

FUND STRUCTURE

Fund Sponsor

Trustees

Asset Management Company

Depository

Custodian

R & T

Agent

MUTUAL FUND STRUCTURE

This is just an illustration

BRIEF HISTORY

First Phase: 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of 1987, UTI had

Rs.6,700 crores of assets under management.

Second Phase: 1987-1993 (Entry of Public Sector Funds)Marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life

Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual

Fund was the first non- UTI Mutual Fund established in June 1987. At the end of 1993, the mutual fund

industry had assets under management of Rs.47,004 crores.

Third Phase: 1993-2003 (Entry of Private Sector Funds)1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual

funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged

with Franklin Templeton) was the first private sector mutual fund registered in July 1993. As at the end

of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

Fourth Phase: since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI Mutual Fund Ltd was

formed and sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the

SEBI Mutual Fund Regulations. The AUM of 38 fund houses as at June 30, 2010 stands at

Rs 6,75,831 crores

MUTUAL FUNDS GROWTH OVER THE YEARS

Source: AMFI website

ADVANTAGES OF MUTUAL FUNDS

� Professional Management

� Diversification

� Potential Higher Return Vs other Avenues

� Low Costs

� Liquidity

� Transparency

� Flexibility

� Choice of schemes

� Tax benefits

� Well regulated

DISADVANTAGES OF MUTUAL FUNDS

� Management fees

� Exit Costs

� Potential poor performance

� Complicated tax reporting issues

Potential market risk with all investments� Potential market risk with all investments

� Aggressive or unethical sales personnel / practices

REALITY CHECK….

In a country with a population of close to 120 crores, we at best

have about 1 crore investors – less than 1% ! (even that is

suspect)

4-5 crore mutual funds investors a myth; these are folios that4-5 crore mutual funds investors a myth; these are folios that

belong to about 60-70 lakh active unique investors

Households’ investments in capital market have fallen from a high

23.3% of gross financial savings in 1991-92 to a meagre 2.6% in

2008-09!

� By Structure

� Open Ended Schemes

� Close Ended Schemes

� Interval Schemes

� By Investment Objectives

� Growth Schemes

� Income Schemes

TYPES OF SCHEMES

� Income Schemes

� Balance Schemes

� Money Market Schemes

� Other Schemes

� Tax Saving Schemes

� Special Schemes

� Index Schemes

� Sector Specific Schemes

� ETFs (including gold ETFs)

� Fund of Funds

� ULIPs

RISK-RETURN TRADEOFF

COMPUTING NET ASSET VALUE

For investors, the performance of their investment

depends on what happens to the fund’s per unit value, or

net asset value (NAV)

NAV = Market Value of Assets – LiabilitiesNAV = Market Value of Assets – Liabilities

Number of Shares Outstanding

� Choose in funds consistent with your objectives, constraints, and tax situation

� Invest. Don’t speculate. (Stock market is not a casino)

� Be regular

� Own funds in different asset classes

MUTUAL FUND INVESTMENT STRATEGIES

� Own funds in different asset classes

� Do your homework or hire wise experts to help you.

� Monitor your investments at a regular interval. Remember, no investment is forever.

� Don’t panic.

MYTHS ABOUT MUTUAL FUNDS

� Mutual Funds invest only in shares.

� Mutual Funds are prone to very high risks/actively traded.

� Mutual Funds are very new in the financial market.

� Mutual Funds are not reliable and people rarely invest in them.them.

� The good thing about Mutual Funds is that you don’t have to pay attention to them.

FACTS ABOUT MUTUAL FUNDS

� Equity Instruments like shares form only a part of the securities held by mutual funds. Mutual funds also invest in debt securities which are relatively much safer.

� The biggest advantage of Mutual Funds is their ability to diversify the risk.

� Mutual Funds are their in India since 1964. Mutual Funds market is � Mutual Funds are their in India since 1964. Mutual Funds market is very evolved in U.S.A and is there for the last 60 years.

� Mutual Funds are the best solution for people who want to manage risks and get good returns.

� The truth is as an investor you should always pay attention to your mutual funds and continuously monitor them. There are various funds to suit investor needs, both as a long term investment vehicle or as a very short term cash management vehicle.

DIRECT EQUITY INVESTMENT VS. MUTUAL FUND INVESTING

� Diversification is the key to success in equity investments. A diversified portfolio serves to minimize risks. An individual investor may not have the capital to build a diversified portfolio.

� Professional Management by mutual funds ensure that the best avenues are tapped with the aid of comprehensive information and detailed research.

� Liquidity of mutual funds is high as you have daily repurchase options for open-end � Liquidity of mutual funds is high as you have daily repurchase options for open-end funds.

� Transaction costs are lower in mutual funds as compared to direct investment due to economies of scale.

� Convenience is high for mutual funds as they sell through service networks, banks and other distributors. Many funds allow investors the flexibility to switch between schemes within a family of funds.

� Blue Chip portfolio available to investors for as low as Rs. 500/-.

� High Service Standards maintained by mutual funds.

� Transparency – High degree of transparency is maintained by the funds.

