CHAPTER 1 THE CONCEPT AND ROLE OF MUTUAL FUNDS

CONCEPT AND ADVANTAGES..

What is a mutual fund?

Common pool of money Joint or Mutual ownership Hence.like shares of a joint stock company Units are the representation of ownership Mutual Fund is not a company which manages individual portfolios

INTRODUCTION TO MUTUAL FUND

A trust that

pools the savings of a number of investors who share a common financial goal And then invests in financial instruments to earn money which is distributed back to investors

CONCEPT AND ADVANTAGES..

Advantages of mutual funds

Portfolio diversification Professional management Reduction / diversification of risk Reduction of transaction cost Liquidity Convenience and flexibility

Comparisons with Other Investments

Return Equity FI Bonds Corporate Debenture Company FDs Bank Deposits PPF Life Ins Gold Real Estate MFs
Source : AMFI

Safety

Volatility

Liquidity

Convenien ce

High Mod Mod Mod Low Mod Low Mod High High

Low High Mod Low High High High High Mod High

High Mod Mod Low Low Low Low Mod High Mod

High/low Mod Low Low High Mod Low Mod Low High

Mod High Low Mod High High Mod Low Low High

CONCEPT AND ADVANTAGES..

Disadvantages of mutual funds

No control over costs

No tailor-made portfolio
Managing a portfolio of funds

HISTORY OF INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India First Phase 1964-87 Second Phase 1987-1993 (Entry of Public Sector Funds Third Phase 1993-1996 (Entry of Private Sector Funds) Fourth Phase- 1996-1999( SEBI MF regulation & dividends tax free) Fifth Phase 2003 (Large and uniform industry) Sixth Phase- 2004 onwards (Consolidation & Growth)

HISTORY OF MUTUAL FUNDS IN INDIA..

Unit Trust of India (1963)

First scheme US64 Followed by ULIP in 1971, Childrens Gift Growth Fund (1986) and Mastershare (1987) UTI the only player in the market with monopoly power Huge mobilisation of funds through assured return schemes

HISTORY OF MUTUAL FUNDS IN INDIA..

Public Sector Mutual Funds

State Bank of India Mutual Fund (1987), first non-UTI mutual fund Followed by Canbank Mutual Fund (1987), LIC Mutual Fund (1989), Indian Bank Mutual Fund (1990) and others Changes in the mindset of investors

HISTORY OF MUTUAL FUNDS IN INDIA..

Private Sector Mutual Funds

Private sector funds entry in 1993 Foreign fund management companies form joint ventures with Indian promoters More competitive products, product innovation, investment management techniques, investor service techniques etc. come in vogue Investors start becoming selective

HISTORY OF MUTUAL FUNDS IN INDIA.. SEBI Regulation for Mutual Funds (1996)
Regulatory authority with constitutional powers Uniform standards for all mutual funds including UTI Mutual Fund (UTI II) Investor protection through SEBI guidelines

TYPES OF MUTUAL FUNDS

Type of Mutual Fund Schemes Investment Objective Special Schemes

Structure Open Ended Funds

Growth Funds Income Funds

Industry Specific Schemes

Close Ended Funds Interval Funds

Index Schemes
Sectoral Schemes

Balanced Funds
Money Market Funds

TYPES OF MUTUAL FUND

14

TYPES OF FUNDS..

Close ended v/s open ended schemes

Close ended schemes

Open only during limited period for subscription Unit capital fixed, investors can buy and sell through stock exchanges where funds are listed Buyback by fund house possible Trading at discount / premium depending on future expectations

TYPES OF FUNDS..

Close ended v/s open ended funds

Open ended schemes

Investors can buy and redeem units anytime Transaction at NAV based prices Unit capital changes with every transaction Funds are allowed to stop subscriptions

TYPES OF FUNDS..
Load

funds v/s no load funds

Load Funds Cover expenses of advertising / distribution Entry load

Purchase price greater than NAV

Deferred load

Charged on recurring basis to meet expenses. NAV net of these charges

Redemption price lesser than NAV

Exit Load

Contingent Deferred Sales Charge

TYPES OF FUNDS..

Load funds v/s no load funds

No load Funds

No load at any point, entry / exit

NAV calculated after accounting for all expenses

TYPES OF FUNDS..

By nature of investment

Equity Funds, Debt Funds, Money Market Funds

Growth Funds, Value Funds, Income Funds

By investment objective

By risk profile

TYPES OF FUNDS..

Equity Funds

Invest primarily in shares and equity related instruments as per stated philosophy Types of equity funds

Aggressive growth funds Growth funds Value funds Index funds Diversified equity funds (ELSS) Equity income funds

TYPES OF FUNDS..

Equity Funds

Types of equity funds

Specialty funds
Sector funds Offshore funds Small cap equity funds Option income funds

TYPES OF FUNDS..

Hybrid Funds

Invest primarily in a mix of shares and debt instruments as per stated philosophy Types of hybrid funds

Balanced funds Growth and income funds Asset allocation funds

TYPES OF FUNDS..

Debt Funds

Invests primarily in debt instruments as per stated philosophy Type of debt funds
Money market funds Gilt funds Diversified debt funds Focused debt funds High Yield debt funds Assured returns debt funds Fixed term plans

TYPES OF FUNDS..

Commodity Funds( Can be Commodity ETF/Sector fund).

Steel funds Food grain funds

Real Estate Funds

Real estate capital appreciation funds Real estate income funds

Gold funds International funds Fund of Funds ETF

Assets Under Management As On March 31, 2010*

in Crore s

Assets Under Management As On March 31, 2010* in Crores TYPE Total % Total Income 311,715 51% Equity 174,054 28% Balanced 17,246 3% Liquid / Money Market 78,094 13% Gilt 3,395 1% Elss-Equity 24,066 4% Gold ETF 1,590 0% Other ETF 957 0% Fund Of Funds Investing Overseas 2,862 0% 613,979 100%

CHAPTER 2 FUND STRUCTURE AND

CONSTITUENTS

LEGAL STRUCTURE..

Structure of mutual funds in India

Sponsor
Trust Deed4 40 % Capital

Trustees

Mgmt Agreement

AMC

Mutual Fund

Scheme One

Scheme Two

Scheme Three

ORGANISATION OF MUTUAL FUND

IMA 206 28

LEGAL STRUCTURE..

Mutual Fund

Formed as a trust registered under the Indian Trust Act 1882 Fund sponsor acts as settlor of the trust No independent legal entity by itself, just a pass through vehicle Formed by a trust deed that is executed by the sponsor in favour of the trustees

LEGAL STRUCTURE..

Sponsor
Establishes the mutual fund, equivalent of promoter of a company Must own at least 40pct of the Asset Management Company Must have a sound financial track record over 5 years prior to registration Appoints Board of Trustees Appoints Asset Management Company

LEGAL STRUCTURE..

