FM-REV-MF-2010-F

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In the era of specialisation,

uncertainty which is theonly certainty, Mutual

Funds are the way ahead.

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Mutual Funds-Huge Scope ahead

India-

Allocation of Household income

Non-Bankin g deposit s

4.0%

Capit al Market

2.0%

Sm all Savings

11.9%

Others

7.0%

Unit Trust of India

0.5%

Provident Fund

17.9%

Life Insur ance Fund

10.9%

Bank Deposit s

45.8%

Banks-45.8%

P.F.-17.9%

Small savings-11.9%

LIC-10.9%

others=-7%

Capital markets-2%Non-bkg.fin.-4%

UTI- 0.5%

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MUTUAL FUNDS

A Mutual fund represents a pool of money collected frominvestors and is invested according to certain investmentobjectives to maximize the yield.

Features

1. The ownership of the fund belong to the investors.

2. Fund managed by professionals who earn a fee for

the services.3. The pool of funds is invested in a mixed portfolio

of marketable securities. Their values are updatedevery day.

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Advantages:

a. Portfolio Diversification

b. Professional managementc. Risk reduction

d. Reduction in transaction costs

e. Liquidity

f. Convenience & flexibility

g. Promotes regular periodic savings

h. Reporting information

Disadvantages:

1. No control over cost

2. No tailor-made portfolios.

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ROAD MAP OF MUTUAL FUNDS IN INDIA

1963-87- UTI the sole monarch.

1987-93- Entry of Public sector banks and FIsGrowth oriented close ended funds.

1993-96- SEBI-1993- open to pvt. Sector/foreign

Product design, servicing etc.

1996-99- SEBI regulations stringent (UTI/Banks)

1999-2002- Rapid growthMF assets cross theRs. 100000 crore mark. Tax breaks toMFUTI share drops to 50%

May-2007 AUM crosses Rs. 4,07,750 Crore !!

May-2009 AUM stands at Rs. 6,39,847 Crore !!!

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Mutual Fund- profile

AUM Crossed Rs. 868000 cr. as on 31st

May-2013.

41 Mutual Funds are operating in India.

Mutual Fund Assets constitute 9% of

Indias GDP.

18 applications lying with SEBI for licence

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TOP TEN FUND HOUSES BY

AUM AS ON 30-6-11No. Fund name AUM ( Rs crores)

1 Reliance Mutual Fund 101259

2 HDFC Mutual Fund 92033

3 ICICI Prudential Mutual Fund 79759

4 UTI Mutual Fund 69105

5 Birla Sun Life Mutual Fund 67475

6 SBI Mutual Fund 47874

7 Franklin Templeton Mutual Fund 34729

8 Kotak mahindra Mutual Fund 33993

9 DSP Blackrock Mutual Fund 30021

10 IDFC Mutual Fund 27849

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MUTUAL FUND STRUCTURE

SPONSOR:- PROMOTER-APPOINTS TRUSTEES,CUSTODIAN, AMC WITH SEBI APPROVAL.

Should have at least 5 years track record.

Profit making in 3 out of the 5 years.

Should contribute at least 40% of capital of AMC.

TRUSTEES:- They appoint AMC.

AMCs:- Responsible for the management.

RTA:- Maintain investors records. Link with investors.

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Brokers:-

Selling Agents & Distributors.

Custodians.

Depository Participants.

BANKERS LEGAL ADVISORS AUDITORS.

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Requirements regarding AMCs:-

a) Minimum Net worth Rs. 10 crore.(Rs. 50 cr. Debated?)

b) Cannot be an AMC or trustee of another mutual fund.c) Not indulge in any other business.

d) At least half of the members must be independent.

e) SEBI regulations set out rights & obligations.

AMFIAssociation of Mutual funds in India1995

a) To promote the interests of mutual funds Must beregistered with SEBI.

b) and unit holders.c) To set ethical, commercial and professional standards in

the industry.

d) To increase public awareness of the industry.

