MUTUAL FUND BASICS

Concept of a mutual fund
A common pool of money into which Investors place their contribution
This money is to be invested According to the pre-stated objectives of the fund
Ownership of the fund is joint or mutual amongst all investors - equivalent to the contribution made as a proportion of the overall fund
Ownership through holding of units at NAV
Advantages of Mutual Funds
Investment Options – Liquid Funds
Investment Objective: Objective is to provide investors with a high level of income from short term investments
Liquidity: Very high within 24 hrs, Direct Credit Facility available with select banks.
Risk: Zero Risk
Range of Returns: Somewhere between the call rates & 1yr T-Bills rates in the current scenario returns ranges between (4.5% - 5.5%)
Applicable Loads: Normally Both Entry /Exit - NIL
Investment Options- Floating Rate Funds
Investment Objective: To provide income consistent with the prudent risk from a portfolio comprising primarily. There are two variants Long Term & Short Term. Long Term FRF invests in long duration floating rates papers while the Short Term FRF generally invests in shorter duration FR papers( MIBOR Linked)
Liquidity: Very high. Within 24 hours. Direct credit to bank a/c
Risk: Minimal Risk
Applicable Loads: Entry/Exit Loads: NIL for ST FRF
Exit Loads: 0.25% - 0.5% for LTF (For investments upto3-6 months)
Investment Options Short Term Funds
Investment Objective : To generate both income & capital appreciation by investing in corporate debentures , call money , bank deposits etc
Liquidity : Very High within 24 hrs . Direct Credit facility available in select banks.
Risk: Credit Risk
Interest Rate Risk
Applicable Loads : Entry Load – NIL
Exit Load 0.25% (15 days - 6 months)
Investment Options Income Funds
Investment Objective : To generate both income & capital appreciation by investing in government securities corporate debentures , call money , bank deposits etc. It invests into long duration papers then the Short Term Income Fund.
Liquidity: 3 business days
Risk: Credit Risk
Interest Rate Risk
Applicable Loads : Entry Load – NIL
Exit Load 0.5% (15 days - 6 months)
Investment Options – Monthly Income Option

Investment Objective : To generate regular income by investing into short duration fixed income paper & capital appreciation by investing a small portion into equity funds
Liquidity : 3 business Days
Asset Allocation : Debt – 80% -100%
Equity – 0% -20%
Risk : The exposure in equity can make the returns volatile. Generally there is a moderate risk on the debt component as are of short duration nature.
Recommended investment Horizon: Minimum 1 year
Applicable Loads : Entry Load – NIL
Exit Load 0.5% for six months
Investment Options – Balance Funds
Investment Objective : To generate long term capital appreciation by investing in equities, maintain an optimum balance between the debt component & equity component and generate periodic income by managing the debt component
Liquidity : 3 business Days
Asset Allocation : Debt – 0% - 50%
Equity – 50%-80%
Risk : The exposure in equity can make the returns volatile. Generally there is a moderate risk on the debt component as are of short duration nature.
Recommended investment Horizon: Minimum 3-5 years
Applicable Loads : Entry Load – 2.25%
Exit Load 0.5% for six months
Investment Options – Equity Funds
Investment Objective: To generate long term capital appreciation by investing in equities.
Liquidity: 3 business Days
Risk: High
Recommended investment Horizon: Minimum 5 years
Applicable Loads: Entry Load – 2.25%
Exit Load 0.5% to 1% for six months or one year

Different types of Equity Funds
Classification based on Market Capitalisation
•Large Cap Funds - Invest in Large Cap Stocks
•Mid Cap Fund - Invests primarily in Mid Cap Stocks
•Small Cap Funds – Invests in Small Cap Stocks
Classification based on Style
•Growth Funds – Invests in high/fast growing companies
•Value Funds – Invests in out of favor stocks where the market price has fallen below its intrinsic value
- Prudential ICICI Discovery Funds
- Templeton India Growth Funds
•Blend Funds – No restriction based on style
- UTI Growth & Value Fund

Equity Funds Other Classification
•Index Funds – Mirrors an index/benchmark returns inline of the index
•Sector Funds – Invests in stocks of a particular sector
Eg ICICI Pru Technolgy Fund, Franklin Pharma Fund
•Select Sector Funds – Invests in Multiple Sectors
Eg Tata Select Sector Fund, Principal Focussed Advantage Fund
•Theme Funds - Invests in stocks /companies which have a common underlying theme. Eg. Chola Global Advatage Funds, Alliance buy India
•Dividend Yield Funds – Invests in High Dividend Yield companies
Eg: Tata Dividend Yield, Principal Dividend Yield
•International Equity Funds- Invests in companies registered in other countries
Principal Global Opportunities Fund
Parameters for Measuring Risk in Equity Funds
•Investment Philosophy
-Portfolio Construction: Top Down/Bottom Up
-Style: Growth Investing
Value Investing
Momentum Investing
•Risk Control Mechanism
• Analytical Tools (Volatility /Consistency)
- Standard Deviation
- Beta Analysis
- Sharpe Ratio
•Size of Fund
The Risk Matrix for Equity Funds
•Based on Market Cap & Style
Tax Benefits in Mutual Funds
•Dividends Tax Free in the hands of investors for all type of MF schemes
•There will be Dividend Distribution Tax
Applicable only for Debt Funds which will paid by Mutual Fund & not by Investor …
Individuals 12.50%
Corporate 20.00%
Surcharge 10.00% from FY2005-06
Effective tax rate is much lower than on interest of bank FD for higher tax bracket Individuals and Corporate investors
•Dividend Tax Free for all Equity and Balanced schemes
Tax Benefits in Mutual Funds
•Interest on all investment avenues (except PPF) would be taxable as section 80L (up to Rs.12000 of interest income exempted up to FY2004-05) scraped.
•Capital Gain Tax
- For Equity / Balanced Funds
LT Capital Gain Tax(After One year)- Nil
ST Capital Gain Tax (Less than 1 year) - @ 10%