Trustees
Form the trust that is the Mutual Fund First level regulators for schemes of the mutual fund Hold the property of the mutual fund in trust for the benefit of the investors At least two thirds of the trustees should be independent Approval of SEBI Rights and obligations of Trustees

LEGAL STRUCTURE..

Asset Management Company

Formed as a private limited company under Companies Act 1956 Float and manage schemes in name of the trust Minimum net-worth of Rs.10 crores At least 50 pct of directors should be independent Responsibilities and duties of AMC

OTHER FUND CONSTITUENTS..

Custodian and Depository

Appointed by board of trustees Safekeeping of physical securities and participating in clearing systems Dematerialised securities held by depositories

Bankers
Maintain bank accounts for all schemes Facilitate collection and redemption

OTHER FUND CONSTITUENTS..

Transfer Agents / Registrars

Appointed by the asset management company Maintain records of all investors

Distributors
Appointed by the asset management company Help to distribute schemes of the mutual fund

FUND MERGERS AND SCHEME TAKE-OVERS

Mergers and takeovers

Constitution

of funds can change in

many ways

AMC may be taken over by new sponsors AMC may merge with another AMC Trustees may change the AMC Schemes may be taken over by new Trustees Schemes of the same mutual fund may be merged

Regulatory

framework to be observed

CHAPTER 3 LEGAL AND REGULATORY

ENVIRONMENT

ROLE OF REGULATORS IN INDIA..

SEBI

Formed in 1992 by an act of parliament All mutual funds registered with SEBI Well regulated industry through guidelines

Reserve Bank of India

Govern bank owned mutual funds jointly with SEBI Govern participation of mutual funds in inter-bank market

ROLE OF REGULATORS IN INDIA..

Company Law Board / Department of Company Affairs / Registrar of Companies

Regulate the Trust and AMC as they operate under their purview

Stock Exchanges

Regulate close ended schemes listed with them

Ministry of Finance
Supervisor of all regulators

ROLE OF SELF REGULATORY ORGANISATIONS

Self

Regulatory Organizations

An organization specially empowered to regulate activities of its members National Stock Exchange is an SRO
AMFI

Not an SRO Formed with the objective of Promote interest of investors and mutual funds Set ethical, commercial and professional standards Increase public awareness

ACE/AGNI
ACE- AMFI code of ethics sets out the standard of good practices to be followed by the AMC in their operation and in their dealing with customer. AGNI- AMFI Guidelines & Norms for intermediaries is a guidelines and code of conduct for intermediaries considering of individual agents ,brokers, distribution houses and banks engaged in selling of mutual fund products.

INVESTORS RIGHTS AND OBLIGATIONS..

Investors rights

Right of proportionate beneficial ownership Right to timely service Right to information Right to approve changes in fundamental attributes of schemes Right to wind up a scheme Right to terminate the asset management company

SERVICE STANDARD MANDATETowards investors Schemes other than ELSS- need to allot units or refund money with in 5 days. Statement of accounts

In case of NFO- with in 5 business days Incase of on going schemes- 10 working days. In case of SIP/STP/SWP 10 working days for initial transaction and on going once every calendar quarter.

INVESTORS RIGHTS AND OBLIGATIONS..

Limitations of rights of investors

Cannot sue the trust because as per law they are not distinct from the trust However they can sue the trustees Cannot ask the AMC to meet shortfall in returns in case of non-assured schemes Can sue the sponsor if returns are assured specifically in the offer document Prospective investors have no rights at all

UNCLAIMED AMOUNTS
The mutual funds has to deploy unclaimed dividend and redemption amounts in the money market. AMC can recover investment management and advisory fees at a maximum rate of 0.5%. If the investor claims money within 3 year ,then the payment is based on prevailing NAV. If the investor claims money after 3 year , then the payment is based on the NAV at the end of 3 year.

INVESTORS RIGHTS AND OBLIGATIONS..

Investors

obligations

Read the offer document Understand risk factors Monitor investments Ask for information required
Redressal

mechanism

SEBI intervention Due diligence certificate by compliance officer No redressal under Companies Act

CHAPTER 4 THE OFFER DOCUMENT

INTRODUCTION

Offer Document
Issued by the asset management company it is the equivalent of prospectus for issue of shares Giving all details of the proposed scheme Enabling the customer to make an informed investment decision

CONTENTS OF THE OFFER DOCUMENT..

Contents of Offer Document

Summary Information (Cover Page) Definitions Risk Factors

Standard risk factors Scheme specific risk factors

Legal and regulatory compliance Financial information Constitution of the mutual fund Management of the fund

CONTENTS OF THE OFFER DOCUMENT..

Contents of Offer Document

Offer related information

Investment procedure Schemes policy on dividend and transfers Associate transactions Borrowing policy NAV and valuation Procedure for redemption or repurchase Description of accounting policies Tax treatment of investments Investors rights and services

CONTENTS OF THE OFFER DOCUMENT..

Contents of Offer Document

Offer related information

Redressal mechanism for investor grievances Penalties, pending litigation or proceedings

SID / SAI

Mutual Fund Offer Documents have two parts: Scheme Information Document (SID), which has details of the scheme Statement of Additional Information (SAI), which has statutory information about the mutual fund that is offering the scheme. It stands to reason that a single SAI is relevant for all the schemes offered by a mutual fund. In practice, SID and SAI are two separate documents, though the legal technicality is that SAI is part of the SID.

SID/SAI
Both documents are prepared in the format prescribed by SEBI, and submitted to SEBI. The contents need to flow in the same sequence as in the prescribed format. The mutual fund is permitted to add any disclosure, which it feels, is material for the investor. Since investors are not sophisticated experts of finance or law, the documents are prepared in simple language, and in clear, concise and easy to understand style.

SID/SAI

Contents of SID The cover page has the name of the scheme followed by its type viz. Openended / Closeended / Interval (the scheme structure) Equity / Balanced / Income / Debt / Liquid / ETF (the expected nature of scheme portfolio. It also mentions the face value of the Units being offered, relevant NFO dates (opening, closing, reopening), date of SID, name of the mutual fund, and name & contact information of the AMC and trustee company. Finally, the cover page has the following standard clauses, which every investor ought to note:

SID/SAI

Contents of SAI

Information about Sponsors, AMC and Trustee Company

(includes contact information, shareholding pattern, responsibilities, names of directors and their contact information, profiles of key personnel, and contact information of service providers {Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund Accountant (if outsourced) and Collecting Bankers} Condensed financial information (for schemes launched in last 3 financial years) How to apply Rights of Unitholders Investment Valuation Norms

SID/SAI

Tax, Legal & General Information (including investor grievance redressal mechanism, and data on number of complaints received and cleared, and opening and closing number of complaints for previous 3 financial years, and for the current year todate). Regular update is to be done by the end of 3 months of every financial year.

