1. 1 Domestic Mutual Funds

2. 2 What is a Mutual Fund – its advantages and disadvantages Types of Mutual Funds and its characteristics Factors to evaluate a Mutual Fund Types of risks associated with Mutual Funds Tax Provisions on Mutual Funds

3. 3 What is a Mutual Fund – its advantages and disadvantages Types of Mutual Funds and its characteristics Factors to evaluate a Mutual Fund Types of risks associated with Mutual Funds Tax Provisions on Mutual Funds

4. 4 Concept of Mutual Fund Many investors with common financial objectives pool their money Investors, on a proportionate basis, get mutual fund units for the sum contributed to the pool The money collected from investors is invested into shares, debentures and other securities by the fund manager. 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.

5. 5 Mutual Fund Operation

6. 6 Organization of Mutual Fund Sponsor Trustees Asset Management Company Mutual Fund Unit-holders Fund Managers Custodian Registrar / Transfer Agent

7. 7 Advantages of Investing in Mutual Funds Professional Management Diversification Transparency Liquidity Low Costs Return Potential Convenient Administration Well regulated Tax benefits Choice of schemes Flexibility

8. 8 Disadvantages of Investing in Mutual Funds Cost Control Not in the Hands of an Investor Investor has to pay investment management fee and fund distribution costs as a percentage of the value of his investments irrespective of the performance of the fund. Difficulty in Selecting a Suitable Fund Scheme Many investors find it difficult to select one option from the plans available. For this, they may have to take advice from financial planners in order to invest in the right fund to achieve their objectives. No Customized Portfolios Fund investment strategy is a decision taken by the fund manager. Investors have no right to interfere in the decision making process.

9. 9 Myths about Mutual Funds A fund invests in the same stocks as its benchmark index Equity funds do invest up to 35% in debt Once a fund house becomes famous, so do all its funds

10. 10 What is a Mutual Fund – its advantages and disadvantages Types of Mutual Funds and its characteristics Factors to evaluate a Mutual Fund Types of risks associated with Mutual Funds Tax Provisions on Mutual Funds

11. 11 Classification of mutual fund schemes on various basis

12. 12 Type of Mutual Funds Equity Funds Money Mkt/ Liquid Funds Hybrid Funds Debt/ Income Funds Gilt FundsOther Funds Specialty Funds Tax Saving Funds Equity Index Funds Diversified Equity Funds Equity Income Dividend Yield Value Funds Growth Funds Asset Allocation Funds Monthly Income Plan Balanced Funds Sector Funds Small Cap/ Mid Cap Funds Foreign Securities Funds Income Funds Short Term Plans Floating Rate Funds Flexi Cap Fixed term Plan Series Funds of Funds Exchange Traded Funds (ETFs) Real Estate Funds Commodity Funds Arbitrage Fund Capital Protected Portfolio

13. 13 Equity Funds Growth Funds Objective is Capital Appreciation (with time horizon of 3 to 5 years). Invest in those companies that are expected to outperform the market in the future. Value Funds Objective is Capital Appreciation by investing in stocks which are currently under valued to their future earning potential and carry medium risk profile. Equity Income or Dividend Yield Funds Objective is to generate high recurring income and steady capital appreciation for investors. Invest in companies which issue high dividends and are exposed to the lowest risk level as compared to other equity funds.

14. 14 Equity Funds Equity Index Funds Objective to match the performance of a specific stock market index Invest in same companies that form the index and is constituted in the same proportion as the index Tax Saving Funds (ELSS) Enjoys tax benefit under section 80 C, i.e. investment in these funds up to INR 1 lac can be reduced from gross total income Normally they are diversified in nature They have a lock in period of three years Diversified Equity Funds Objective to give well diversified fund to reduce sector-specific or company-specific risk. Invest mainly in equities without any concentration on a particular sector(s).

15. 15 Equity Funds- Specialty Fund Sector Funds Invest in a particular sector/industry of the market therefore, they are more risky than equity funds that invest in multiple sectors. Mid Cap/ Small Cap Funds Invest in Mid-Cap or Small-Cap Companies. The shares of Mid- Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies thus making, investment risky. Foreign Securities Funds Invest in one or more foreign companies. They achieve international diversification and hence are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk.

