session 3 -Mutual funds

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Wealth management class on Mutual fund - for MBA students -Sept 2012

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PowerPoint Presentation:

1 Wealth Management 1 Welcome to Session 3 S G Raja Sekharan

PowerPoint Presentation:

2 Broad plan for this course Wealth management course Session 1 3 hours An Introduction to the landscape of the Wealth Management business in India And Long term financial planning Session 2 3 hours Risk Profiling and Investment planning Session 3 3 hours Spectrum of Investment Solutions : Debt Oriented Solutions Session 4 3 hours Spectrum of Investment Solutions : Equity Oriented Solutions Session 5 3 hours Spectrum of Investment Solutions : Mutual funds Session 6 3 hours Spectrum of Investment Solutions : Insurance Session 7 3 hours Spectrum of Investment Solutions : Real estate investments Session 8 3 hours Spectrum of Investment Solutions : Commodities and other structured instruments Session 9 3 hours Investment Strategies during the tenure of the Mandate, A sset allocation and reporting Session 10 3 hours Career in Wealth management industry and final wrap up

Preparation for this session:

Preparation for this session You have read the file on Mutual funds (a beginners module) http://www.nseindia.com/education/content/module_ncfm.htm 3

Today’s agenda:

Today’s agenda Mutual fund quiz - CIA 1 Discussion on MF’s and how to invest in MF’s and get the returns that we need to get rich What caught my eye 4

WHAT IS MUTUAL FUND?:

WHAT IS MUTUAL FUND? Many investors with common financial objectives pool their money Investors, on a proportionate basis, get mutual fund units. The fund realizes gains or losses, and collects dividend or interest income. Any capital gains or losses from such investments are passed on to the investors in proportion of the number of units held by them.

PowerPoint Presentation:

Mutual Fund Operation Flow Chart

Quiz:

Quiz There are 29 questions and the final score of your team gets into your CIA 1 credit –this will contribute to your team’s CIA 1 marks I am the final arbiter  7

Basic rules:

Basic rules Each question is for a specific team by rotation basis You will get 30 seconds to answer Correct answer – the team gets 2 marks Incorrect answer - the team looses 3 marks The team can pass the question Next team will get the same marks for correct/ incorrect answer

Q1:

Q1 As per estimates, what is the % of house hold savings that are channelized into the stock markets, either directly or through mutual funds? NOT MORE THAN 5% 9

Q2:

Q2 HDFC Mutual fund like other MF’s have a three tier structure. The structure is: HDFC Limited and Standard life investments limited – _________ HDFC Trustee Company Limited – Trustee HDFC Asset management company- Asset management company Fill in the blank 10

Q2:

Q2 HDFC Mutual fund like other MF’s have a three tier structure. The structure is: HDFC Limited and Standard life investments limited – Sponsor HDFC Trustee Company Limited – Trustee HDFC Asset management company- Asset management company 11

Q3:

Q3 HDFC Mutual fund like other MF’s have a three tier structure. The structure is: HDFC Limited and Standard life investments limited – Sponsor HDFC Trustee Company Limited – Trustee HDFC Asset management company- Asset management company What is the role of trustees? The role of trustees is to see whether the money is being managed as per the stated objectives by the AMC. 12

Q4:

Q4 The AMC, in the name of the trust, floats new schemes and manages the money. The AMC operates under the supervision of _______ 13

Q4:

Q4 The AMC, in the name of the trust, floats new schemes and manages the money. The AMC operates under the supervision of it’s Board of directors, the Trustees and also SEBI The AMC manages the investor’s money on a day to day basis. 14

Q5:

Q5 Whenever the fund manager wants to buy /sell a security, the permission of _____________ is a must. 15

Q5:

Q5 Whenever the fund manager wants to buy /sell a security, the permission of Compliance officer is a must. 16

Q6:

Q6 The custodians of HDFC MF are HDFC Bank Limited and Citibank NA. What is the role of custodians? The custodians safe keep the physical securities and keep tab of corporate actions like rights issue, bonus and dividends of companies in which the fund has invested. In India today, securities are held mostly in dematerialized form through Depository Participants (DP) 17