- For Debt Funds
LT Capital Gain Tax @ 10%
ST Capital Gain Tax Tax bracket of Investors
•Deduction upto Rs. 1 lakh available u/s 80C for investment in ELSS from FY2005-06
A brief history of MF industry in India
· UTI constituted in 1963 by a special act of parliament
· Public Sector banks were allowed to launch mutual funds late 80s
· SEBI was formed for investor protection in 1992 & mutual funds to be governed by SEBI
· Private Sector funds started form 1994 with the first one to hit was the The Morgan Stanley Growth Fund ( A close ended fund)
· Debacle of US 64 scheme from 1995
The Players in the Indian MF Industry
Mutual Fund - The US Experience

Every third household is a mutual fund investor
· Mutual funds have overtaken bank deposits
· Over 5000 mutual funds with total assets of over Rs. 350 lac crores (India’s GDP is Rs.28 lac crores)
Some Perceptions
•All Mutual Funds invest in shares
–While the industry has grown with a predominance of equity based products, there are different funds for different needs
•All Mutual Funds are poor performers
–The boom in equities and equity funds in 1992-1994 and the subsequent poor stock market conditions has led investors to view all mutual fund schemes as risky and bad performers
Perception & Reality
What led to these perceptions ?
•The Government stifled competition
•The Regulator was inexperienced
•The MF industry did not have skills
•The intermediaries mis-sold MFs
•Plethora of closed ended schemes
•Investors’ lack of knowledge
What’s different today?
•Keenly competitive
–High service standards
•Experienced regulator
–Transparency
•Highly professional and long term Fund Houses
–Market development
–Need based selling
–Professional Fund Managers

MAKING SMART GOALS

• 
  Making SMART Goals
  “A life that hasn't a definite plan is likely to become driftwood”. This thought of David Sarnoff pretty much sumsup the importance of proper planning in our lives.
  Planning is bringing the future into the present so that we can do something about it now.Visualizing and taking the right steps at the appropriate time would be very crucial to the success of your dreams and goals in life.George A. Ford, many years ago, made some self-confronting questions which are still very relevant even today. These questions are in fact the gist of what planning is all about …
  
  ''Where do I want to be at any given time?''
  
  ''How am I going to get there?
  
  ''What do I have to do to get myself from where I am to where I want to be?''...
  
  ''What's the first, small step I can take to get moving?''
  The first very critical stage of any financial plan is deciding exactly where you want to be at a given time.
  Defining our goals smartly would be crucial to achieving them.
  

Ingredients of the SMART Goal:

Specific:

Goals such as "I want a Vacation Home," and "I want to retire young," really aren't goals, they are simply dreams at this point. Putting very concrete details around your dream will enable you to form a plan to help achieve it. For example, if you want a vacation home, where do you want it to be? Do you want a simple 1BHK
flat or a bungalow with a private garden? Being specific and identifying what you exactly need is a crucial first step of a financial plan.

Measurable:
Now that we know what we are looking for, the next question arises is – what is the price tag? Taking the case
of the Vacation Home, we need to ask questions like … What are the present property rates and how much is it
expected to increase till you buy it? How much are you wiling to spend? If you plan to take a loan, how much
down payment would you need?
Estimating the right price / cost of your goal or objective would help us make the desired efforts to achieve it.
Being measurable would also mean that we can compare the progress of our efforts with our goals and
regularly keep a track of it.

Achievable:
While defining the goal and determining the cost / price of your goal another important thing to be kept in mind
is the feasibility of achieving the same. Quite often, we hope for too much and then end up compromising and
not achieving the desired results. You should keep in mind your potential future savings, the variability in the
same to determine whether or not you would be able to make that required contribution needed for the goal.

Requisite:
The requisite or the need for a goal should be considered carefully before the goal. Further, you must also
define the priority for the goals. The goal of an exotic foreign tour for family may be less important than the goal
to buy an additional home. You may even go a step further and define the intensity of the goals. You may
define how much you are willing to sacrifice or under achieve your goals. For example, in case of a Farm
House, you would also define the bottom end of the budget apart from the ideal cost.
Quite often, the goals / objectives that you define may out weight your potential to make savings by far. In such
a case, your priority and the intensity for the goals would help you make the right decisions.

Time bound:
By now we are very clear as to what we want, how much we want, giving consideration to its measurability and
feasibility. We are also very clear as to the importance of such goals and their intensity. The next crucial thing
we need to know is the time frame within which we need to achieve the same. Care should be taken that not too
many goals coincide at the same time. Typically we may classify the goals into the following categories
depending on the flexibility of the time needed to achieve them …
Fixed time frame - E.g. Child Education and Retirement
Semi-fixed time frame - E.g. Purchase of residential Home, Car, Child Marriage, etc
Flexible time frame - E.g. Holiday abroad, Vacation Home, etc
All our goals work in conjunction with a timetable. Buying that vacation home in five years or 15 years makes a
big difference today. The more time we have, the more probability we have to achieve bigger goals. Ideally we
should first set the goals that have fixed time frame, then semi-fixed and lastly the flexible goals. The approach
should be such that the flexible goals should set such that they do not overshadow the more important goals
and be in such a way that we are able to smoothly achieve all our goals in an evenly spread out time frame.
Our goals are our dreams. It is our life and we should try to make more of it. By taking a little time and thinking
about our goals and objectives thoroughly would really be the first step in achieving them. If we haven’t set
SMART goals as discussed above, we probably do not wish or believe in achieving them. We all can have what
we desire in life provided that we take the actions needed