THE KEY INFORMATION MEMORANDUM

Key information memorandum

Abridged version of offer document Distributed with the application form Carries all the key information from the prospectus

CHAPTER 5.

FUND DISTRIBUTION
AND CHANNEL MANAGEMENT PRACTICES

WHO CAN INVEST

Who can invest in mutual funds

Resident individuals Indian companies Indian trusts / Charitable institutions Banks Non-banking finance companies Insurance companies Provident funds Non-resident Indians (Repatriable and nonrepatriable) Foreign Institutional Investors

DISTRIBUTION CHANNELS
Types

of distribution channels

All distributors and employees of distribution companies to be AMFI certified

Individual agents Distribution Companies Global money managers - DP Merrill Lynch National level players - Karvy Consultants Regional SME businesses Banks and non-banking finance companies Largest mobilizers form mutual funds Direct marketing by mutual funds

NEWER DISTRIBUTION CHANNELS

Inter net Stock exchanges

SALES PRACTICES..

Agent commissions

Agents are paid commission for distribution of mutual funds

Upfront commission- paid by the investor directly Trial commission- calculated as a percentage of net asset.

Agency commission may be paid out of entry / exit load subject to overall expense limits

SALES PRACTICES..

Investor servicing

Understand all aspects of the schemes Understand client profile in terms of

Age profile Risk appetite Income and liquidity requirements

Offer clients investments suitable to investors profile Continuous monitoring of clients investments Personalised after sales service

SALES PRACTICES..
SEBIs

advertising code

Should not be misleading Dividends should be declared in Rs. / unit For performance reporting Annualised returns only for periods of one year and more Absolute returns for periods less than one year Consistency in comparison to benchmarks Past performance may or may not be sustained Rankings need to be explained

SALES PRACTICES..

Terms of appointment of agents

No approval from SEBI is required for agents appointed by mutual funds. They are normally appointed on the following terms
Provide customer a copy of offer document Customer has no recourse to agent Agent will sell only at public offering price Agent responsible for his own actions and cannot hold the fund house responsible

SALES PRACTICES..
AMFI

code of ethics

Interest of unit-holders primary High service standards Adequate disclosures Professional selling practices Fund management as per stated objective Avoid conflict of interest with directors / trustees Refrain from unethical market practices

CHAPTER 6. ACCOUNTING, VALUATION AND TAXATION

ACCOUNTING..

Net Asset Value..

Represents the value of each unit of the fund Calculated as follows NAV = Net assets of the scheme

Where net assets of the scheme are Market value of investments + Receivables + Other accrued income + Other assets - Accrued expenses - Other payables - Other liabilities

Number of outstanding units

ACCOUNTING..

Net Asset Value..

Other Assets includes any income due but not received (for e. Other Liabilities includes expenses payable by the fund (for e.g. Management fee to AMC)

All income and expenses have to be accrued upto the valuation date and included in the computation of the NAV. Major expense such as management fees should be accrued on a day to day basis, while others need not be accrued, if non-accrual does not affect NAV by more than 1% Sale or repurchase of units and sale or purchase of investment securities must be recorded within 7 days of the transaction provided the non-recording does not affect NAV by more than 2%. g. Dividend announced by a company)

NAV

Net Asset Value Let us understand the concept with a simple example. Investors have bought 20crore units of a mutual fund scheme at Rs 10 each. The scheme has thus mobilized 20 crore units X Rs 10 per unit i.e. Rs 200 crore. An amount of Rs 140 crore, invested in equities, has appreciated by 10%.

NAV

The balance amount of Rs 60 crore, mobilized from investors, was placed in bank deposits. Interest and dividend received by the scheme is Rs 8 crore, scheme expenses paid is Rs 4 crore, while a further expense of Rs 1 crore is payable. If the above details are to be captured in a listing of assets and liabilities of the scheme, it would read as follows

ASSET AND LIABILITIES Liabilities

Amount (cr) 200

Unit Capital (20crore units of Rs10 each)

Profits {Rs 8 cr (interest and dividend received) minus Rs 4 cr (expenses paid) minus Rs 1 cr (expenses payable)} 3

Capital Appreciation on Investments held {10% of Rs 140 crore} 14 217 1 218

Unitholders Funds in the Scheme Expenses payable Scheme Liabilities Assets Market value of Investments (Rs 140 crore +10%) Bank Deposits {Rs60crore (original) plus Rs 8 crore (interest and dividend received) minus Rs 4 crore (expenses paid)}

154

64 218

Scheme Assets

NAV

Unitholders Funds in the Scheme No. of Units

In the above example, it can be calculated as: Rs 217 crore 20 crore i.e. Rs 10.85 per unit.

Net assets includes the amounts originally invested, the profits booked in the scheme, as well as appreciation in the investment portfolio.

Net assets go up when the market prices of securities held in the portfolio go up, even if the investments have not been sold.

NAV

NAV has to be published daily, in at least 2 newspapers NAV, Sale Price and Repurchase Price is to be updated in the website of AMFI and the mutual fund.

In the case of Fund of Funds, by 10 am the following day.

In the case of other schemes, by 9 pm the same day

ACCOUNTING..

Net Asset Value..

Daily by 9pm on AMFI website for open ended schemes Weekly for listed close ended schemes Monthly / quarterly for unlisted close ended schemes A funds NAV is affected by

Purchase and sale of investment securities Valuation of all investment securities held Other assets and liabilities Units sold or redeemed

ACCOUNTING..

Pricing of units
All pricing is always relative to NAV Repurchase price cannot be lower than 93% of NAV (95% in case of closed-end schemes) This means maximum exit load can be 7% Sale price can not be higher than 107% of NAV This means maximum entry load can be 7% The difference between the repurchase and sale price can not be more than7% of the sale price This means that if a scheme charges entry and exit load the maximum cumulative charge can be 7%

POSITION SINCE AUG 2009

Entry Load- Nil .Sale Price =Same as NAV Exit Load/CDSC in excess of 1% of the redemption proceeds have to be credited back to the fund.

ACCOUNTING..

Structure of fees charged by the AMC

Initial issue expenses capped at 6pct of corpus collected at initial issue These expenses include advertising, marketing, distribution and other expenses at initial issue They cannot be recovered at the launch of the scheme but have to be amortised For close ended schemes initial issue expenses amortised over life of the scheme For open ended schemes initial issue expenses amortised over maximum 5 years Unamortised amount to be added as other asset in calculation of NAV

ACCOUNTING..

