Indian Institute of Capital Markets

Presentation on:
Mutual Funds
Indian Institute of Capital Markets
Retail Investors
Investment Objective
Risk Management
NAV
Factsheets
Return
AUMs
Portfolio
Portfolio
Professional
Management
Asset Allocation
Tax Saving
Growth
Fund Manager
Redemption
Open Ended
Investment
Dividend
Close Ended
Exit Load
Entry Load
Sale Price
Repurchase Price
Indian Institute of Capital Markets
Mutual Fund
Snapshot.
Indian Institute of Capital Markets
Indian Institute of Capital Markets

An old Axiom :

It is not wise to put all eggs into
one basket



was probably in the minds of
those who formed the first mutual fund.
Why did Mutual Funds come into existence?
Indian Institute of Capital Markets
Contents
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Flow Cycle of a Mutual Fund
Indian Institute of Capital Markets
Investors
Fund
Manager
Securities
Returns
Flow Cycle of a Mutual Fund
Indian Institute of Capital Markets
Mutual Funds defined.a flow cycle
Flow Cycle of a Mutual Fund
Indian Institute of Capital Markets
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.
Flow Cycle explained
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Diff. b/w MF and Direct Investment
Indian Institute of Capital Markets
Professional investment management
Risk reduction through diversification
Convenience
Availability of alternative portfolio objectives
Unit holders account administration and services


Mutual fund investing vs. Direct investing
Diff. b/w MF and Direct Investment
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Balance sheet of a Bank and Mutual Fund
Indian Institute of Capital Markets
Difference between Bank and Mutual Fund
Mutual Fund Balance Sheet
Liabilities Assets






Bank Balance Sheet
Liabilities Assets






Difference b/w Balance Sheets of MF and Bank
Indian Institute of Capital Markets
Difference between Bank and Mutual Fund
Mutual Fund Balance Sheet
Liabilities Assets
Unit Capital


Investment in
Financial
Securities
Bank Balance Sheet
Liabilities Assets
Share Capital
Deposits

Loans and
Advances

Difference b/w Balance Sheets of MF and Bank
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Organizational Structure of Mutual Fund
Indian Institute of Capital Markets
Organizational Structure of Mutual Fund
Indian Institute of Capital Markets
Sponsor
Akin to the Promoter of the company,
Contribution of minimum 40% of net worth of AMC,
Posses sound financial record over five years period,
Establishes the Fund,
Gets it registered with the SEBI,
Forms a trust, & appoints Board of trustee.
Trustees
Holds assets on behalf of unit holders in trust,
Trustees are caretaker of unit holders money,
Two third of the trustees shall be independent persons (not associated with the
sponsor),
Trustees ensure that the system, processes & personnel are in place,
Resolves unit holders GRIEVANCES,
Appoint AMC & Custodian, & ensure that all activities are accordance with the SEBI
regulation.



Organizational Structure of Mutual Fund
Indian Institute of Capital Markets
Custodian
Holds the funds securities in safekeeping,
Settles securities transaction for the fund,
Collects interest & dividends paid on securities,
Records information on corporate actions.

Asset Management Company
Floats schemes & manages according to SEBI,
Can not undertake any other business activity, other than portfolio mgmt services,
75% of unit holders can jointly terminate appointment of AMC,
At least 50% of independent directors,
Chairman of AMC can not be a trustee of any MF.

Distributor / Agents
Sell units on the behalf of the fund,
It can be bank, NBFCs, individuals.



Organizational Structure of Mutual Fund
Indian Institute of Capital Markets
Banker
Facilitates financial transactions,
Provides remittance facilities.

Registrar & Transfer Agent
Maintains records of unit holders accounts & transactions
Disburses & receives funds from unit holder transactions,
Prepares & distributes a/c settlements,
Tax information, handles unit holder communication,
Provides unit holder transaction services.