16. 16 Equity & Hybrid Funds Equity Fund CategoryVulnerability inRemarks market correction Diversified - Large CapMedium Diversified - Mid-CapHigh Diversified - Multi CapMedium-High SectoralHighdepends on sector Hybrid Fund CategoryVulnerability inRemarks market correction BalancedMediumint. rate risk also present MIPsLow Dynamic EquityMedium - Highint. rate risk also present

17. 17 (I) Value Investing Investing in companies whose current Market Value < = Intrinsic Value Fundamental analysis using valuation techniques like Price to Earnings, Price to Book Value, Discounted Cash flow (II) Growth Investing Strong growth oriented companies Underlying belief is company’s earnings growth meets or exceeds market expectations Understanding Equity Funds : Investing Styles

18. 18 Understanding Equity Funds : Investing Styles (III) Momentum Investing Investing in companies based on expectations that market value of stock will increase rapidly Ignores valuation measures for selecting stocks Investment Style is important for the following: Style determination helps in measuring performance relative to benchmark Style identification helps an investor to diversify portfolio

19. 19 Money/ Liquid Funds Very low risk product Nearly zero interest rate risk & low credit risk Stable returns Positioned as a very short term investment product Better returns vis-a-vis savings bank account Ideally suited as a parking facility for short term idle funds The typical investment options for liquid funds include- Treasury Bills (issued by governments), Commercial papers (issued by companies) Certificates of Deposit (issued by banks).

20. 20 Debt/ Income Funds Lower risk product Very low uncertainty over the medium term Stable returns Positioned as medium to long term investment Tailor made products to suit every cash flow and risk requirement (Short Term Plan, Monthly Income Plan and Floating Rate Plans) Maturity profile, Asset class to be looked into while selecting funds Very little differentiation between the funds, hence important to know the fund mangers view on economy, inflation, interest rate etc

21. 21 Debt/ Income Funds Flexi Cap Funds The fund invest in debt securities of any duration depending upon his view on the market direction Fixed Term Plan Series Objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. Usually are closed-end schemes having short term maturity period that offer a series of plans and issue units to investors at regular intervals. Short Term Plans Invests in debt securities having maturity up to 1 to 3 years Low Risk product Liquid Plus Funds The fund invests in debt securities having maturity between 6 to 12 months

22. 22 Debt Funds – Sensitivity to interest rates Debt Fund CategoryInterest Rate RiskRemarks (rise in int. rates) Fixed Maturity PlansNoneif held to maturity Liquid FundsVery Low Floating Rate PlansNoneBenefit if int. rates increase Short Term Debt FundsLow Medium Term Bond FundsMedium Long Term Income FundsHigh Gilt FundsHigh

23. 23 Gilt Funds Extremely safe as investment is made in securities issued or guaranteed by Central/State government Only risk is interest rate risk Positioned across all time segments – short term medium term & long term as per investment objective Short term factors impact performance Best suited for risk averse investors & institutional investors against statutory investments ( PF’s) Active portfolio management and risk management process are critical factors for selecting fund

24. 24 Debt Mutual Funds Gilt Funds (Maturity – 5 to 15 years) Income Plans (Maturity – 3 to 7 years) Short Term Plans (Maturity – 1 to 2 years) Liquid Plus Plans (Maturity – six to 12 months) Liquid Plans (Maturity- Less than 3 months)

25. 25 Hybrid Funds Balanced Funds Objectives is to reward investors with moderate capital appreciation with minimum risk of capital erosion. Invests in debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. More than 65% is invested in equity to avail tax benefits enjoyed by equity funds Monthly Income Plan Objectives is to reward investors with a regular income, moderate capital appreciation with minimum risk of capital erosion. Invests in debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. Around 80% of the portfolio is in debt securities Asset Allocation Funds Funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets.

26. 26 Other Funds Commodity Funds Investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts. Funds of Funds Invest in other mutual fund schemes offered by different AMCs. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. Exchange Traded Funds (ETFs) Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. Real Estate Funds Objective is to generate regular income for investors or capital appreciation Invests directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies.

27. 27 Other Funds Arbitrage Funds Objective is to generate regular income for investors or capital appreciation by identifying profitable arbitrage opportunities between spot and derivative market segments. Short Term Maturity. Most Liquid contracts are near term settlements Capital Protection Oriented Funds A fund that aims to protect the capital by investing in high quality fixed income securities along with equities for growth potential.