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CONTENTS OF AN OFFER DOCUMENT

1. Preliminary information.

2. Fund-specific information.

3. Scheme attributes.

4. Details of scheme offered.

5. Load, fee structure.

6. Unit holder rights.

7. Associate transactions.(key information memorandum)

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Standard Risk Factor:-

a. Mutual funds and securities investments are

subjected to market risk and so there is no

assurance that the objectives of the MF will be

achieved.

b. NAV can go up or down based on capital market.

c. Past performance of the sponsor/MF no

guarantee.

d. Name of the scheme does not indicate quality of

the prospects.

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SCHEME SPECIFIC RISK FACTORS

a) Investment strategy.

b) Non-diversification.c) Assured returns without guarantee from sponsor.

d) Previous experience- to be indicated

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Investor Rights:

1. Entitled to receive dividends within 30 days.2. Redemption proceeds within 10 days of receipt

(penalty 15%)

3. Claim div/redemption proceeds within 3 years.

4. MF to allot the units within 30 days of IPO.

5. MF to publish half-yearly results and entire portfolio

once in 6 months.

6. Any matter of material interest to be made public.

7. Scheme can be wound up if 75% of the unit holders

decide.

8. Right of inspection of documents.

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Tax aspects:

a) Open ended fund-with more than 50 %

equity, dividend is not taxable but on otherfunds div. distribution tax of 12.5%

+surcharge of 2.5% to be paid by the

MF.(12.8125%)

b) Div. received by corporates can be set off

against div. paid by them.

c) ELSS- deductions under S-80C-Max-Rs.

100,000

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A mutual fund registered under the SEBI

(Mutual Fund) Regulations, 1996 is ful ly

exempt from paying tax on i ts income

under S.10 (23 D) of I T Act.

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Regulations regarding Investments by MFa) Can invest only in marketable securities.

b) All investments on actual delivery basis only.

c) Cannot hold more than 10% of PUC of a company in all itsschemes.

d) Cannot invest more than 10% of its NAV in a single co.(except for sectoral and index funds)

e) Investments in rated investment grade issues cannot exceed15 % of net assets (20%-trustees)

f) Investments in unrated securities not exceed 10%.

g) Investments in unlisted shares not to exceed 5% of netassets for an open-ended fund and 10% for a close endedfund.

h) Can invest in ADR/GDR upto $50 ml. Or 10% ofnetassets whichever is lower.

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Net Asset:

Represent the market value of assets of investors on a given

date.=

Market Value of Investments + Current and other assets plus

accrued income.

Less- Current Liabilities & Other liabilities.Less- Accrued expenses

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THE TALE (TOLL) OF US-64

1. For 2/3 years in succession the return distributed to the unit

holders was more than returns earned from investments.2. Reduction in the value of residual investments in the scheme.

3. Persistent fall in basic commodity industry shares and PSUshares compounded the crisis.

4. At a time the NAV of the US-64 was going down, UTI keptincreasing the sale and re-purchase price of the units.

5. After Pokhran II the stock market collapsed, which resulted inerosion of the schemes book reserves and a wide difference

between actual NAV and sale/repurchase price.

6. Money supply reduced. High interest rates ruled in the market.For liquidity, many Corporates and Banks started redeemingtheir holdings in mutual funds and UTI The market crashed.

7. Now the UTI is bent on building the confidence of the unitholders.

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Lesson:

The sale/repurchase price to be marked to market/NAVbased.

Investor confidence should be built on strong financials andnot on temporary better yields.

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THE MORGAN MUDDLE

Early 1994- Morgan Stanley raises huge corpus by way of

IPO (more than 10 bl.)

The hype- internationally acclaimed AMC!

Fund investors expected-superior returns.

No one realized that MS was only a service provider-giving

investment advice and management of funds. Artificial grey

market premium added to the scene.

IPO was a roaring success-a dream of One million Indians.

The funds were raised when the stock market was in boom.

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Plenty of money was flowing in from FII into the stock

market. The fund managers of Morgan Stanley could notwait to lose the opportunity. They invested in small-cap

companies which were doing well in the recent past. But

Indian stock market lacks depth and is quite illiquid.

In late 1994, the market changed. The corporates were flush

with funds from public issues at high prices and massive

private placements in equity and GDR at huge premium.

RBI intervened to tighten the money supply to control theinflation.