Organizational Structure of Mutual Fund
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Classification of Mutual Fund Schemes
Indian Institute of Capital Markets
Each category is classified into more sub-categories.
AMFI Classification of MF Schemes
Fund schemes

Portfolio objectives
Growth & Income High Risk & High Return
Balanced Moderate Risk & Return
Liquid & Money Market Fixed Return
Gilt Zero Risk
ELSS Tax Saving
Fund of funds Additional diversification
ETFs Market Driven
Classification of Mutual Fund Schemes
Indian Institute of Capital Markets
By Structure
Open-Ended anytime enter/exit
Close-Ended Schemes listed on exchange, redemption after period of
scheme is over.
By Investment Objective
Equity (Growth) only in Stocks Long Term (3 years or more)
Debt (Income) only in Fixed Income Securities
Liquid/Money Market Short-term Money Market (CPs, CDs, Treasury Bills)
Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years)
Gilt Funds primarily in G-Sec
Other Schemes
Tax Saving Schemes such as ELSS
Special Schemes (ETFs, foreign funds)
Other classification of MF schemes
Classification of Mutual Fund Schemes
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Risk-return structure of schemes
Indian Institute of Capital Markets
Risk Return of different schemes
Risk-return structure of schemes
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
History of Mutual Funds in India
Indian Institute of Capital Markets
Formation of
UTI
Entry of Public
Sector Funds
Entry of Private
Sector Funds
A phase dedicated
to Retail Investors
1964
1987
1993
2009 ?
Phases of Mutual Fund Industry in India
History of Mutual Funds in India
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Regulatory Aspects
Indian Institute of Capital Markets
Governed by SEBI (Mutual Fund) Regulation 1996
All MFs registered with it, constituted as trusts ( under Indian Trusts
Act, 1882)
Bank operated MFs supervised by RBI too
AMC registered as Companies registered under Companies Act, 1956
SEBI- Very detailed guidelines for disclosures in offer document, offer
period, investment guidelines etc.
NAV to be declared everyday for open-ended, every week for closed
ended
Disclose on website, AMFI, newspapers
Half-yearly results, annual reports
Select Benchmark depending on scheme and compare
Regulations
Regulatory Aspects
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Portfolio Management Process
Indian Institute of Capital Markets
Portfolio Management Process
Investment Objective
Portfolio Construction
Security Selection
Investment
Portfolio Optimizer
Portfolio Management Process
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Risk Management
Indian Institute of Capital Markets
Risk Management Function
Risk category Risk factors
Fund management
Volatility in performance, portfolio concentration,
Interest rate movement, liquidity risk & credit risk.
Operations
Deal error, settlement problem, NAV & fund pricing
error, inaccurate financial reporting, fraud.
Customer Error in deal processing, fraud .
Marketing & distribution New product development, selling & distribution
Other business risk Critical knowledge loss, skills shortage, third party
risk
Disaster recovery & business contingency plans.
Insurance against third party loss (R&TA), arising from error & omission.
Risk Management
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Investment Checklists
Indian Institute of Capital Markets
Draw up your asset allocation
Financial goals & Time frame (Are you investing for retirement?
A childs education? Or for current income? )
Risk Taking Capacity
Identify funds that fall into your Buy List
Obtain and read the offer documents
Match your objectives
In terms of equity share and bond weightings, downside risk
protection, tax benefits offered, dividend payout policy, sector focus
Check out past performance
Performance of various funds with similar objectives for at least 3-5
years (managed well and provides consistent returns)
Investing Checklist
Investment Checklists
Indian Institute of Capital Markets
Checklist continued..
Think hard about investing in sector funds
For relatively aggressive investors
Close touch with developments in sector, review portfolio regularly
Look for `load' costs
Management fees, annual expenses of the fund and sales loads
Does the fund change fund managers often?
Look for size and credentials
Asset size less than Rs. 25 Crores
Diversify, but not too much
Invest regularly, choose the S-I-P
MF- an integral part of your savings and wealth-building plan.