WORLDWIDE MUTUAL FUND ASSETS

Worldwide MF Assets in Rs 1,064,00,000 crs (31st Dec’09)

India MF Assets in Rs. 6,75,831 crs (30thJun’10)

0.63% of the worldwide MF assets

Source: Investment Company Institute1 USD = Rs 46.53 as at Dec 31, 2009 (trillions of U.S. dollars, end of Dec 2009)

US LEADS THE WORLD MUTUAL FUND MARKET

WORLDWIDE MUTUAL FUND ASSETS BY TYPE OF FUND

Data as of Sep 2010 Source: Investment Company Institute

FACTORS TO CONSIDER BEFORE CHOOSING A FUND

� Track record / experience of the fund house

� Stability of the investment team / adherence to an investment process

� Consistent performance of the fund across market cycles

� Disclosure and service levels offered by the fund house� Disclosure and service levels offered by the fund house

� Relative performance among its peer group (across time periods)

� Investment style (whether it suits your risk profile)

� Look for Expense Ratio, Exit load etc

INVESTMENT MODES

� Systematic Investment Plan (SIP)

� Invest a fixed sum every month. (6 months to 10 years-through post-dated cheques or Direct Debit facilities)

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

� 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)

PERFORMANCE OF DIVERSIFIED EQUITY FUNDS

Performance as at July 19,2010

PERFORMANCE OF TAX-SAVING EQUITY FUNDS

Performance as at July 19,2010

PERFORMANCE OF BALANCED FUNDS

Performance as at July 19,2010

TWO GREATEST INVESTMENT BLUNDERS

1. Investing in the NFOs

2. Investing in the schemes which gives high dividendswhich gives high dividends

INVESTING IN NFOS

� Its new (Old wine in a new bottle, participate in India’s growth potential)

� Its at Rs 10 i.e its cheaper than a existing fund whose NAV is Rs.110

� My neighbour is buying it� My neighbour is buying it

� My distributor / agent has strongly recommended it.

� I can make good profit in the short term

RS.10 OR RS.100 – NAV MAKES NO DIFFERENCE

DON'T FALL FOR THE DIVIDEND BAIT

� The NAV falls to the extent of dividend payout

� Expense incurred on advertisement campaigns for spreading the word goes from your fund

� It might be a sign of the fact that the fund manager doesn't see any attractive investment opportunities.

� If the basis of investing in a scheme is flawed, so is the investment

TAXATION - EQUITY MF ORIENTED SCHEMEInvestor Category Short Term

Capital Gain Tax (holding period< 12 months)

Long Term Capital Gain Tax

(holding period > 12months)

Dividend Income

Dividend Distribution Tax

TDS

ResidentialIndividual/ HUF

15%* Nil Tax Free Nil Nil

Partnership Firms/AOP/BOI

15%* Nil Tax Free Nil Nil

Domestic Companies 15% *$ Nil Tax Free Nil Nil

NRIs 15%* Nil Tax Free Nil STCG- 15%*

LTCG – Nil

TDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual

*Additional education cess of 3% on the amount of tax$ Additional surcharge of 7.5% and an education cess of 3% on the amount of tax

TAXATION - DEBT MF ORIENTED SCHEME

Investor Category Short Term Capital Gain Tax(holding period <12months)

Long Term Capital Gain

Tax(holding period >12 months)

Dividend Income

Dividend Distribution Tax – Other than Liquid & Money Market Schemes

Dividend Distribution

Tax - Liquid & Money Market Schemes

TDS

ResidentialIndividual/ HUF

As Per Tax Slab

10%(20% with indexation)*

Tax Free 13.841% # 27.681%# Nil

Partnership 30%* 10%(20% with Tax Free 22.145% # 27.681% # NilFirms/AOP/BOI indexation)*

DomesticCompanies

30%*$ 10%(20% with indexation)$^

Tax Free 22.145% # 27.681%# Nil

NRIs As Per Tax Slab

10%(20% with indexation)*

Tax Free 13.841% # 27.681%# STCG- 30%*LTCG- 20%*(After providingfor indexation)

TDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual

*Additional education cess of 3% on the amount of tax$ Additional surcharge of 7.5% and an education cess of 3% on the amount of tax #DDT includes 7.5% surcharge and 3% education cess

�Fund's management changes

�Performance slips compared to similar funds.

�Fund's expense ratios climb

�Beta, a technical measure of risk, also climbs.

WARNING SIGNALS

�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.

� Contacting the Asset Management Company directly� Web Site

� Request for agent

� Mutual Fund / Insurance Agents� Locate one on AMFI site

� Financial Planners� ASK Wealth

BUYING MUTUAL FUNDS

� ASK Wealth

� Sykes & Ray FP

� National Distributors

� Birla Sunlife, Bajaj Capital

� Banks� Net-Banking

� Phone-Banking

� ATMs

� Online Trading Account

� ICICI Direct, Motilal Oswal, Indiabulls

�Filling up an application form and writing out a

cheque = end of the story… NO!

�Periodically evaluate performance of your funds

KEEPING TRACK…

�Periodically evaluate performance of your funds

�Fact sheets and Newsletters

�Websites

�Newspapers

�Professional advisor

My retirementportfolio at

the end of my50th Birthday

SIP CALCULATIONS

Atleast

15 crores

Monthly pension

Rs 12 lakhs

EQUITY INVESTMENT WITH ZERO RISK

� Post Office MIS (8%)

� Investment : 6 lakhs

� Monthly income: Rs 4,000

� After 30% tax : Rs 2,800

� SIP of Rs 2,800 in a good diversified Equity fund for 6 years

� 5 yr category average return – 19.77%

� After 30% tax : Rs 2,800 per month

� At the end of 6 years you get = Rs 6 lakhs

return – 19.77%

� Value of SIP at the end of 6 years : Rs 3.93 lakhs

Total Tax-free return = Rs 6 lakhs + Rs 3.93 lakhs = ~ Rs 10.00 lakhs

(Source valueresearchonline.com , As at July 19, 2010)

THANK YOUTHANK YOU