28. 28 Features – Gold ETF Taxation as that of a non equity mutual fund Transparent pricing NAV of a Unit will track price of approximately 1Gram of Gold Ideal for Retail Investor as minimum lot size to trade is one unit on secondary market. Low cost way of investing in gold Listed and traded on NSE/BSE just like a stock-Easy Buying / Selling No Storage & Security Issues A trading account with an NSE/BSE Broker is a must A Demat Account is also necessary as it can be settled only in Demat form

29. 29 Capital Protection Fund - Portfolio Designed To Deliver Twin Benefits A fund that aims to protect the capital by investing in high quality fixed income securities along with equities for growth potential

30. 30 Features of Capital Protected Fund Quality debt portfolio: High quality debt securities with matching maturities to minimise credit and Interest rate risk Superior return potential: Participate in equity potential. Flexible investment style seeking healthy inflation-adjusted returns over the fund’s holding period Tax advantages: Avail indexation benefits and potential superior post-tax returns compared to traditional savings avenues Closed end nature: Facilitates effective fund management through a stable corpus. Equity investment is given sufficient incubation period to achieve long term views

31. 31 What is a Mutual Fund – its advantages and disadvantages Types of Mutual Funds and its characteristics Factors to evaluate a Mutual Fund Types of risks associated with Mutual Funds Tax Provisions on Mutual Funds

32. 32 Some important terms SIP/STP/SWP Point to Point Returns Rolling Returns CAGR Standard Deviation Beta Sharpe Ratio

33. 33 Factors to be looked at Fund Strategy Total Risk (Volatility) & Beta Style Downside Risk Probability Sharpe Ratio Treynor Ratio

34. 34 Fund Strategy Aggressive Moderate Conservative A fund will be classified as Aggressive, Moderate and Conservative depending on Total Risk, Beta, Downside Risk and Sharpe Ratio of the fund

35. 35 Style Style = Total Risk / Benchmark Risk Higher the Style more aggressive the fund Downside Risk Probability Measures the number of times the returns go below the benchmark An aggressive fund will have a higher downside risk probability compared to a conservative fund Beta Correlation of the portfolio with the benchmark. Funds with higher beta tend to have higher volatility Total Risk Refers to the standard deviation of the returns Funds with higher standard deviation indicates that the fund is more volatile. Risk Measurement of Portfolio

36. 36 Treynor Ratio The extent of extra return per unit of beta over and above the risk free return is calculated by Treynor Ratio. =Return of the fund - Risk free return Portfolio beta Higher the ratio better the fund performance Sharpe Ratio Ratio considering the entire risk =Return on the portfolio - Risk Free Return Standard deviation of the portfolio Returns obtained above the risk free rate to the standard deviation (risk) of the fund. Higher the ratio better the fund performance Risk Measurement of Portfolio

37. 37 What is a Mutual Fund – its advantages and disadvantages Types of Mutual Funds and its characteristics Factors to evaluate a Mutual Fund Types of risks associated with Mutual Funds Tax Provisions on Mutual Funds

38. 38 Mutual Funds: What are the risks ? Country Risk Inflation Risk Industry Risk Currency Risk Income Risk Credit Risk Principal Risk Market Risk Manager Risk Interest Rate Risk

39. 39 Interest Rate Risk Interest rate risk is the change in the price of the fund/bond to change in market yield Interest rate risk that a fund takes is related to the duration of the fund, which is related to the maturity of the fund. Thumb rule: Duration of a fund/bond = maturity of the fund (or bond)/1.7 Duration of a fund (or a bond) is a measure of the sensitivity of the bond to change in interest rates. As interest rates rise, the prices of bonds fall and vice versa Assume that the duration of the bond is 5. If the yields move higher by 1%, the price of the bond moves lower by 5%. Thus, higher the duration of the fund, higher would be the portfolio volatility

40. 40 Debt strategy in volatile markets Take exposure to aggressive Income Funds and Gilt Funds in periods of falling interest rates. Reduce the interest rate risk in periods of rising interest rates Take exposure to Short Term Plans Take exposure to Floating Rate Bond Funds Take exposure to Bank Fixed Deposits

41. 41 Credit Ratings – a measure of credit risk Explores the credit worthiness of the issuer. AAA – Highest Safety AA – High Safety A – Adequate Safety BBB – Moderate Safety BB – Inadequate Safety B – High Risk C – Substantial Risk D - Default

42. 42 Credit Risk Exposure to bonds rated AA+ and lower Advantages – Enhance the portfolio running yields An advantage in periods of stable interest rates Disadvantages – Liquidity Risk – AA+ and lower rated bonds have lower liquidity as compared to G Secs or AAA bonds