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Small cap companies were worst hit by the redemptions.These stocks lost more than 90% of their peak prices.Morgans investment being in small-cap companies, it hadto restructure its fund portfolio at big loss. NAV went

below par and investors confidence in the foreign company.Was shattered. Being close-ended and listed on the Stock

exchange-the price in the stock market went crashingquoting at a steep discount to its NAV.

In a last minute attempt to regain investors, MS started re-

purchase of its unit in order to reduce the discount andboost the NAV. But its shear corpus size would not help inrectifying the position with any amount of buy-back.

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Consequently NAV mirrored the gory saga

of Morgan Stanley Growth Fund

In the last one and a half years the fund has regained itsposition substantially by large investments in FMCG, pharma

and software companies and the NAV has improved since

1998 onwards.

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MUTUAL FUND PRODUCTS

BASED ON NATURE OF PARTICIPATION

1. Open-ended- Fund open for additional sales/repurchase.

Buy/sell linked to the NAV. Statement of account for

holding. (74% share)

2. Close-ended- Open for sale during a specific period.Further buy/sell only through SE if listed. Certificate or

Dep. Receipts.

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BASED ON NATURE OF INCOME DISTRIBUTION

Dividend option (warrants)Growth option (value of portfolio grows)

Reinvestment of dividends option (holdings grow)

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TYPES OF PRODUCTS OFFERED

Based on Investment portfolio:-

- Equity Funds.

- Simple equity funds (80-90%).

- Equity linked savings schemes.

- Primary market funds.- Sectoral funds (volatile returns).

- Index funds (eg. CNX-Nifty).

- Other equity funds.

a) Small stock funds.

b) PSU funds.

c) Top 200 funds.

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- Debt Funds:- Income Funds (periodic payments).

- (Long term bonds or short term).

- Simple debt.

- Sectoral debt (rating wise)- Liquid fund/MMMF.

- Serial/fixed term plans.

- Balanced Funds (based on risk-return profile).

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MUTUAL FUNDS-STYLE OF INVESTMENTS

To achieve the desired returns out of theportfolio , every fund manager follows a

particular style of Investment.

A healthy investment portfolio can be achieved

only when the right kind of asset in the rightproportion and at the right time is acquired.

Hence style Analysis of the funds is important.

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MUTUAL FUNDS-

STYLE OF INVESTMENTS

STOCK/EQUITY FUNDS:

AGGRESSIVE GROWTH FUNDS: They seek

capital appreciation and employ techniquessuch as short selling, leveraging, frequent

trading, and small cap equities. Do not believe

in interest income or dividend and they

redeploy the earnings in the company. Thefocus is on growth . This style is generally the

riskiest style of investment but views high

returns.

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MUTUAL FUNDS-

STYLE OF INVESTMENTSSTOCK/EQUITY FUNDS

EQUITY INCOME FUNDS:- basically for those

who seek current income /dividends. Then investment (about 50%) is made in stocks with above average yield.

- GROWTH FUNDS: invest in stocks of companieswith earnings that are expected to grow at an above

average industry-rate. These funds sek capitalappreciation. Not very aggressive and offer current

income as second objective.

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MUTUAL FUNDS-


DEBT FUNDS

LIQUID FUNDS: invests predominantly in

money market instruments.

GILT FUNDS: invests in Government

Bonds.

Basically for risk-averse investors seeking

steady return on regular basis.

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MUTUAL FUNDS-


INTERNATIONAL FUNDS

International Equity: invest heavily in foreign

stocks

International Bonds: Invest in non-indian

currency denominated debts ( often anobligation of foreign governments or

agencies.)

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MUTUAL FUNDS-


HYBRID FUNDS

o They do not specialize in any particular security.

o They are structured to meet special objectives suchas rapid growth, matching a market index, or

sector funds.

o They invest in both stocks and bonds.E,g. Balanced Funds and Income Funds

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MUTUAL FUNDS-

STYLE OF INVESTMENTS SECURITY SPECIFIC:

TOP DOWN APPROACH

BOTTOM UP APPROACH FUND SPECIFIC:

ACTIVE STYLE

PASSIVE STYLE

MARKET RISK SPECIFIC:CONTRARIAN STYLE

CONSERVATIVE STYLE

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MUTUAL FUNDS-

STYLE BOX

VALUE

MIXED

GROWTH

SMALL MID-CAP LARGE

Market capitalisation

Large Cap:

Companies with

Market cap of

Over Rs. 1500 cr

Mid-Cap: market

Cap of Rs. 500 to

Rs. 1500 crore

Small cap: market

Cap of less than Rs.

