Introduction to Mutual funds in the Wealth management course

1. Welcome to the Wealth management course S G Raja Sekharan

2. Mutual funds

3. WHAT IS MUTUAL FUND? A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities like stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals

4. WHAT IS MUTUAL FUND? The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective The income earned through these investments and the capital appreciation realized are shared by its unit holders(investors) in proportion to the number of units owned by them

5. Why invest in a MUTUAL FUND? 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

6. ADVANTAGES OF MUTUAL FUNDS Affordable Professional Management Diversification Liquidity Tax benefits Well regulated and low cost Transparency Flexibility Choice of schemes

7. DISADVANTAGES OF INVESTING THROUGH MF NO TAILOR-MADE PORTFOLIO

8. Mutual Fund Operation Flow Chart

9. HISTORY OF MF IN INDIA MF INDUSTRY STARTED IN INDIA IN 1963 WITH FORMATION OF UTI DIFFERENT PAHSES : PHASE -1(UTI) PHASE-2 (ENTRY OF PUBLIC SECTOR MFs) PAHSE-3 (ENTRY OF PRIVATE MFs) PHASE-4 (UNDER SEBI REGULATION)

10. PHASE-1 (1963 -1987) - ESTABLISHMENT OF UTI IN 1963 LAUNCH OF FIRST SCHEME US-64 FOLLOWED BY ULIP IN 1971,CGGF(1986), MASTERSHARE(1987) UTI WAS THE ONLY PLAYER IN THE MARKET WITH MONOPOLY POWER HUGE MOBILIZATION OF FUNDS

11. PHASE-2 (1987 -1993) - ESTABLISHMENT OF SBI-MF---THE FIRST NON-UTI MF THAT STARTED IN 1987 FOLLOWED BY CANBANK-MF, LIC-MF,BOI-MF CHANGE IN THE MIND SET OF THE INVESTORS UTI STILL THE UNDISPUTED LEADER OF THE MARKET THERE WERE NO PRIVATE SECTOR PLAYERS AT THIS STAGE

12. PHASE-3(1993 -1996) - ENTRY OF THE PRIVATE SECTOR FUNDS IN 1993 JV OF FOREIGN FUND MANANGEMENT COMPANIES WITH INDIAN PROMOTERS MORE COMPETITIVE PRODUCT INNOVATION, INVESTMENT MANAGEMENT TECHNIQUES, INVESTORS SERVICING TECHNIQUES CAME INTO INDIA INVESTORS STARTED BECOME SELECTIVE

13. PHASE-4 ( 1996 onwards ) SEBI- THE REGULATORY AUTHORITY SEBI MF REGULATION 1996 UTI CAME UNDER SEBI REGULATION VOLUNTARILY GOVT.’S STEPS FOR INVESTORS’ PROTECTION

14. TYPES OF Mutual funds – by structure Open ended -theses schemes do not have a fixed maturity period –they are available for subscription and repurchase on a continuous basis Close ended –these have a stipulated maturity period of 5-7 years – they are open to subscription only during the period of launch. They can be bought and sold in stock exchanges where they are listed. Exit routes are also provided by the fund through repurchase at specific points of time.

15. TYPES OF Mutual funds – by investment objectives Growth equity schemes –they provide capital appreciation over medium to long term – they carry risk of equity exposure. Income /Debt schemes –these aim at providing regular income to the investors by investing in debt instruments like bonds, corporate debentures, govt securities, money market instruments etc. Balanced funds –these provide a mix of regular income and capital appreciation –these invest in a mix of equity and debt instruments

16. TYPES OF Mutual funds – by investment objectives Money market /liquid schemes –these provide easy liquidity, preservation of capital and moderate income – they invest in safe short instruments such as treasury bills, inter bank call money, commercial paper etc – they give returns of about 5-8% per year Gilt funds – they invest in govt securities only and have no default risk –they return about 3-5% p.a.

17. TYPES OF Mutual funds – other classifications Index funds -they replicate specific indices – like BSE sensex. They invest in securities in the same weightage as the index Tax saving schemes – these schemes give tax rebates under specific provisions of IT act eg Equity linked tax saving scheme, Pension schemes etc – these are growth oriented and predominantly invest in equities

18. TYPES OF Mutual funds – other classifications Commodity funds – there are funds today that invest in Gold as a commodity and closely mirror the rate of gold. Real estate funds –Real estate funds are those that invest their corpus in real estate projects and provide returns to investors based on appreciation of the asset over a period of 5-8 years. There are also few real estate funds that provide regular quarterly returns based on leasing out of the real estate properties