Structure of fees charged by the AMC

Fees for recurring expenses excluding issue and redemption expenses but including investment management and advisory fees capped at
Max expenses for Max expenses for equity schemes

Average weekly net assets Rs. Crores schemes Debt First 100 Next 300 Next 300 Above 700

2.50pct 2.25pct 2.00pct 1.75pct

2.25pct 2.00pct 1.75pct 1.50pct

No load schemes can charge 1 pct more than above

RECURRING EXPENSES
1.25 % on the first 100 cr of net assets of a scheme. 1.00% on the balance of the net asset.

For Index schemes Recurring expense limit 1.5%

Management fees- 0.75%

ACCOUNTING..

Disclosures and reporting requirements

General Disclosures Each scheme has its own annual report I.e. balance sheet, profit and loss account etc. These annual reports to be audited by auditors independent of auditors of AMC Within six months of close of accounting year publish an advertisement giving scheme-wise annual report summary to be sent to all unit-holders copy to SEBI

ACCOUNTING..

Disclosures and reporting requirements

Specific Disclosures Any item of expenditure more than 10 pct of total expenses to be specifically disclosed Half yearly disclosure of NPAs Unit-holders holding more than 25 pct of scheme to be mentioned in half yearly results Annual report to state that unit-holders can request for complete annual report instead of summary

ACCOUNTING..

Accounting policies

Any investment having a residual maturity of more than six months to be marked to market Unrealised appreciation can not be distributed Dividend received by fund should be recognised on the date the share is quoted on ex-dividend basis and not on the date of declaration. To calculate gain or loss on sale of investments, the average cost method must be followed to determine the cost of purchase Purchase sale to be recognized on the date of transaction and not settlement Bonus / rights to be recognized on ex-bonus / ex-rights day

TAX

A mutual fund is exempted from income tax under Section 10(23D) of the Income Tax Act. Mutual fund dividends are exempt from tax, in the hands of the investors as per Section 10(35) of the IT Act. Dividend distribution tax (DDT) is paid by debt funds at the rate of12.5% and 20% for individuals and institutions & 25% for all categories in a liquid scheme No DDT on equity oriented fund but STT @ .25% is levied on sale of Equity oriented fund

Capital gains on Gold ETFs -Investments in Gold Exchange-Traded Funds (ETFs) have the same tax implications as debt funds.
Wealth tax-Mutual fund units are not treated as assets under Section 2 of the Wealth Tax Act and are therefore not liable to tax.

TAXATION..

Taxation in the hands of the fund

Since a mutual fund is only a pass through vehicle, the income it earns is tax free, else it would amount to double taxation However the fund is liable to pay dividend distribution tax plus surcharge on the dividend declared for the following

Close-ended schemes Debt schemes

No dividend distribution tax on equity funds I.e. funds having more than 65pct equity

TAXATION..

Taxation implication for investors

Dividends are tax-free in the hands of the investors Section 80C benefit for Equity Linked Saving Schemes on a maximum investment of Rs.1,00,000/Wealth tax not applicable as units are not considered wealth

DIV DISTRIBUTION TAX

Money market mutual fund/Liquid fund 25% + surcharge + education cess.

Other debt funds( for individual/HUF) 12.5%+ surcharge + education cess

Other debt funds(other investor)

20% +surcharge +education cess

TAXATION..
Taxation

implication for investors

At redemption, difference in application and redemption value is treated as capital gains Capital gains may be invested in capital tax saving bonds of REC, NABARD, RBI etc. under sec 54EC Short term capital gains If the investment is held for less than one year it leads to short term capital gains Gains are taxed at 30%( those who are in 20% tax bracket)- Debt schemes. Gains are taxed at 15% plus surcharge and education cess for equity schemes. Short term capital gains can be off-set against short-term capital loss

CAPITAL GAINS
Capital Gains LTCG Equity NIL Others 10% w/o indexation or 20% with indexation

STCG

15%

Marginal Rate of Tax

TAXATION..

Taxation implication for investors

Long term capital gains

If the investment is held for more than one year it leads to long term capital gains No Long term capital gains tax on Equity Mutual Fund Investments. For Debt schemes 10% for with out indexation and 20% for with indexation for with indexation.

*** Indexation means that the cost of acquisition is adjusted upwards to reflect the impact of inflation.

TAXATION..
Taxation

implication for investors

Dividend stripping is not permitted Investment should be held for a minimum period of nine months to avail of any short term capital loss that may arise after dividend declaration For non-resident Indians Dividend is tax free Tax is deducted at source as follows
@20pct on long term capital gains @30pct on short term capital gains Plus 2pct surcharge

SECURITIES TRANSACTION TAX

On purchase of share in stock exchanges-0.125 % On Sale of shares in stock exchanges- 0.125% On sale of F&O in stock exchange- 0.017%.

On purchase of units in stock exchanges- 0.125% On sale of units in stock exchanges 0.125% on repurchase of units ( by AMC)- 0.25%

TAXATION..

Taxation implication for investors

For foreign companies

Dividend is tax free Tax is deducted at source as follows @20pct on long term capital gains @48pct on short term capital gains

Investments made by a mutual fund on behalf of investors are accounted as

Assets
Liabilities Capital None of the above

CHAPTER 7 INVESTOR SERVICES

APPLYING FOR AND REDEEMING UNITS..

Purchase of units

At investor service centers or registrars Application form Supporting documents

None for resident individual investors Same as bank account opening for corporates

Application form is agreement for investment Mode of payment KYC is compulsory for all investments of Rs 50000 and above.

APPLYING FOR AND REDEEMING UNITS..

Redemption of units

At investor service centers or registrars Redemption form Mode of payment

Direct credit Cheques

Redemption for non-resident Indians

Repatriable Non-repatriable

ONLINE TRANSACTION
This Facility given to existing investor in a mutual fund. The investor required to fill the requisite details in the application form. Based on this ,the registrar would allot a user name and pass word. This is can be used by the investor to make the further purchase of units in the mutual fund, or to request repurchase of the units held in the mutual fund.

INVESTMENT OPTIONS -TIME DIVERSIFICATION

SIP

Here the investor is given the option of making a pre-determined number of investments in the fund. The investor is allotted units on the date of investment at the applicable NAV.

SWP

the Systematic Withdrawal Plan (SWP) allows the investor the facility to withdraw a pre-determined amount/units from his fund at a pre-determined interval. Is a facility to transfer a pre-determined amount/units from one mutual fund to another mutual fund (within a fund house) at a pre-determined interval

STP

INVESTMENT PLANS AND SERVICES..

Automatic reinvestment plan

Automatic reinvestment of dividend Automatic reinvestment at ex-dividend NAV Benefit of compounding

Systematic

investment plan / Automatic investment plan / Voluntary accumulation plan

Periodic investments at regular intervals Cultivates investment habit Avoids timing the market Avoids greed and fear Participation in all market movements

INVESTMENT PLANS AND SERVICES..