500 crore.

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INVESTMENT PHILOSOPHIES OF

MUTUAL FUNDS

J. Mark Mobius-Templeton: -

Believes in Value investing and not momentum investing-

economic recovery is quite common.

Ajay Srinivasan-Prudential ICICI :-

Management quality of the company should be good and the

business should be enduring. Consistent track record of

ROCE/RONW.

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Shreekant Pandey:- Sundaram Newton MF:-

We take a long term perspective-monitor liquidity and go for

diversification.

Niamatullah:- SBI Mutual F uns:-

Bottom-up approach in investment policy. Companyspotential and not the Sectors potential is seen. Focus of thecompany on creation of shareholders wealth is important.

Gul Teckchandani:- Sun F & C Mutual Funds:-

Bottom up approach. People running the business is moreimportant. Past performance is not of much significance.

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R. Sresankar: - DSP Merr il l Lynch MF:-

Bottom up approach is performed. Look out for stocks that

offer growth with value.

Prakash Dalal: - Kotak Mahindra MF:-

We look for even investment mix in a balanced fund-K-

Balance. Maximum exposure in particular sector is 40% andmaximum investment in a particular stock is 15%. Reputed

management and good growth-bottom up approach is the

philosophy.

THUS THE MUTUAL FUNDS AR HERE TO STAY FOR

INVESTOR PROTECTION PARTICULARLY IN A

VOLATILE MARKET.

RUPEE COST AVERAGING

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RUPEE COST AVERAGINGAmount

Invested (a)

NAV Per

Unit (b)

Number of units

bought ( c )

Cumulative number

of units (d)

Value of

holding (e)

1000 12.5 80.00 80 1000.001000 11.25 88.89 168.89 1900.00

1000 10.75 93.02 261.91 2815.56

1000 11 90.91 352.82 3881.03

1000 12.75 78.43 431.25 5498.471000 13.35 74.91 506.16 6757.22

1000 13.85 72.20 578.36 8010.30

1000 14.45 69.20 647.57 9357.32

1000 13.85 72.20 719.77 9968.781000 13.5 74.07 793.84 10716.86

Average cost (13.50)

Helps:- SIP (d) X (b) = (e) (b) = (e) / (d)

(a) / (b) = ( c )

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MUTUAL FUND-

PERFORMANCE EVALUATIONEVALUATION CRITERIA ARE MANY:-

1) Average NAV of similar funds for past

years.

2) Growth rate of NAV.(simple-CAGR)

3) Statistical Testing-using regression ,

Variance and standard deviation .

4) Comparing NAV on select parameters.

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MUTUAL FUND-

PERFORMANCE EVALUATION5) Comparing load adjusted returns.

6) Relative returns with benchmark indices

7) Risk adjusted returns-comparison8) Expenses Ratio.

9) Portfolio Turnover.

10)Fund Size- Depth of the Market.11)Investor concentration

12)Investor servicing.

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INDEX FUNDS

Passivelymanaged funds that track a particular

Index.

Listed and traded on the Exchanges like any otherstock.

Lower cost structure than open-ended index fund.

Less cash required for servicing redemptions.

Churning of Portfolio minimised/avoided.

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EXCHANGE TRADED FUNDS

(ETF) No requirement of minimum contract size.

(so substitute for trading In Index futures)

Open ended and also listed. Intra-day movements in price captured.

Stable and good returns-index performance

Low cost diversified exposure So appeals to long-term Investors/institutional

Investors/retail investors.

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(ETF)

Concept of Authorised Participants

Creation units.

Perpetual on line trade through Exchange

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(ETF) NIFTY BeES- 8th January,2002(corpus7cr).