19. TYPES OF Mutual funds – other classifications Load funds and No load funds – load funds charge an entry and exit fee –the No load funds do not charge any entry and exit fees

25. TYPES OF EQUITY FUNDS AGGRESSIVE GROWTH FUNDS:Investment in less researched or speculative/non-blue chip stocks GROWTH FUNDS: Investment in stocks with above average growth prospects over 3-5 years.Ex:Tech Stock SPECIALITY FUNDS: Sector, Offshore, Small-cap equity, Option income funds DIVERSIFIED EQUITY FUNDS: ELSS. EQUITY INDEX FUNDS VALUE FUNDS: Invest in fundamentally sound companies with low P/E ratio. EQUITY INCOME FUND: Invest in sectors where low fluctuation in stock price and high dividend is expected.

26. Ground rules for investing Have a long term investment plan – early in life, you can have a higher exposure to equities or equity based MF’s Keep a small amount liquid /debt funds for contingencies or planned expenses over 2/3 years Spend time in educating yourself in investment areas Ignore hot tips, hot stocks etc Start early Invest regularly –look at Systematic investment plans offered by Mutual funds Buy and hold

27. What to look for before investing in a MF Compare the performance between the same types of funds Risk assesment - most of the well known funds are rated - Value research ratings and Money control.com’s ratings are fairly comprehensive Go with funds that have a large corpus of funds – these are mostly safer than the ones with low corpus Management - look at the fund manager’s record and go with fund managers who have a good past performance record

28. Build Wealth through Systematic Investment Plan

29. A Systematic Investment Plan (SIP) is an option that allows you to invest a fixed sum at periodic intervals on specific dates. A Systematic Investment Plan works for you in three ways:- It helps you to save regularly and thus inculcates a sense of discipline It harnesses the power of compounding It is the best possible way you to reign in impulsive buys-and-sells that otherwise one is gripped by in times of market volatility. - Rupee cost averaging You are free to choose any amount (minimum Rs 500 and in multiples of Re 1/-) and any date as per your convenience.

30. OFFER DOCUMENT

31. Offer Document (OD) A legal document issued by AMC or Sponsor OD describes the product Very important document from the perspective of prospective investor Primary vehicle for investment decision

32. Contents of theOffer Document Summary information Definitions Risk Factors Legal and Regulatory Compliance Financial Information Constitution of the Mutual Fund Investment objectives and policies Management of the Fund Offer Related information

33. Who can invest in MF’s in India

34. Residents : Resident Individuals, Indian Companies, Indian Trusts/ Charitable Institutions, Banks / NBFCs, Insurance Companies, Provident funds Non Residents : NRIs Foreign Entities: FIIs registered with SEBI

35. Accounting and NAV calculation

36. Net Asset Value (NAV) Investors’ subscriptions are not accounted as liabilities or deposits but as Unit Capital Investments made on behalf of the investors are reflected on the assets side. Liabilities also form part of the balance sheet NAV is asset minus liabilities and divided by total number of outstanding units. AV = Assets - Liabilities NAV = Net assets value of the scheme /Number of units outstanding Market value of investments + receivables + accrued income + other assets -accrued expenses-payables- liabilities No.of units outstanding on NAV date

37. Daily NAV for open-end schemes Weekly NAV for close-end schemes A fund’s NAV is affected by Purchase and sale of investment securities Valuation of all investment securities held Other assets and liabilities Units sold or redeemed Valuation of investment securities must be at their market prices.

38. Legal and Regulatory Environment

39. Organization of a Mutual Fund

40. LEGAL STRUCTURE IN INDIA ISSUE OF OPEN AND CLOSE END FUNDS IN SAME LEGAL STRUCTURE FOLLOW THE SEBI REGULATION TRUST FORM SPONSOR: ESTABLISHES THE MUTUAL FUND Must contribute 40% of the net worth of the AMC Need to have sound financial track record Appoint trustees

41. Regulators in India SEBI SEBI regulates MFs All MFs have to be registered with SEBI RBI Bank-owned MFs are under RBI and SEBI Ownership of AMC by the bank Guarantees issued by the bank as sponsor Permission to access inter-bank call money market

42. AMFI Promote the interests of the mutual funds and unit-holders Set ethical, commercial, and professional standards in the industry Increase the public awareness of MF industry

43. Investors Obligations / Complaint Redressal Investors should: Read Offer Document Understand Risk factors Monitor Investments Ask for information required “Monitoring is entirely your responsibility” SEBI intervention For issue of due diligence certificate for new scheme by compliance officer Companies Act cannot protect investors as fund investors are neither shareholders in the AMC nor depositors

44. Thank you