Mutual Funds An efficient vehicle for wealth creation Fund structure & constituents 3-tier structure ∞ Sponsor ∞ Trustee ∞ AMC Advantages of Mutual Funds ∞ Portfolio diversification ∞ Professional management ∞ Reduction in risk and transaction cost ∞ Tax efficiency ∞ Liquidity ∞ Convenience and flexibility Risk and Return Return Sectoral funds Equity funds Index funds Balanced funds Debt Funds Gilt funds ST debt funds Liquid funds Risk Principles in Debt Valuation ∞ Increase in interest rate Decrease in Bond price ∞ Decrease in interest rate Increase in Bond price ∞ Change in bond price = f (tenor of the bond) Principles in Debt Valuation 1 month 3 months 6 months 1 year Higher the Average Maturity, 8.5% (8 yrs) higher the risk (volatility), higher the return. 7.5% (4 yrs) 6.5% (2 yrs) 5.5% (0.5 yrs) PERIOD Above returns are assumed purely for simplification & are not indicative Measurement of Risk and Return ∞ Return Methods Change in NAV Total Return Total Return with dividend re-investment CAGR ∞ Risk Standard deviation Beta and Ex-Marks ∞ Benchmark and comparison Concept of Financial Planning ∞ Financial planning ∞ Identifies all the financial needs of a person ∞ Translates the needs into monetarily measurable goals ∞ These goals can be short term, medium term and long term ∞ Plans the financial investments that will allow these goals to be met. Attributes of a Good Financial Planner ∞ Understands: The universe of investment products Risk-return attributes Tax and estate Planning ∞ Has the ability to convert life cycles of investors into need and preference based financial products ∞ Organised approach to work ∞ Excellent communication and interpersonal skills Process of FP in Practice ∞ Step I: Establish and define the relationship with the client ∞ Step II: Define the client’s goals ∞ Step III: Analyse and evaluate client’s financial status ∞ Step IV: Determine and shape the client’s risk tolerance level Process of FP in practice ∞ Step V: Ascertain client’s tax situation ∞ Step VI: Recommend the appropriate asset allocation and specific investments ∞ Step VII: Executing the plan ∞ Step VIII: Periodic Review MFs in Financial Planning ∞ Forms the core foundation and building block for any type of FP ∞ Variety of products available to suit any need or combination of needs ∞ Barring life and property insurance, rest of the product portfolio can be created out of bouquet of MFs Products Available ∞ Physical Assets – Gold & Real Estate ∞ Bank Deposits ∞ Corporate –Shares, Bonds, Debentures & Fixed Deposits ∞ Government – G. Secs, PPF, RBI Relief Bonds and other personal Investments ∞ Financial Institutions – Bonds, Shares ∞ Insurance Companies – Insurance Policies Why MF is the Best Option ∞ Mutual funds combine the advantages of each of the investment products ∞ Dispense the short comings of the other options ∞ Returns get adjusted for the market movements Systematic Investment Plan Invest as you earn Historically, Equity is the Only Wealth Creator 1980 – 2004, % CAGR Pre tax 20% 18% 18% 16% 14% Real Return 12% 10% 11% 10% Tax Tax Tax 8% 6% 7% Inflation 4% 2% 0% Gold Bank FDs G-Secs Equity Investments should give positive Post-Tax, Post-Inflation return, over a long period. In this sense, Not investing in Equity could be risky Source: CLSA. Inflation: 7.47% CAGR. Rate of tax: 30%, performance may or may not sustain in future. Equity Investing = Business Ownership Investing in equity is like investing in business; it takes time to reward. But usually the reward is much higher over a longer period Equity is Imperative for Wealth Creation, but Remember… 'Oct: This is one of the dangerous months to invest in stocks. Other dangerous months are July, Jan, Sep, April, Nov, May, March, June, Dec, Aug & Feb.‘ Mark Twain Habit of “Timing” the market could be dangerous Time In, Not Timing, the Market Creates Wealth Frequency Distribution of Sensex Returns^ 3 Years 5 Years 7 Years BSE Sensex* 1 Year CAGR CAGR CAGR Negative Returns 32.03% 12.97% 7.58% 0.04% 0 to 10% 14.92% 30.72% 22.58% 25.50% 10 to 20% 12.07% 17.26% 25.51% 25.04% 20 to 30% 6.47% 14.62% 24.08% 39.69% 30 to 50 % 10.34% 19.05% 19.86% 9.73% Above 50 % 24.17% 5.38% 0.39% 0.00% Staying invested improves probability of earnings ^ Rolling Returns * Period – Since BSE Sensex inception in 1979 till 2004 Timing the Market Vs. Time in the Market Good Timing Bad Timing Investing each year Investing each year at at the lowest point the highest point in the in the market market 1979 - 2004 1979 - 2004 Average Annual Return Average Annual Return 19.4% 18.1% Wealth creation is an evolutionary and gradual process. Over a long period, “discipline” matters – not “Timing” Time-honoured Investment Strategies ∞ Start investing early ∞ Invest regularly ∞ Invest systematically, without heeding short-term market dynamics The secret of wealth creation lies in being disciplined, not in being lucky Start Investing Early Power of Compounding You start investing in a diversified equity mutual fund through a Systematic Investment Plan at age 35 40 # Your monthly investment Rs. 5000 Rs.5000 # You stop investing at age 60 60 # Your total contribution Rs.15,00,000 Rs.12,00,000 Your Savings could grow to* Rs. 1,37,82,804 Rs. 66,35,367 Difference = Rs. 71 