High Yield Mutual Funds

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					Mutual Funds

    Vishal Aggarwal
   MBA Class of 2007

• Me - no expert

• Not Comprehensive

• Majority from websites and some practical
                           Mutual Fund Defined

       Brief History                                   Regulations

Organization of Mutual Fund                  Terminologies Demystified

    Types of Schemes                                  Risk Behavior

   Investment Strategies                              Equity Funds

  Buying a Mutual Fund                           Selecting a Mutual Funds

Mutual Funds Comparision                             Keeping Track

     Warning Signals                               Reference Websites
               Mutual Fund ??
• Form of trust that pools the funds of a whole
  lot of investors to make more money by
  investing in an array of financial instruments.

• Advantages of a MF
  –   Professional Management
  –   Diversification
  –   Flexibility in choice - selection, redemption
  –   Low costs
  –   Transparency
              Brief History

• 1964-UTI

• 1987- Public Sector banks, Insurance Companies
   – SBI, Canbank, PNB LIC, GIC

• 1993- Private Sector
   – Kothari Pioneer ( later merged with Franklin
     Templeton), J P Morgan, Morgan Stanley, George
     Soros and Capital International
Organization of a Mutual Fund

                         Adobe A crobat 7.0
• 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
    Terminologies Demystified…

•   Asset Allocation
    –   Diversifying investments in different assets such as stocks, bonds, real estate,
        cash in order to optimize risk.

•   Fund Manager
    –   The individual responsible for making portfolio decision for a mutual fund, in
        line with fund’s objective.

•   Fund Offer Document
    –   Document with investment objectives, risk factors, expenses summary, how to
        invest etc.

•   Dividend
    – Profits given to the investor from time to time.                        Adobe A crobat 7.0

•   Growth
    – Profits ploughed back into scheme. This causes the NAV to rise.
                Terminologies Contd…
•   NAV
     –   Market value of assets of scheme minus its liabilities.

•   Per unit NAV          =          Net Asset Value
                           No. of Units Outstanding on Valuation date

•   Entry Load/Front-End Load (0-2.25%)
     –   The commission charged at the time of buying the fund.
     –   To cover costs for selling, processing

•   Exit Load/Back- End Load (0.25-2.25%)
     –   The commission or charge paid when an investor exits from a mutual fund. Imposed to discourage
     –   May reduce to zero as holding period increases.

•   Sale Price/ Offer Price
     –   Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher than

•   Re-Purchase Price/ Bid Price
     –   Price at which close-ended scheme repurchases its units

•   Redemption Price
     –   Price at which open-ended scheme
Types of Mutual Fund Schemes
• 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
   – Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)

• Other Schemes
   – Tax Saving Schemes
   – Special Schemes                               Adobe A crobat 7.0
       • ULIP
• Historical analysis
   – Return is remembered, Risk forgotten

• Risk = Potential for Harm

• Market Risk

• Non-Market Risk

• Credit Rate Risk

• MF Risk = Volatility (fluctuation of NAV)
   – Standard Deviation
   – Websites give star rating ( basis = risk-adjusted return)
        Investment strategies
• Systematic Investment Plan (SIP)
  – Invest a fixed sum every month. (6 months to 10 years-
    through post-dated cheques or Direct Debit facilities)
  – 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.

• 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)
Before declaration of dividend / bonus
              Growth    Dividend   Dividend       Bonus
                        payout     reinvestment
NAV           20        20         20             20
Units         100       100        100            100
Value (Rs)    2,000     Rs 2,000   Rs 2,000       Rs 2,000
After declaration of dividend / bonus
NAV           20        19         19             18.1818
Units         100       100        105.2631       110
Value (Rs)    2000      1900       2000           2000
Dividend      -         Rs 100     -              -
received in
Additional    -         -          5.2631         10
               Equity Funds

•   Diversified equity funds
•   Index funds
•   Opportunity funds
•   Mid-cap funds
•   Equity-linked savings schemes
•   Sector funds like Auto, Health Care, FMCG etc
•   Dividend Yield Funds
•   Others (Exchange traded, Theme, Contra etc)
        Investing in Equity Funds
• Errors
   – Invest in only top performing funds
   – These cannot go wrong
   – Replicate past performance in future

• Appropriate way
   – Right Mix of equity MFs (Top 3-4 funds, may all be mid-cap funds)
   – Have variety of funds like diversified funds, mid-cap funds and sector
     funds – in right proportion.
   – Beginner- it makes sense to begin with a diversified fund
   – Gradual exposure to sector and specialty funds.

• Look at performance of various funds with similar objectives for
  at least 3-5 years (managed well and provides consistent returns)
Tired of your savings account?
• Extra Cash in savings A/c?? Consider Cash Funds

• Liquidity: Savings account wins
   – b/w a savings account and a fixed deposit, no ATM (Now-
     Rel Regular Savings Fund)
• Safety: Savings account wins
   – All mutual funds are subject to market risks
• Returns: Cash funds win
   – Upto about 17.5% return
• Performance: Cash funds win
   – Interest rate fluctuations covered by quick maturation

• Invest when surplus money in savings a/c based on
  expense ratio
          Investing Checklist
• Draw up your asset allocation
   – Financial goals & Time frame (Are you investing for retirement? A
     child’s 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)
                   Checklist Contd…
• 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.
                Portfolio Decision
• The right asset allocation
   – Age = % in debt instruments
   – Reality= different financial position, different allocation
   – Younger= Riskier

• Selecting the right fund/s
   – Based on scheme’s investment philosophy
   – Long-term, appetite for risk, beat inflation– equity funds best


   – IPO Blur
       • Begin with existing schemes (proven track record) and then new schemes

   – Avoid Market Timing
                MF 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
              Buying Mutual Funds
•   Contacting the Asset Management Company directly
     – Web Site
     – Request for agent
•   Agents/Brokers
     – Locate one on AMFI site
•   Financial planners
     – Bajaj Capital etc.
•   Insurance agents
•   Banks
     – Net-Banking
     – Phone-Banking
     – ATMs
• Online Trading Account
     – ICICI Direct
     – Motilal Oswal, Indiabulls- Send agents
                Keeping Track…

• 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
   –   Newspapers                         Adobe A crobat 7.0

   –   Professional advisor
                                          Adobe A crobat 7.0
             Warning Signals

• 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
• It merges into another fund.
• Change in management style or a change in the
  objective of the fund.

• 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.sbimf.com/portal/static/calculator/RiskAssess/RiskAssessCal1.asp

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

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