Q7:

Q7 What is “NFO?” NFO stands for New Fund Offer – These are new schemes that are launched by the AMC’s regularly, after getting the approval of the Trust and SEBI – these schemes invite investors to invest – the investment cannot be done by cash - the details of the NFO are given in the Offer document (OD). 18

Q8:

Q8 HDFC Mutual funds have appointed Computer Age Management Services Limited as their “Registrars and Transfer agents” – what role does this company play? The Registrar and transfer agent maintain all the investor records of investments and redemption . 19

Q9:

Q9 On redemption request by investors, the AMC must dispatch the redemption proceeds within ___ days of the request? 20

Q9:

Q9 On redemption request by investors, the AMC must dispatch the redemption proceeds within 10 days of the request. 21

PowerPoint Presentation:

Organization of a Mutual Fund

Why invest in a MUTUAL FUND?:

Why invest in a MUTUAL FUND? 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

ADVANTAGES OF MUTUAL FUNDS:

ADVANTAGES OF MUTUAL FUNDS Affordable Professional Management Diversification Liquidity Tax benefits Well regulated and low cost Transparency Flexibility Choice of schemes

SHORTCOMINGS OF INVESTING THROUGH MF:

SHORTCOMINGS OF INVESTING THROUGH MF NO TAILOR-MADE PORTFOLIO

Types of Mutual funds:

Types of Mutual funds 26

Q10:

Q10 What are Open ended and Close ended funds? In an open ended fund, the investor can enter and exit at his convenience. In the close ended fund, the investor can enter only during the NFO period and exit only when the term of the scheme comes to an end (typically 5-7 years) – these are however listed in the stock exchanges and the investor can buy and sell these schemes from other investors. 27

Q11:

Q11 What is the definition of Equity funds? Equity funds are those funds that have atleast 65% of their Average Weekly Net Assets invested in Indian equities . 28

Q12:

Q12 What is an Index fund? Index funds invest in stocks comprising of the Index ( for example Nifty) in the same proportion as the Index ( based on market capitalization). These are passively managed funds as the fund manager does no research – these funds aim to mirror the Index as closely as possible. 29

Q13:

Q13 What are diversified large cap funds? These are funds which restrict their stock selection to the large cap stocks – typically the top 100 or 200 stocks with highest market capitalization and liquidity It is generally perceived that large cap stocks are those which have sound businesses, strong management, globally competitive products and are quick to respond to market dynamics. Therefore, diversified large cap funds are considered as stable and safe. 30

Q14:

Q14 What are Quant funds? Here the software system is the fund manager’, -the software system takes the decision to buy and sell stocks based on some pre defined conditions. 31

Q15:

Q15 What is Growth investing? Growth investing is an investment style that refers to investing in fast growing companies -companies whose profits are expected to grow at the higher than an average rate 32

Q16:

Q16 What is Value Investing? Value investing approach is based upon the premise that a stock/ sector is currently undervalued and the market will eventually realize its true value. So, a value investor will buy such a stock/ sector today and wait for the price to move up. When that happens, the Value investor will exit and search for another undervalued opportunity. 33

Q17:

Q17 What is ELSS? Equity Linked Savings Scheme ( ELSS) are equity schemes, where investors get tax benefit upto Rs. 1 Lakh under section 80C of the Income Tax Act. These are open ended schemes but have a lock in period of 3 years 34

Q18:

Q18 What is Fund of Funds? These are funds which do not directly invest in stocks but invest in units of other mutual funds which they feel will perform well and give high returns. 35

Q 15:

Q 15 What is Net Asset Value? NAV is current value of one unit of the Mutual fund and is calculated by dividing the value of Net Assets by the outstanding number of Units. 36

Q16:

Q16 How often is a Fund fact sheet published? Fund fact sheet is published monthly by the AMC It gives all details as regards the AUMs of all its schemes, top holdings in all the portfolios of all the schemes, loads, minimum investment, performance over 1, 3, 5 years and comparison of scheme’s performance with the benchmark index, fund managers outlook, portfolio composition, expense ratio, portfolio turnover, risk adjusted returns, equity/debt split for schemes etc 37

Q17:

Q17 What is expense ratio? Expense Ratio is defined as the ratio of annual expenses incurred by a scheme to its Average Weekly Net Assets. It means how much of investors money is going for expenses and how much is getting invested. Transaction costs (brokerage, STT, cess, etc) are not considered while calculating expense ratio 38

Q18:

Q18 How is Portfolio turnover calculated? Portfolio Turnover is defined as ‘Lesser of Assets bought or sold/ Net Assets’. A scheme with Rs. 100 cr as net assets sells Rs 20 cr of its investments. Thus its Portfolio Turnover Rate would be 20/ 100 = 20% 39

Q 19:

Q 19 What is ETF? Exchange traded funds (ETF’s) are are mutual fund units which investors buy/sell from the stock exchange, as against a normal mutual fund unit, where the investor buys / sells through a distributor or directly from the AMC. Buying and selling ETFs is similar to buying and selling shares on the stock exchange. Prices are available on real time and the ETFs can be purchased through a stock exchange broker just like one would buy / sell shares. 40

Q20:

Q20 Give four advantages of investing in gold through Gold ETF vis a vis Physical gold: Fear of Theft No surety of quality Locker costs Loss due to making charges 41

Q 21:

Q 21 What are the two main objectives of Debt funds? The main investing objectives of a debt fund is usually preservation of capital and generation of income 42

Q22:

Q22 Explain the terms -Face value, Coupon and Maturity for a debt instrument? Face Value represents “the amount of money taken as loan” Coupon represents “the interest that the borrower will pay on the Face Value” Maturity is “how long the borrower has taken the loan” 43

Q 23:

Q 23 In a situation where the investor expects the interest rates to rise – should he buy debt paper of longer maturity or shorter maturity? He should but Debt paper of shorter maturity - when the paper matures, he can buy a debt of higher coupon rate. 44

Q 24:

Q 24 As the interest rates rise, does the NAV of Debt funds fall ? Yes 45

Q 25:

Q 25 What are FMP’s? Fixed Maturity Plans (FMP’s) are close ended debt schemes. The money received by the scheme is used by the fund managers to buy debt securities with maturities coinciding with the maturity of the scheme. Regulations do not allow mutual funds to guarantee returns, hence mutual funds give investors an idea of what returns can they expect from the fund through “indicative yields”. 46

Q 26:

Q 26 What are Capital protection funds and how do they operate? These are close ended funds which invest in debt as well as equity or derivatives. The scheme invests some portion of investor’s money in debt instruments, with the objective of capital protection. The remaining portion gets invested in equities or derivatives instruments like options. This component of investment provides the higher return potential. 47

PowerPoint Presentation:

48

Q 27:

Q 27 What are Balanced funds? These are funds which invest in debt as well as equity instruments. Balanced does not necessarily mean 50:50 ratio between debt and equity. 49

Q 28:

Q 28 What are MIP’s Monthly Income Plans (MIP’s) are Balanced funds that invest more in debt papers than equities. Investors who want a regular income stream invest in these schemes Investment in the debt portion provides for the monthly income whereas investment in the equities provides for the extra return which is helpful in minimising the impact of inflation. 50

Q 29:

Q 29 Where do Child Benefit plans invest? These debt oriented funds, with very little component invested into equities. The objective here is to capital protection and steady appreciation as well. Parents can invest in these schemes with a 5 – 15 year horizon, so that they have adequate money when their children need it for meeting expenses related to higher education. 51

That’s the end of the quiz:

That’s the end of the quiz 52

A recap of the type of MF’s:

A recap of the type of MF’s 53

Types of Mutual funds – by investment objectives:

Types of Mutual funds – by investment objectives Growth objective – “I want to invest Rs 10,000 today and after five years take back Rs 25,000 and I want this to be tax free” - The funds that try to meet these objectives invest in equities – hence they are called Equity funds Types of Growth / Equity Funds – Diversified Equity funds vs Sectoral funds Large cap vs small cap vs Mid cap funds Index funds 54

Types of Mutual funds – by investment objectives:

Types of Mutual funds – by investment objectives Income objective – “I am retiring next year and would get a gratuity of Rs 30 lacs - I want to invest it such that my gratuity is preserved and I get a monthly income better than a post office deposit interest” The funds that try to meet these objectives typically invest in debt instruments issued by government, banks, corporate and financial institutions - hence they are called Fixed income funds or debt funds . 55

Types of Mutual funds – by investment objectives:

Types of Mutual funds – by investment objectives A combination of growth and fixed income – “I have received my annual bonus of Rs 10 lacs just now – I want to invest it such that in 5 years it becomes 15-18 lacs plus I get a payoff of Rs. 60,000 per annum for my vacation out of this fund” The funds that try to meet these objectives typically invest in both equities and debt instruments – these funds are called Balanced funds . 56

Types of Mutual funds – by investment objectives:

Types of Mutual funds – by investment objectives Short term investments – “I have Rs 100,000 with me for the next three months – it is meant for my child’s school admission in May and I need to park it somewhere till then – I would like to have a better return than a savings bank account” The funds that try to meet these objectives typically invest in short term debt instruments like interbank money markets – hence these are called Money market funds . 57

Types of Mutual funds – by investment objectives:

Types of Mutual funds – by investment objectives Tax saving – “I want to reduce my tax out go and is there some place I can invest beyond PPF and Post office schemes?” The funds that offer tax rebates are called Equity linked saving schemes (ELSS), - these funds invest in equities and typically have a three year lock-in period. 58

MATURITY PROFILES ACROSS DEBT CATEGORIES:

MATURITY PROFILES ACROSS DEBT CATEGORIES Gilt Funds (Maturity – 5 to 15 years) Income Plans (Maturity – 3 to 7 years) Short Term Plans (Maturity – 1 to 2 years) Ultra Short Term Plans (Maturity – six to 12 months) Liquid Plans (Maturity- Less than six months) 59

Now that we know a bit about MF’s Let us see the real MF market offerings in India:

Now that we know a bit about MF’s Let us see the real MF market offerings in India 60

How to select the Mutual fund for investing and getting the 15 -20% return to get rich:

How to select the Mutual fund for investing and getting the 15 -20% return to get rich 61

Deciding on the MF starts with the objectives – here we are looking at wealth creation with 15-20% returns:

Deciding on the MF starts with the objectives – here we are looking at wealth creation with 15-20% returns Investing will be in Equity funds In Equity look at a portfolio allocation of Large and Mid/small cap (depends on your risk profile) Look at the best funds in these categories – AUM, Rating and past performance Invest (through SIP or as an when you have money to invest) 62

PowerPoint Presentation:

63 Broad plan for this course Wealth management course Session 1 3 hours An Introduction to the landscape of the Wealth Management business in India And Long term financial planning Session 2 3 hours Risk Profiling and Investment planning Session 3 3 hours Spectrum of Investment Solutions : Debt Oriented Solutions Session 4 3 hours Spectrum of Investment Solutions : Equity Oriented Solutions Session 5 3 hours Spectrum of Investment Solutions : Mutual funds Session 6 3 hours Spectrum of Investment Solutions : Insurance Session 7 3 hours Spectrum of Investment Solutions : Real estate investments Session 8 3 hours Spectrum of Investment Solutions : Commodities and other structured instruments Session 9 3 hours Investment Strategies during the tenure of the Mandate, A sset allocation and reporting Session 10 3 hours Career in Wealth management industry and final wrap up

Next session – Investing in Equity Preparations for the class - Just brush up your SAPM fundamentals on Equity valuation:

Next session – Investing in Equity Preparations for the class - Just brush up your SAPM fundamentals on Equity valuation 64

Thank you:

Thank you 65

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