Systematic withdrawal plan

Withdrawal at regular intervals Provides regular income Amount withdrawn is treated as redemption Different from monthly income plan Redemption of principal amount, not only gains as in monthly income plans Redemptions taxed as capital gains

INVESTMENT PLANS AND SERVICES..

Systematic transfer plans

Periodic transfer of investments from one scheme to another Trigger may be related to date or value Efficient manner of booking profits and maintaining allocation of debt and equity Transfer out is treated as redemption and transfer in is treated as application Tax as applicable on application and redemption

TRANSACTION THROUGH STOCK EXCHANGES

Both NSE and BSE extended their trading platform to help the stock exchange brokers become a channel for investor to transact in mutual funds. Bothe platforms are open from 9 am to 3 pm on every working day. Fresh subscriptions .Similarly redemptions are permited.

INVESTMENT OPTIONS

Most mutual fund schemes offer below mentioned options

Dividend Growth Dividend reinvestment options.

*** When a dividend is paid ,the NAV of the units falls to that extend.

Investment Options

Dividend Option

Growth option

Dividend Payout

Dividend Reinvestment

Before declaration of dividend / bonus Growth Dividend payout Dividend reinvestment Bonus

NAV
Units Value (Rs) NAV Units Value (Rs)

20
100 2,000 20 100 2000

20
100 Rs 2,000 19 100 1900

20
100 Rs 2,000 19 105.2631 2000

20
100 Rs 2,000 18.1818 110 2000

After declaration of dividend / bonus

Dividend received in cash

Additional units

Rs 100

5.2631

10

INVESTMENT PLANS AND SERVICES..

Other

investor services

Phone transactions - Interactive voice recognition system Cheque writing facility Sweep facility to bank accounts Periodic statements and tax information Loan against units Nomination facility Transfer of units through listing of close ended funds

TRIGGERS

For instance , an investor can specify that the units would be repurchased if the market reaches certain level. In that case ,once the market reaches that level ,the units would be repurchased without the need for going through the a separate repurchase transaction.

PLEDGE

Banks ,NBFC and others financiers often lend money against pledge of units by the unit holder. Once the units are pledged ,the unit holder cannot sell or transfer the pledge units ,until the pledgee gives a no objection to release the pledge.

CHAPTER 8 RETURN ,RISK & PERFORMANCE OF

FUNDS

EQUITY PORTFOLIO MANAGEMENT..

Types of equity instruments

Ordinary shares Preference shares Equity warrants Convertible debentures

Derivatives
Futures Options

EQUITY PORTFOLIO MANAGEMENT..

Classification of equity shares

By market classification
Large capitalisation companies Medium capitalisation companies Small capitalisation companies

By anticipated earnings
Price to earnings ratio-CMP/EPS Dividend yield

Cyclical shares Growth stocks Value stocks

EQUITY PORTFOLIO MANAGEMENT..

Fund management organisation structure

Fund manager
Performs asset allocation

Security analyst
Supports the fund managers through analytical reports (Fundamental, technical and quantitative)

Security dealers
Executes actual buying and selling through brokers

EQUITY PORTFOLIO MANAGEMENT..

Equity Research

Fundamental analysis The study of the Financial health of a particular company, by studying the past 3 to 5 years Balance sheets & Profit & Loss accounts Technical analysis The study of the market movements of share price of a company or industry / sector to predict the future trend Quantitative analysis The use of mathematical models for equity valuation

EPS/PE/BOOK VALUE

EPS- Profit after tax/No of equity shares P/E ratio: Market price/EPS

Book value per share: Net worth / no of equity share

Price to book value: Market price /book value per share.

EQUITY PORTFOLIO MANAGEMENT..

Approaches to portfolio management

Passive fund management (Index funds) Active fund management

Growth investment style Value investment style

Portfolio Building approach Top down and bottom up

EQUITY PORTFOLIO MANAGEMENT..

Portfolio management process

Set Investment policy Perform security analysis and research Construct a portfolio Revise the portfolio Evaluate the performance of the portfolio

DEBT

DEBT PORTFOLIO MANAGEMENT..

Classification of debt instruments

Secured v/s unsecured Government security v/s corporate security By maturity profile

Money market securities Debt securities

Interest bearing v/s zero coupon / discounted Floating coupon v/s fixed coupon

DEBT PORTFOLIO MANAGEMENT..

Types of debt instruments

Certificate of deposit Commercial paper Corporate debentures Floating rate bonds Government securities Treasury bills Bank / Financial Institution bonds Public sector undertaking bonds

FEATURES OF DEBT INSTRUMENTS

A security such as bond that pays a specified cash flow over a specific period. Also called fixed income securities. Unlike equities they promise regular cash flows. Except for G Sec all other carry a degree of default risk In case of liquidation debt holders are first to be paid.

CHARACTERISTICS
Rs 1000 par value ( face value) with coupon of 10% paid annually and maturity of 10 years. Par value= Rs 1000 Coupon ( interest) rate= 10%= Rs 100 Maturity: 10 years Redemption value: Rs 1000 after 10 years

BOND PRICING

If the required rate of return is r=10% based on its risk levels what should be the value of this bond? Bond value = Present value of coupons + Present value of redemption value

c3 cn c1 c2 P0 .......... ........ 2 3 n (1 r ) (1 r ) (1 r ) (1 r )

P= 100/(1+0.1)^1+100/(1+0.1)^2+...+1100/(1+0.1)^10 = 1000 Coupon is fixed, maturity is fixed , but the one that fluctuates is the required rate of return. On what does required rate of return depend? Required rate of return on the bond = risk free rate of return+ return to compensate for default risk, liquidity etc. So if interest rates in the economy changes or the default risk of bond changes the required rate of return changes/ What is the other name for required rate of return? YTM= Yield to maturity

WHAT HAPPENS TO PRICE IF R INCREASES OR DECREASES?

PAR VALUE = 1000, COUPON 10% MATURITY 10YEARS

Required rate of return 10% 12% 8%

Market Price 1000 887 1134

Conclusion: Price and interest rates are inversely related

INTEREST RATE CHANGE AND MATURITY

Bond 1: Rs 1000 par value, 10% coupon, 10 years to maturity, currently trading at ytm of 10%? Bond 2: Rs 1000 par value, 10% coupon, 5 years to maturity, currently trading at ytm of 10%?

