Mutual Funds By Mrs.Lalitha PPM What is Mutual Fund? • A Mutual Fund is an investment vehicle that pools the money of several investors and invests it in different securities. Organisation of Mutual Fund Some Concepts Clarified….. • NAV - Net asset value is the market value of a unit of a scheme after accounting for all expenses on any given business day. • Load Load • Charged directly to the investor • Includes Agent’s commission, Marketing and Selling expenses • Front end Load and Back end Load • Entry loads vary between 1.00% and 2.5%. • Exit loads vary between 0.25% and 3.00%. • Regulations do not allow either front-end load or back-end load in any combination to be higher than 6%. …….Some Concepts Clarified • Purchase price is the price paid by a customer to purchase a unit of the fund. • Redemption price is the price received by the customer on selling units of an open-ended scheme to the fund. • Repurchase price is different from redemption price and refers to the price at which a close- ended scheme repurchases its units. • Expense ratio Expense Ratio • Operating Expenses paid out of the fund’s earnings • Includes advisory fees paid to investment managers, audit fees, custodial fees, transfer agent fees, trustee fees etc. • Advisory fees range from 1% to 1.5% of the corpus • Limits mandated by SEBI • First Rs. 100 crores 2.50% 2.25% • Next Rs. 300 crores 2.25% 2.00% • Next Rs. 300 crores 2.00% 1.75% • On the balance of assets 1.75% 1.50% • The annual expense expressed a percentage of the fund's average daily net assets. Exploding a Myth-A Fund with lower NAV is cheaper than that with higher NAV • A Mutual Fund with lower NAV will give better returns !!!!!! Existing New scheme scheme with with NAV at par NAV at Rs. 50 Rs Rs. NAV 10 50 Your investment , 1,000000 , 1,000000 No. of units allotted to you , 100000 , 20000 Market Value of Assets after one year , , , , 120000000 600000000 Corresponding NAV after one year 12 60 Current value of your investment , 1,200000 , 1,200000 Return on investment 20% 20 % Classification Of Mutual Fund • By Asset Class • By Investment Sector • By Liquidity • By Trading Strategy • By Investment Strategy • By Security Selection • By Load Charged / Cost • By Place of origin WHY Choose Mutual Funds? • Professional Management • Lower Risk • A better portfolio for less Money • Lower Transaction Cost • Liquidity • Transparency • Affordability • Choice of Schemes • Well Regulated Ground Rules of Mutual Fund Investing • Define your Investment Objectives • Draw up your Asset Allocation Equity Balance MIPs Debt Fixed Total Total MF d MF MF Inc. Equity Debt Below 30 50 % 30% 5% 5% 10 % 70 % 30 % 30- 45 40 % 30% 15 % 5% 10 % 60 % 40 % 45- 55 25 % 25% 25 % 5% 20 % 45 % 55 % Above 55 5% 10% 40 % 5% 40 % 15 % 85 % ….Ground Rules of Mutual Fund Investing • Identify Funds with matching Investment objectives. • Evaluate Past Performance, look for Consistency • Diversify • Consider Fund Costs • Factor Tax Implications Tax Implications – on Dividend Mutual TDS Dividend Fund Distribution Scheme Tax Debt Oriented Nil 12.5% + Scheme Surcharge + Cess -> 14.025% Equity Oriented Nil Nil Scheme Tax Implications – on Capital Gains TAX Debt Oriented Equity Oriented Scheme Scheme STT Nil 0.2 % STCG Marginal Rate 10 % of Taxation LTCG Lower of NIL - 10% without indexation - 20% with indexation Which Option to Choose? Mutual Fund Scheme Dividend Payout Growth Debt Oriented Scheme -< 1 Year 14.025 % <30% - >1 Year 10%or20%(WI)< 14.025% Equity Oriented Scheme -< 1 Year 0% < 10% - > 1 Year Profit Booking ….Ground Rules of Mutual Fund Investing • Look for Size and Credentials • Customer Service • Monitor regularly and Review • Invest Regularly When To Sell Mutual Funds? • The Fund Manager leaves • Below par performance for the last 2 years • Size of the corpus increases too fast • The Promoter of Mutual Fund is going through financial difficulties • The scheme changes its investment objectives • You change your plan • Enough has been earned Systematic Investment Plan(SIP) Advantages • Disciplined investing • Convenience • Avoiding market prediction • Rupee Cost Averaging Rupee Cost Averaging • Advantages of Early Investing Investing in a @ 35 Yrs @ 40 Yrs Diversified MF - SIP Monthly IRS 5000 IRS 5000 Investment Investment 60 Yrs 60 yrs Stopped @ Total IRS 15,00,000/= IRS 12,00,000/= Contribution Growth (assume IRS IRS 15 % CAGR) 1,37,82,803.88/= 66,35,367.20/= Mutual Fund Investing by NRIs • Power of Active Funds Management • Online trading simplifies procedure • Some online trading sites www.icicidirect.com www.Indiainfoline.com www.Myiris.com ICICIDirect one up on others. • No Application forms to be filled up • Automatic debit from and credit to bank account • Automatic paperless SIP/SWP • Online order confirmations and status tracking • Online dividend payout / reinvestment facility • Online updation of portfolio of unit holdings at latest NAV Few Mutual Funds NRIs can consider For Conservative investors • HDFC Top 200 Fund • Sundaram Growth • HDFC Prudence • Principal MIP For Aggressive investors • HSBC Equity Fund • Franklin India Bluechip • FT India Balanced Fund • FT India MIP Product Innovations • Fund Of Funds is a fund that invests in other funds instead of securities. • Super SIP isn't a fund but a way of buying funds that combines long-term SIP with term insurance. • ETF is a hybrid financial product, a cross between a stock and a mutual fund .
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