Investment Checklists
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Mutual Fund Comparison
Indian Institute of Capital Markets
Mutual Fund Comparison
Absolute returns
% difference of NAV
Diversified Equity with Sector Funds No
Benchmark returns
SEBI directs
Fund's returns compared to its benchmark
Time period
Equal to time for which you plan to invest
Equity- compare for 5 years, Debt- for 6 months
Market conditions
Proved its mettle in bear market
Mutual Fund Comparison
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Expenses
Indian Institute of Capital Markets
Expenses of Mutual Fund
Accounted for in FUND RETURN Not included in FUND RETURN
Management fee* Front end sales load
Group fee* Back end sales load
Performance fee* Transaction fee
Administrative fee* Redemption fee
Brokerage costs Account maintenance fee
Interest costs Bid ask spreads
An asterisk * indicates fee which is included in a funds expense ratio.
As per SEBI Rule, expense ratio should be 2.5% for equity & 2.25% for
debt fund of fund value.
Expenses
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Tracking Mutual Funds
Indian Institute of Capital Markets
Filling up an application form and writing out a cheque = end of the story No!
Periodically evaluate performance of your funds
Fact sheets and Newsletters
Websites such as www.valueresearchonline.com,
www.mutualfundsindia.com, www.morningstar.in, www.lipperweb.com et al.
Newspapers
Professional advisor
Keeping Track
Tracking Mutual Funds
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Warning Signals
Indian Institute of Capital Markets
Fund's management changes;
Performance slips compared to similar funds;
Fund's expense ratios climb;
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.
Warning Signals
Warning Signals
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
AUM movements in India
Indian Institute of Capital Markets
54195
77469
71258
47451
52903 86349
197342
197132
11659
14371
22938
31551
67144
119538
192129
99081
17996
14164
4663
5472
6833
9170
19937 11348
12105
10801
32424
59447
64711
97757
112349 82776
3908
4316
6917 4876 3730 2057
1975 6368
1960 1479 1893 1740 3927 8726
19063 11577
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec 08
Income Equity Balanced Liquid/Money Market Gilt ELSS GOLD ETFs Other ETFs FoFs
Movement of AUMs in different categories over a period of time
Stock Funds have become a mainstream product.
Liquid Plus Funds and FMPs have seen aggressive inflows due to regulatory changes.
New asset classes like ETFs and FoFs have emerged.
AUM movements in India
Indian Institute of Capital Markets
101822
122600
140093
150537
199248
323597
549936
413365
0
100000
200000
300000
400000
500000
600000
700000
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 May-08 Dec 08
14 %
66 %
-13 %
Indian Asset Management Industry - Growth in Assets
Total Assets Under Management as on March 2009 Rs 493286 crores
Total No. of players - 36
AUM movements in India
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
Penetration of Mutual Funds
Indian Institute of Capital Markets
235
26
90
58
182
8.4
230
0
50
100
150
200
250
Bank A/cs Credit Cards Debit Cards Mutual Fund
Folios
Life Insurance
Customers
Retails Broking
Accounts
Mobile
Subscribers
I
n

M
i
l
l
i
o
n
s

Penetration vis--vis Other Financial Products
Note: Penetration of Mutual Funds is still low as compared to Banks and
Insurance Companies.
Penetration of Mutual Funds
Indian Institute of Capital Markets
Flow Cycle of a
Mutual Fund
Organizational
Structure of a
Mutual Fund
Balance sheet
of a Bank and
Mutual Fund
Diff. b/w MF
and Direct
Investment
Portfolio
Management
Process
Mutual Fund
Comparison
Investments
Checklists
Risk
Management
Regulatory
Aspects
Classification
of Mutual
Fund Schemes
Risk-return
structure of
schemes
History of
Mutual Funds
in India
AUM
movements in
India
Expenses
Tracking
Mutual Funds
Warning
Signals
Penetration of
Mutual Funds
What Mutual
Funds are not?
What Mutual Funds are not?
Indian Institute of Capital Markets
MFs are not get rich quick investments
MFs are not risk free investment
MFs are not assured return investment
MFs are not a universal solution to all investment needs
What Mutual Funds are not?