RESULT
Maturity 5 years Price at ytm Price at ytm Price at ytm @8% of 8% 10% 12% 1080 1000 927 @12% 80 -73

10 years

1134

1000

887

134

-113

Long term bonds are more riskier than short term bonds

INTEREST RATE RISK MEASURE FOR BONDS

Interest rate risk that a fund takes is related to the duration of the fund, which is related to the maturity of the fund. Duration of a fund (or a bond) is a measure of the sensitivity of the bond to change in interest rates. Thumb rule: Duration of a fund/bond = maturity of the fund (or bond)/1.7

INTEREST RATE RISK

Assume that the duration of the bond is 5. If the yields move higher by 1%, the price of the bond moves lower by 5%. Thus, higher the duration of the fund, higher would be the portfolio volatility

128

OTHER ASSET CLASS- GOLD

Gold- Is seen as safest investment avenue. When the rupee becomes stronger , the same foreign currency can be bought for fewer rupees. There for the same gold price translate into a lower rupee value for the gold portfolio.

This pushes down the gold fund return

OTHER ASSET CLASS REAL ESTATE

Real estate is another asset class where investors can look into that.
The prices of real estate will be the function of interest rate movement.

RETURNS

Absolute Return: This is a type of return that an asset generates over a certain period of time. It calculates the appreciation or depreciation (as a %) that an asset usually a stock or a mutual fund achieves over a given period of time.

CAGR (Compounded Annual Growth Rate): This type of return calculates the annual performance of an asset class. It immunizes the time horizon and describes the rate which an investment has grown over the yearly basis

EXAMPLE
You invest in a equity scheme at NAV of Rs 100 and sell after five years for Rs 300 calculate absolute returns and CAGR?

RETURNS
Holding

Period Absolute return can be calculated = (EV-BV/BV)*100 =(300-100/100)*100=200% And In the second scenario we can calculate CAGR = ((EV/BV)^(1/n) -1 ) *100 = ((300/100)^(1/5) -1) *100 = 24.57%

WHAT IS RISK?
Risk,

in traditional terms, is viewed as a negative. Websters dictionary, for instance, defines risk as exposing to danger or hazard".

Risk as defined in financial world

The Chinese symbols for risk, reproduced below, give a much better description of risk

The first symbol is the symbol for danger, while the second is the symbol for opportunity, making risk a mix of danger and opportunity.

RISK IN MF SCHEMES

Portfolio risk- The valuation of the portfolio purely depends on the composition of asset class and Market volatility. Portfolio liquidity: Schemes maintain certain proportion of their asset in liquid form . Because High market valuation and to meet redemption requirements. Schemes can hedge and rebalance their portfolio by using derivatives.

137

DEBT STRATEGY IN VOLATILE MARKETS BASED ON MODIFIED DURATION

Take exposure to aggressive Income Funds and Gilt Funds in periods of falling interest rates. Reduce the interest rate risk in periods of rising interest rates

138

Take exposure to Short Term Plans Take exposure to Floating Rate Bond Funds Take exposure to Bank Fixed Deposits

CREDIT RATINGS A MEASURE OF CREDIT RISK

Explores the credit worthiness of the issuer. AAA Highest Safety AA High Safety A Adequate Safety BBB Moderate Safety BB Inadequate Safety B High Risk C Substantial Risk D - Default

139

MEASURE OF RISK

Variance: It measures the fluctuation in periodic returns of a scheme as compared to its own average return.( for debt and equity) Standard deviation: It measures the fluctuation in periodic returns of a scheme as compared to its own average return.(Mathematically it is a square root of Variance).(for debt and equity) Beta: It measures the non systematic risk.( only equity).

MEASURING MUTUAL FUND PERFORMANCE..

Useful tips

Consider the effect of loads Compare similar time periods For less than one year period calculate returns on absolute basis except for money market funds For a period of one year and more calculate returns on annualised basis Returns since inception

MEASURING MUTUAL FUND PERFORMANCE..

Other

concepts

Expense Ratio Total expenses to average net assets Total expenses does not include brokerage paid on funds transactions Indicates the expenses the fund is incurring Is a function of fund size, and limits are as set by SEBI Income Ratio Net investment income to average net assets Helps evaluating debt funds

MEASURING MUTUAL FUND PERFORMANCE..

Other concepts..

Portfolio turnover rate

Indicates the amount of and number of times securities are bought and sold by a fund 100pct turnover implies entire portfolio was sold and bought during the period Useful for equity funds

Transaction costs
These include brokerage, stamp duty, registrar and custodian fees and dealer spreads They have limited application for comparison

MEASURING MUTUAL FUND PERFORMANCE..

Other concepts..

Fund size
Small funds are easier to manage and change Large funds bring economies of scale on expense ratios

Cash holdings
Large cash holdings indicate idle funds Large cash holdings also help as hedge mechanisms

Borrowing by mutual funds

Only allowed for meeting liquidity requirements Maximum six months Maximum 20 pct of net assets

EVALUATING FUND PERFORMANCE..

Measuring mutual fund performance refers to calculating returns while evaluating performance refers to comparing it with other funds / benchmark

Evaluation with benchmarks Index Funds

Comparison to base index Comparison to Nifty / Sensex / BSE 100 / BSE 200 Money market funds (CRISIL Liquid Fund Index) Short-term funds (CRISIL Short-term Bond Fund Index) Debt funds (CRISIL Bond Fund Index)

Equity Funds

Debt Funds

EVALUATING FUND PERFORMANCE..

Evaluation with peer group

Following criteria must be considered when selecting peer group for evaluation Similar investment objectives and risk profiles
Debt cannot be compared to equity Value funds cannot be compared to balanced funds

Portfolio composition

High yield debt funds cannot be compared to GILT funds

Comparison has to be made over the same period of average annualised return on a pre / post tax basis

TRACKING MUTUAL FUND PERFORMANCE

Tracking fund performance is a regular full time activity of professional organisations like CRISIL, Value research, Credence etc.
Requires a lot of data compilation and analysis Most distributors and mutual fund houses out-source this activity

BENCH MARKS AND PERFORMANCE

For equity scheme- It should synch with investment objectives. Ex.BSE Sensex, Nifty, BSE 200,BSE 500 etc..

For Debt scheme Si bex( 1 to 3 years) Mi -bex( 3 to 7 years) Li bex( more than 7 years).and CRISIL composite index.

QUANTITATIVE MEASURE OF FUND MANAGERS

PERFORMANCE

Sharpe ratio/Treynor ratio - Is the risk premium per unit of risk. Higher the ratio ,better the scheme is considered to be. Alpha-The difference between scheme actual return and its optimal return. Positive alpha indicative of outperformance by the fund manager.

CHAPTER 9
SCHEME SELECTION

SEQUENCE OF DECISION MAKING

Step 1- Deciding on the scheme category Step 2 Selecting a scheme with in the category. Step 3 -selecting the right option within the scheme.

With in the category : For Equity scheme- Active/Passive - Open ended /Close ended. - Sector/Thematic - Large cap/Small cap. - Growth fund/ Value funds.

