Mutual Fund-presentation

An old Axiom :

“It is not wise to put all eggs into one basket”

……… was probably in the minds of those who

MUTUAL FUND

Presented by: Richi Shrivastava Amit Mukherjee Keshri N.Tripathi Kanhaiya Gupta

Cont ent

Concept

Regulations

Organization of Mutual Fund

Types of Schemes

Investment strategy

Risk Management

Portfolio Management

MF Comparison with U.S.

Expenses of MF

What MFs are not? Reference Websites

Co nce pt • 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.

Or ganiz ation al Struct ure of MF SEBI (mutual fund) Regulation,1996 Structure of MF in India

Sponsor • Akin to the Promoter of the company, • Contribute min 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.

• 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.

Custodian • Holds the fund’s securities in safekeeping, • Settles securities transaction for the fund, • Collects interest & dividends paid on securities, • Records information on corporate actions. Examples of custodian HDFC

CITY BANK

ABN AMRO

IIT CORPORATE SERVICES

SBI INDIA

STANDARD CHARTRED

SHCIL

DEUTSCHE BANK

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. of AMC • Examples Chairman of AMC can not be a trustee of UTI ICICI Prudential Reliance any MF. SBI

Canbank

ING Vysya

Stanchart

Taurus

HSBC

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

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. Examples of R & T Agents CAMS

KARVY

MCS Ltd

Datamatics

MN Dastoor & Co

IIT Corporate Services

Computeronics

TCS

ICICI Infotec

UTI ISL

Regu la tory Aspe ct • SEBI (MF), 1996 as regulator of MF. Provisions of SEBI

IMPACT

Legal character of MF

•MF can be set up only as TRUST. •MF can’t invest in Gold, silver & real asset. •Unit holder can’t challenge trustees.

Structure of MF

•Arms-length relationship b/w various constituents. •Independent custodian. •Must fulfill eligibility criteria u/s 7. •AMC have min net worth of 10 cr.

Registration of MF Operation of MFs

•Disclosure of information. •Advertisements. •Daily pricing. •Risk management system.

Ro le o f AMF I • • • •

Incorporated on 22 August, 1995. Apex body of all the registered AMCs. All AMCs are its member. Objective to maintain high ethical & professional standard. • Provide certificate to Agents to sell MF • Best practice guidelines. • Code of ethics.

MFI Cl ass ifica tion o f MF sche me Fund schemes

Portfolio objectives

Growth & Income

High Risk & High Return

Balanced

Moderate Risk & Return

Liquid & Money Market Gilt

Fixed Return

ELSS

Tax Saving

Fund of funds

Additional diversification

Zero Risk

Each category is classified into more sub-

the r classif ic at ion o f M F sche me • 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 (3-10 months) – Liquid/Money Market (including gilt) – Short-term Money Market (Govt.) – Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)

• Other Schemes – Tax Saving Schemes

What ar e ET Fs • Exchange traded funds are Mix of stocks & MFs. • Like MF, they comprise a set of specific stocks- e.g. an index like Nifty/ Sensex or commodity like gold, or Real estate . • Like equity they are traded on stock exchange on real time basis. • There have been a couple of ETFs from Prudential ICICI AMC and UTI AMC.

isk –Re turn of dif ferent s che mes

Invest men t Strate gy • Systematic Investment Plan (SIP) – Invest a fixed sum every month. (6 months to 10 years) – Fewer units when the share prices are high, and more units when the share prices are low. Average cost price tends to fall below the average NAV. – Nowadays ,Insurance is free with SIP.

• 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) • Flexi Withdrawal Plan (FWP)

Po rtfolio M anagement Proce ss

Fun d M anagement Proce ss

Expected Return

Volatility & Correlation Estimates

Constraints on Portfolio choice

Portfolio Optimizati on

Optimal Portfolio

Investor objective

u nd m ana ger ’s I nv est men t J udgm ent Return market Group /Industry Growth Cyclical stable

Individual Stock

Active Strateg y

Risk Beta or Market Risk Extra market covariance Or Group /Industry Risk

Specific Risk

Passive Strateg y

Risk Ma nage ment Risk management is defined as the: “Overall process of identifying & understanding the full spectrum of an organization’s risk & taking informed action to help it achieve its strategic objectives, reduce the likelihood of failure & decrease the uncertainty of overall business performance”

• Risk Management function. Risk category

Risk factors

Fund management

Volatility in performance, portfolio concentration, Interest rate movement, liquidity risk & credit risk. Deal error, settlement problem, NAV & fund pricing error, inaccurate financial reporting, fraud.

Operations

Customer

Error in deal processing, fraud .

Marketing & distribution Other business risk

New product development, selling & distribution Critical knowledge loss, skills shortage, third party risk

• Disaster recovery & business contingency plans. • Insurance against third party loss (R&TA), arising from error &

Com pari son with US mark et • An Overview • Developed market • Low cost countries (LCC) having total expense (.3%), (.59%), even less than one. • Organizational structure is different from India. • Vast product variety e.g. diamond, currency, metal ETFs, small cap MF, macro cap MF, bear market MF, kids MF, commodity MF, donor advised MF(tax exemption)etc. • Vast variety of different countries equity & debt fund

Exp en se s of MF Accounted for in FUND RETURN

Not included in FUND RETURN

Group fee*

Back end sales load

Performance fee*

Transaction fee

Administrative fee*

Redemption fee

12(b)-1 fee*

Account maintenance fee

Brokerage costs

Bid ask spreads

Management fee*

Interest costs

Front end sales load

•(An asterisk indicates fee is included in a fund’s expense ratio) •As per SEBI Rule expense ratio should be 2.5% for equity & 2.25% for debt fund of fund value.

What MFs are not…….. • 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’

Re fere nces WEBsites • http://news.moneycontrol.com/mf/glossary.php •

http://www.investopedia.com/university/mutualfunds/default.asp

•

http://www.valueresearchonline.com

•

http://www.amfiindia.com/

•

http://www.mutualfundsindia.com/resourcecentre.asp

books • Mutual fund industry in India- ICFAI university press. • Mutual fund product & services- Taxman (IIFB). • Security analysis-Taxman (IIFB).

THANK