(equivalent to 50 shares of NIFTY)

Prudential ICICI- on BSE-Sensex-SPICE (equivalent to 1/100th of Sensex)-22 Cr.

UTI MF launch ETF based on Nifty with Rs. 300

crore corpus. ETFs will be much sought after instruments

in future.

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ETFs in India

Nifty BeES Track CNX Nifty

Bank BeES CNX Bank Index

Gold BeES Domestic Gold price

PSU Bank BeES PSU Bank stocks in NSE

Junior BeES CNX Nifty Junior Index

Liquid BeES Money market Instruments

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FUND OF FUNDS(FOF)

Approved by SEBI in February,2003.

MFs invests in the schemes of its own and

also other mutual funds/hedge funds.

Over-diversification of risk.

Over-cautious retail investor.

Target group-retired people.(5 in 1 view)

More expensive(cap-0.75% of NAV)

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FUND OF FUNDS(FOF)

Taking exposure on different Investment styles.

All funds do not flounder at the same time.

Investment objectives and Investors criteria canbe matched.

One extra level of professional moneymanagement expertise-by active allocation of

assets. Every rupee well invested as per the need of your

life cycle.

TOP FUND OF FUNDS

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TOP FUND OF FUNDS

FOF AUM-28/2/10(Rs. Cr.) 1 YEAR RETURN(%)

DSPBR WORLD GOLD 1310.40 10.85FT INDIA DYNAMIC PE RATIO 463.75 55.61

AIG WORLD GOLD 213.74 17.19

KOTAK GLOBAL EMERGING

MARKET

210.81 54.93

FT INDIA LIFE STAGE FLOATING

RATE

186.00 20.85

SUNDARAM BNPB GLOBAL ADV 135.99 51.14

ING GLOBAL REAL ESTATE

RETAIL

125.70 46.88

PRINCIPAL GLOBAL

OPPORTUNITIES

125.51 44.69

HSBC EMERGING MARKETS 90.15 40.81

ING LATIN AMERICA EQUITY 61.40 63.87

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FUND OF FUNDS

PLAYERS IN FOFS:-

HDFC MF

PRUDENTIAL ICICI AMCTATA MF

KOTAK MAHINDRA AMC

SHORTLY RELEASINGSTRUCTURED MUTUAL FUNDS !!!!!!!!!

HEDGE FUND V TRADITIONAL FUND

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HEDGE FUND Vs TRADITIONAL FUND

Hedge Fund Traditional Fund

Invest both long and short Invest long only

Are leveraged Not leveraged

Co-investment by fund manager Not encouraged

Use futures and other derivatives Restricted use

Broad investment universe Limited area

Absolute return objective Relative return objective

Can have large cash allocation To remain fully invested

Investor access regulated. Product lightly

regulated

Frequently heavily regulated.

VALUE V GROWTH

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VALUE Vs. GROWTHValue Investing Growth Investing

Traded at discount to Book value low p/bv) Relatively expensive

High dividend yield Normal dividends

Low P/E High P/E

Viewed through margin of safety (I-Value

Vs. Book value)

Multi-baggers in futureabove average

growth.

Generally outperform growth stocks in

long run

Practiced by Warren Buffet, John

Templeton, Martin Whitman, Joel Green

blatt

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AMC ACQUISITIONS

Year Acquired by AMC acquired % stake

acquired

2005 BNP Paribus Sundaram AMC 49.9%

2008 IDFC Standard CharteredAMC

100%

2009 L & T Finance DBS Cholamandalam 100%

2010 Sundaram

Finance

Sundaram BNP

Paribus AMC

49.9%

2011 Goldman Sachs Benchmark Mutual

Fund

100%

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Points to Ponder-

from Sri. S S Tarapore-economist- MFs to separate Retail and Institutional

schemes.

Tax benefits to be available to only retailinvestors.

Not more than 50% of the corpus should beInstitutional.

Min. Net worth of AMCs to be raised from10 cr. To 50 cr.

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Points to Ponder-

from Sri. S S Tarapore-economist- Proliferation of schemes (1000 schemes / 5000 variants)

should be consolidated.

Inter-scheme transfers a cause of concern- ceiling to beprescribed-Board to ratify

Excessive churning to be avoided.