SCHEME SELECTION

For Debt scheme- Regular debt /MIP - Open ended funds/ FMP - Gilt funds /Diversified debt. - Long term debt /Short term - Liquid funds.

SELECTING A SCHEME WITHIN A CATEGORY

Parameter to be considered:

A. Fund Age B. FRE( Fund Running expense) C. Tracking error. D. Regular income yield in portfolio.

OPTION WITHIN SCHEME

Dividend pay out Or Dividend reinvestment or Growth option

CHAPTER 10
SELECTING THE RIGHT INVESTMENT PRODUCTS FOR INVESTOR.

INVESTMENT VS. SPECULATION INVESTOR

PLANNING HORIZON RISK DISPOSITION RETURN EXPECTATION LONG MODERATE MODEST

SPECULATOR
SHORT HIGH HIGH

BASIS FOR DECISIONS

LEVERAGE

FUNDAMENTAL
NO

TECHNICAL
HIGH

INVESTMENT ALTERNATIVES
Investment Avenues Nonmarketable Financial Assets Bonds

Equity Shares Money Market Instruments

Mutual Fund Schemes Real Estate

Life Insurance Policies Precious Objects Financial Derivatives

EVALUATION OF VARIOUS INVESTMENT AVENUES

Return Current yield Capital appreciation Equity Shares Nonconvertible Debentures Equity Schemes Debt Schemes Bank Deposits Public Provident Fund Life Insurance Policies Residential House Gold and Silver Low High Low Moderate Moderate Nil High Negligible High Low Nil Moderate Risk High Low High Low Negligible Nil Marketability/ Liquidity Fairly high Average High High High Average Tax Shelter High Nil High No tax on dividends Nil Section 80 C benefit Section 80 C benefit High Nil Convenience High High Very high Very high Very high Very high

Nil Moderate Nil

Moderate Moderate Moderate

Nil

Average Low Average

Very High Fair Average

Negligible Average

Risk Return Spectrum

High

Equity Real Estate

Return potential

Gold

Debt Funds
PPF, NSC, KVP, PO Deposits, RBI Bonds Liquid Funds

Savings Bank/ FD
Low Low Risk High

Note:The above chart is for illustrative purpose only and is not marked to scale. The chart is based on our perception of the risk and return potential of various investment avenues

NEW PENSION SCHEME

Kind of Pension accounts:

Tier 1 ( Pension account) is non withdrawable. Tier 2( Savings account) is withdrawable to meet the financial contingencies

Kind portfolio- Investor a have choice of selecting Equity /Debt and Gilt port folio.

CHAPTER 11 HELPING INVESTOR WITH FINANCIAL PLANNING.

WHAT IS FINANCIAL PLANNING?

Identifying Planning

the varying needs for money.

ones saving and investment in a manner the enables one to achieve the prespecified goal.

ASSESSMENT OF FINANCIAL GOAL

Calculate difference between real and nominal rates of return for various asset classes mentioned in the previous slide?

VALUE OF MONEY OVER TIME

Impact of Inflation on monthly expenses of Rs 20,000
60,000 53,066 41,579 32,578 25,526 20,000 20,000 10,000 Today

Monthly Exps in Rs

50,000 40,000 30,000

Value of Rs 1 lac over time InflationPeriod A Devil, we need to beat it!

120,000 100,000 100,000

5 years

10 years

15 years

20 years

Value of Money

80,000 60,000 40,000 20,000

78,353 61,391 48,102 37,689

Inflation @ 5% p.a

Today 5 years 10 years Period 15 years 20 years

POWER OF COMPOUNDING

Activity

POWER OF COMPOUNDING

Case 1:Single payment Assume index fund earn a return of 18% and Fixed deposits earn 8% If you invest Rs 10000 in index and in fixed deposit, what will be the amount say after 20 years?

CHOICE BETWEEN MISERY & HAPPINESS Index Debt Differenc Fund e

Returns Expected
Amount Years Amount after 20

0.18
10000 20

0.08
10000 20

POWER OF COMPOUNDING

Case 2: Monthly payment (SIP) Assume index fund earn a return of 18% and Fixed deposits earn 8% If you invest Rs 1000 per month in index and in fixed deposit , what will be the amount say after 20 years?

SMALL SAVINGS MAKE HUGE DIFFERENCE

Index Returns Expected
Amount Years Amount after 20 years 0.18 1000 20

Debt
0.08 1000 20

Difference

2308854

589020

1719834

What does it take to create wealth

Investing Rs 2400 per month @ 10% p.a for 15 yrs makes you a

Millionaire

Value /Yrs

10

15

5,00,000 12,000
10,00,000 23,800 25,00,000 60,000 50,00,000 1,20,000 100,00,000 2,38,000

7000
13,000 32,500 64,500

2,500
4,900 12,200 24,300 48,500

1,200
2,400 6,000 12,000 24,000

1,30,00 0

The table shows the SIP amount required to be invested per month for achieving the target amount in the specified time period. The hypothetical rate of return on the investments is assumed at 10% p.a.

FINANCIAL PLANNING
Financial Planning is the process of
identifying

a persons financial goals evaluating existing resources and, designing the financial strategies, i.e. by making appropriate asset allocation ..
that help the person achieve those goals.

OBJECTIVE OF F.P
The objective of F.P is to ensure that the right amount of money is available in the right hands at the right point in the future to achieve an individuals financial goals.

WHY IS IT CRITICAL NOW?

Independent lifestyle- Nuclear families Increase in life expectancy from 60 yrs to 80 years Poor financial literacy Volatile financial markets Too many investment choices

WHAT ARE THE STEPS INVOLVED IN FINANCIAL PLANNING?

Establish and define the relationship with the client. Define clients goal. Understand ability to save and need for cash flows. Understand the risk tolerance of clients. Understand the tax liability and requirements of clients. Create asset allocation path. Review and rebalancing.