lakhs! (Investment amount difference Rs. 3 lakhs) Compounding allows your money to grow exponentially over time. Start investing early. * Assumes compounded annual returns of 15%over the entire period Guesswork in Action Hickory Dickory Dock…Greed and Fear in action 9,000 Greed: Buy BSE Sensex 8,000 7,000 Greed: Buy 6,000 Greed: Buy Fear: Sell 5,000 Greed: Buy 4,000 Greed: Buy Fear: Sell Fear: Sell 3,000 Fear: Sell Fear: Sell 2,000 Jan-00 Sep-00 Jan-01 Sep-01 Jan-02 Sep-02 Jan-03 Sep-03 Jan-04 Sep-04 Jan-05 Sep-05 May-00 May-01 May-02 May-03 May-04 May-05 Invest in Equity through SIP route… Invest Regularly & Systematically Invest through SIP & Make volatility work for you Benefits of SIP ∞Rupee Cost Averaging When NAV rises, SIP lowers average cost of purchase When NAV falls, SIP procures more units ∞Compounding Benefit Early bird advantage ∞Convenience Disciplined saving habit Auto debit facility Switch / systematic transfer Lower entry load SIPs work best over a period of time & There is no wrong time to start a SIP Market Level does not Really Matter Much Because… ∞ A lot of investment opportunities exist beyond top few companies Market has promising depth… Over 4700 companies listed on BSE BSE, among the top 5 stock exchanges worldwide in terms of number of transactions BSE 100 accounts for only 32% of total market cap …and breadth Investment opportunities across sectors and market cap ∞ Power of active fund management Driven by research and diversification Invest in Equity through Mutual Funds… Markets v/s Mutual Funds ∞ Sensex first touched 6000 mark in Feb 2000 ∞ Then drifted and tumbled to below 3000 mark ∞ Sensex second time touched 6000 mark in Jan 2004 Let us see how Mutual Funds fared during this period… Advantage Mutual Funds Sense NAV* x Sensex v/s Mutual Fund Performance (Rs.) Value 9,500 MFs double the capital 20 8,500 7,500 15 6,500 Sensex hardly recovers 10 5,500 4,500 5 3,500 2,500 0 Feb-00 Feb-01 Feb-02 Feb-03 Dec-00 Dec-01 Dec-02 Dec-03 Jun-00 Jun-01 Jun-02 Jun-03 Oct-00 Oct-01 Oct-02 Oct-03 Aug-00 Aug-01 Aug-02 Aug-03 Apr-01 Apr-00 Apr-02 Apr-03 Source: CRISIL MF Portfolio Tracker * AUM Weighted Average NAV of equity category. Past performance may or may not sustain in future. SIP in Kotak 30 SIP of Rs.10,000 per month, since inception of Kotak 30 (Jan 99) would have grown to Rs.26,35,958 on 13th Dec 05 700 600 500 BSE Sensex v/s Kotak 30 400 (Indexed values) 300 200 100 0 an-99 May-99 Sep-99 an-00 May-00 Sep-00 an-01 May-01 Sep-01 an-02 May-02 Sep-02 an-03 May-03 Sep-03 an-04 May-04 Sep-04 an-05 May-05 Sep-05 J J J J J J J Kotak 30 BSE Sensex * Dividends of Kotak 30 assumed to be reinvested in the scheme, at ex-dividend NAV. Dividend not taken into account. SIP in Kotak 30 Rs.1000 invested in Kotak 30 every month… Last 1 Year Last 3 Years Last 5 Years Investment Amount Rs.12,000 Rs.36,000 Rs.60,000 Investment Value Rs.15670 Rs.77,855 Rs.173,641 XIRR 61.15% 57.10% 44.04% Fund performance also matters * Dividends of Kotak 30 assumed to be reinvested in the scheme, at ex-dividend NAV. Dividend not taken into account. Food for Thought To make a million, start with $2.000,000 Morton Shulman SIP @ Kotak ∞Minimum amount: Rs.1000 every month / quarter Rs.500 in case of Kotak ELSS ∞Minimum number of installments: 6 ∞Can be thru ECS Debit (in select locations) or thru Post Dated Cheques ∞Initial investment on any day; SIP / STP dates: 1st, 7th, 14th, 21st ∞For SIP / STP amount below Rs.25 lacs per installment in Kotak Equity FOF / equity and balanced schemes* Entry load: 1.00% Exit load: 1.25% for redemption before 2 years (except in Kotak ELSS) ∞For further details on terms, please contact your financial advisor * Not applicable for investments by FIIs / sub a/c of FIIs / FOFs Risk Factors Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved.*As with any securities investment, the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets.*Past performance of the Sponsor does not indicate the future performance of the Scheme.*Kotak 30 is only the name of the Scheme and does not in any manner indicate either the quality of the Scheme, future prospects or returns.*The NAV of the Scheme may be affected, inter alia, by changes in the market interest rates, trading volumes, settlement periods and transfer procedures.*Appreciation of the value of the Units issued under the Scheme can be restricted in the event of a high asset allocation to cash, when stock appreciates *Tax laws may change, affecting the return on investment in Units. Statutory: Kotak Mahindra Mutual Fund has been established as a trust under the Indian Trusts Act, 1882, by Kotak Mahindra Bank Limited (liability Rs. NIL) with Kotak Mahindra Trustee Company Limited as the Trustee and with Kotak Mahindra Asset Management Company Limited as the Investment Manager. Before investing, please read the Offer Documents. We, Kotak Mahindra Asset Management Company Limited, and/or our employees, have long/short positions in the securities in respect of which investment advice is being rendered. Investment Objective: To generate capital appreciation from a portfolio of predominantly equity and equity related securities with investment in, generally, not more than 30 stocks.
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