AMC and trustees need to be strictly separate.

Remuneration of Trustees

Weak service system-declaration of dividend, redemption.

Redressal Agency-AMFI, SEBI ??- Ombudsman Transparency of operations-code of conduct- like BCSBI

( banking codes and standards board of India)

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Developments in 2009

No early exit in close ended funds.

FMPs considered as quasi-ponzi schemes

MFs can invest in IDRs

Ban on entry Load.

Uniform exit load for individuals and corporates

Cap on ULIP charges 3% for contribution upto 10years, 2.25% for over 10 years.

( if fund earns 15% Unit holder to get 12.75%)

Proposal to enhance tenure of ULIP from 3 to 5years.

M t l F d ff ti 1 7 2010

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Mutual Funds- effective 1-7-2010 NFO subscription period reduced to 15 days(

earlier 30 days) except for ELSS-(Fasterprocessing/ faster refund )

Ban on distribution of dividend from Unit

Premium Reserve-new investor unaffected.

Extension of ASBA to NFO Investors

No business house less than 5 yrs. in financial

services experience, can own stake in AMC

Valuation of money market and debt security

maturing over 91 days on M to M basis.

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THE ULIP DEBATE

Who should be the Regulator ?

Investor confused with the return

Very heavy frontloading of charges

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ULIP- how resolved

Comes within IRDA ambit

PAC, Surrender charge, Lock in Period, Net

yield to investor, Miniimum guarantee and

covenants revisited.

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ULIP- the changes made

PAC

UPTO 31-8-2010

Frontloading

FROM 1-9-2010

To be distributed over the wholetenure

Surrender

charges

30-40% of first year

premium

Upto Rs. 25000/- not more than 20%

Max-Rs. 3000/-( Ist year)

Not more than 5% ( IVth year)

Over Rs. 25000/- twice the above

Net yield to

Investor

Less than 10 yrs.- 3%

Over 10 years- 2.25%

Upto 5 yrs.4%

Over 5 yrs.3%

Minimum lock in

period/Minimumguaranteed

Lock in period- 3 years

No minimum guaranteedreturn

Lock in period5 years

Min. Guaranteed return- 4.5%

( no partial withdrawal/not a pension

scheme)

Minimum cover

on all life ULIP

5 times the annual

premium

10 times the annual premium

Except pension schemes.

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SEBI GUIDELINES-OCT-20121) Hike in Total Expense Ratio by 0.4% of daily NAV if funds are

received from other than top 15 cities.(if more than 30% ofgross inflow).Investor to bear service tax on TER

2) All schemes under one Plan only-Institutional-Individual

3) Direct Plan route

4) Exit loads- credit back to corpus fund-upto 0.20% can be

recovered under TER by AMC5) Advisors to get only client fee no commission

6) Cash Transactions upto Rs. 20000

7) Product labelling by Regulator.-reveal type of funds

COLOUR CODING SYSTEM FROM 1 7 2013

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COLOUR CODING SYSTEM FROM 1-7-2013

BLUE YELLOW BROWN

LOWEST RISK MODERATE RISK HIGHEST RISK

Average return Above average return Potentially High return

Liquid fund/ Income

funds/gilt fund/short term

debt funds/FMPs

Balanced

Funds/MIPs/Multi asset

funds

Diversified equity

funds/sectoral funds/index

funds/ELSS/RGESS

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MUTUAL FUNDS-

THE ROAD AHEAD FRANKLIN TEMPLETON ACQUIRINGPIONEER ITI AND HDFC MF ACQUIRING

ZURICH MF POINT TOWARDSMORE M &

As -in future.

MORE CONSOLIDATIONS IN THE AIR

FOREIGN BANKS MAY ENTER AS AMCs INLARGER NUMBERS(SCB)

THE ONE WITH LARGE CORPUS WILLSURVIVE.

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TO CONCLUDE

THE MUTUAL FUNDS ARE HERE TO

STAY SO LONG AS THE MARKETS

ARE VOLATILE AND INVESTORLACKS TIME AND EXPERTISE TO

INVEST.

FM-REV-MF-2010-F

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Transcript of FM-REV-MF-2010-F