HUMAN LIFE CYCLE

Phase I Phase II
Childs Marriage Childs Education Housing Child birth Marriage 22 yrs 38 yrs 10- 20 yrs

Phase III

Education Age- 22 yrs

Earning Years

Post Retirement Years

Age- 60 yrs

RECOMMENDED ASSET OR SAVINGS ALLOCATIONS

Asset Mid 20s Late 30 to early 40's
55% 10%

Mid 50's

Late 60s and beyond

25% 15%

Stocks Real Estate

65% 10%

45% 12.50%

Bonds
Cash

20%
5%

30%
5%

37.50%
5%

50%
10%

CASE STUDY

Life cycle stages & respective investment needs

STAGE OF LIFE CYCLE: MARRIED WITH YOUNG CHILDREN; BOTH

PARTNERS EARNING Financial status:

Double income High expenses, credit card payments Plan home loan + car loan already Given income status risk appetite high

Needs:
Short Term: Down payment for home loan. Medium Term: Save up for children's education; Medical insurance, Life insurance Long Term: Funds for retirement

Choice of Investments: Short term (< 5years) Short term liquid funds Bank fixed deposits Medium term (5-10 years) NSC, KVP, RBI bonds Debt and balanced MFs Long Term ( >10 years) Equity MFs Insurance: Life Insurance

STAGE OF LIFE CYCLE: YOUNG AND UNMARRIED

Financial status: Relatively low income Spending needs are large gizmos, car

Taken a car loan

Risk appetite high

Needs:

Short Term: Marriage & financial decisions such as expenses to run home. Medium Term: plan to buy home on loan would mean saving for down payment Long Term: Good education for children + funds for retirement

Choice of Investments: Short term (< 5years) Short term liquid funds Bank fixed deposits Medium term (5-10 years) NSC, KVP, RBI bonds Debt and balanced MFs Long Term ( >10 years) Equity MFs Insurance: Insurance to cover car liability

STAGE OF LIFE CYCLE: MARRIED WITH OLDER CHILDREN

Financial status: Mid career high income High expenses: for children; house maintenance expenses

Cleared home loan

Risk appetite high

Needs:
Short Term: Children's higher education; life , medical and disability insurance Medium Term: Plan for retirement Build large corpus to enable to live the life style

Choice of Investments: Short term (< 5years) Short term liquid funds Bank fixed deposits Medium term (5-10 years) NSC, KVP, RBI bonds Debt and balanced MFs Long Term ( >10 years) If sufficient corpus is not built for retirement, would have to take risk and invest in equities.

STAGE OF LIFE CYCLE: PRE- RETIREMENT

Financial status: Highest income Children independent Substantial funds for retirement High Low risk appetite

Needs: Retirement Planning

Choice of Investments: Short term (< 5years) Short term liquid funds Bank fixed deposits If sufficient corpus not built for retirement you need to take risk and invest in equities

STAGE OF LIFE CYCLE: RETIREMENT

Financial status: Income declines substantially Expenses high on account of medical expenses

Lowest risk appetite

Choice of Investments: Regular income for daily needs can be meet out of regular income liquid plans

Needs: Need to have 2/3 rd of income you had in your working years.

WHAT IS WEALTH CYCLE CLASSIFICATION OF INVESTORS?

STAGE FINANCIAL NEEDS INVESTMENT PREFERENCES

Accumulation stage Investing for long term identified financial goals

Transition stage Near term needs for funds as pre-specified needs draw closer Higher liquidity requirements

Growth options and long term products. High risk appetite

Liquid and medium term investments. Lower risk appetite Liquid and medium term investments. Preference for income and debt products

Reaping stage

Inter-generational transfer

Long term investment of inheritance

Low liquidity needs. Ability to take risk and invest for the long term
Wealth preservation. Preference for low risk products

Sudden wealth surge

Medium to long term

CHAPTER 12.

RECOMMENDING MODEL PORTFOLIO AND FINANCIAL PLANS.

RISK PROFILING

Risk profiling an approach to understand the risk appetite of investor an essential pre requisite to advise investor on their investments.

ASSET ALLOCATION: MEANING & ROLE

Asset allocation a plan for diversifying money among the major types of Asset Classes/securities.

The process of deciding how to distribute wealth among asset classes, sectors, & countries for investment purposes A good asset allocation will maximize returns while minimizing risk.

Significance of Asset Allocation

Significance Relative to Return

Asset Allocation helps explain over 93% of a portfolios performance.

Brinson, Hood and Bee bower Determinants of Portfolio Performance,1986, 1991:

ASSET ALLOCATION TYPES

Strategic asset allocation: It is based on the risk profiling of the client. Tactical asset allocation: It is based on the likely behavior of the market

WHAT ARE THE PRINCIPLES OF FINANCIAL PLANNING THAT INVESTORS SHOULD USE IN CREATING THEIR INVESTMENT STRATEGY?

Harness the power of compounding.

Start investing early.

Have realistic expectations. Invest regularly.

WHAT ARE THE FINANCIAL PLANNING STRATEGIES THAT CAN BE RECOMMENDED TO INVESTORS?

Rupee cost averaging. Value averaging. Jacobs rebalancing strategy. Grahams 50:50 portfolio re-balancing.

WHAT IS BOGLES STRATEGIC ASSET ALLOCATION?

Older investors in the distribution phase:

50% equity : 50% debt

60% equity : 40% debt 70% equity : 30% debt 80% equity : 20% debt

Younger investors in the distribution phase: Older investors in the accumulation phase: Younger investors in the accumulation phase: -

THE STEPS IN DEVELOPING A MODEL PORTFOLIO FOR AN INVESTOR?

Develop long term goals. Determine asset allocation. Determine sector distribution. Select specific fund managers and their schemes.

MODEL PORTFOLIOS RECOMMENDED FOR INVESTORS ACCORDING TO THEIR LIFE CYCLE STAGES:

Young unmarried professionals :

50% in aggressive equity funds. 25% in high yield bond funds, growth and income funds. 25% in conservative money market funds.

Young couple with 2 incomes and 2 children:

10% in money market funds. 30% in aggressive equity funds. 25% in high yield bond funds and long term growth funds. 35% in municipal bond funds.

CONTD:

Older couple single Income :

30% in short term municipal funds 35% in long term municipal funds 25% in moderately aggressive equity 10% emerging growth equity

Recently retired couple :

35% in conservative equity funds for capital preservation / income 25% in moderately aggressive equity for modest capital growth 40% in money market funds

WHAT IS THE RECOMMENDED PORTFOLIO FOR INVESTORS IN ACCUMULATION PHASE?

Diversified Equity : Sector and balanced funds 65 80%

Income and gilt funds : 15 30%

Liquid funds and bank deposits :

5%

WHAT IS THE RECOMMENDED PORTFOLIO FOR INVESTORS IN DISTRIBUTION PHASE?

Diversified Equity and balanced funds: 15 30%

Income funds : 65 80%

Cash

funds :

5%

WHAT ARE THE STEPS IN SELECTION OF AN EQUITY FUND?

Classify into broad categories that signify their risk and return characteristics.

Classify the funds on the basis of their fund manager style.

Evaluate the performance of the scheme. Understand the structural characteristics of the scheme:

Size of the fund Fund age Portfolio managers experience Costs of investing

Understand the portfolio characteristics of the scheme.

WHAT ARE THE STEPS IN SELECTION OF A BOND FUND?

Fund age and size. Relative yield. Costs. Quality of the portfolio.

Average maturity.

WHAT ARE THE STEPS IN SELECTION OF A MONEY MARKET FUND?

Lower expense ratios. Higher credit quality of the portfolio

Yield

THANK YOU