43. 43 Income Funds Key factors to look at for choosing Income Fund are: Returns (over the last 6 months, 1 year, 2 years etc.) Volatility (deviation from its mean returns) Downside Risk (the risk of returns falling below the benchmark returns) Sharpe Ratio (measure the risk adjusted returns) Credit quality of the portfolio Portfolio Liquidity Fund Size Maturity of the portfolio G-Sec exposure

44. 44 Short Term Plans Key factors to look at for choosing STPs are: Returns (over the last 1 month, 3 months, 6 months etc.) Volatility (deviation from its mean returns) Downside Risk (the risk of returns falling below the benchmark returns) Sharpe Ratio (measure the risk adjusted returns) The Fund should ideally have no exposure to high maturity G-Secs which reduces the portfolio volatility Portfolio Liquidity Fund Size Maturity of the portfolio

45. 45 Gilt Funds Key factors to look at while choosing a Gilt Fund are: Returns (over the last 1 year, 2 year, 6 months etc.) Volatility (deviation from its mean returns) Downside Risk (the risk of returns falling below the benchmark returns) Sharpe Ratio (measure the risk adjusted returns) Fund Size Maturity of the portfolio

46. 46 Liquid Funds Key factors to look while choosing a Liquid Fund are: Returns (over the last 7 days, 14 days, 1month etc.) Volatility (deviation from its mean returns) Downside Risk (the risk of returns falling below the benchmark returns) Sharpe Ratio (measure the risk adjusted returns) Credit quality of the portfolio Portfolio Liquidity Fund Size Maturity of the portfolio

47. 47 Mutual Funds: What are the risks ? Income Risk The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates. Industry Risk The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. Credit Risk The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk. Country Risk The possibility that political events, financial problems, or natural disasters will weaken a country's economy and cause investments in that country to decline. Currency Risk The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk

48. 48 Mutual Funds: What are the risks ? Inflation Risk The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Principal Risk The possibility that an investment will go down in value, or "lose money," from the original or invested amount. Market Risk The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall. Manager Risk The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives Interest Rate Risk The possibility that a bond fund will decline in value because of an increase in interest rates.

49. 49 Equity Funds Snapshot : HDFC Top 200 Fund Active Fund Management Style Top down Investment approach Investment style focuses on investment in top performing sectors (at least four) at any point of time and making changes in sectoral weightages as per prevailing trends Investment portfolio is a mix of large and mid cap range with good liquidity Low weightage to top 10 holdings and focus on stocks across sectors has enabled the fund to generate superior risk adjusted performance in recent times Right sectoral moves in line with market developments remains the key factor for its future performance It is among top funds recommended for investment given its track record of consistent performance and large corpus size

50. 50 What is a Mutual Fund – its advantages and disadvantages Types of Mutual Funds and its characteristics Factors to evaluate a Mutual Fund Types of risks associated with Mutual Funds Tax Provisions on Mutual Funds

51. 51 Tax Planning: Basics Tax planning is not tax avoidance but planning your affairs smartly by making effective use of legal provisions. Tax planning should always be done in harmony with the investment objective and risk profile Tax planning can work effectively if your asset allocation is undertaken correctly.

52. 52 Equity & Balanced Funds (if more than 65% in equity):- Long term capital gains on equity funds completely tax free for both Individual & Corporates. Short term capital gains to be taxed at 15% Dividends on Equity MF’s and Balanced Funds to remain tax free in the hands of investors Dividend Distribution Tax is not applicable for equity and balanced funds Tax Provisions on Equity MFs

53. 53 Equity Funds Taxation - Snapshot * Tax Rate excluding applicable surcharge and education cess Short Term Capital Gains Tax Long Term Capital Gains Tax Dividend Income in investors hands Dividend Distribution Tax Other than Liquid) TDS Individuals/HUF15%* NIL Tax freeNIL Partnership Firm/AOP/BOI 15%*Tax freeNIL Corporates15%*Tax freeNIL NRIs15%*Tax free STCG–15.45% LTCG–NIL Particulars Equity Schemes NIL

54. 54 Debt Funds Taxation - Snapshot For Liquid schemes DDT is 25% for Individual/HUF/NRI and 30% for Firm/AOP/BOI/Corporates * Tax rate excluding applicable surcharge and education cess Short Term Capital Gains Tax Long Term Capital Gains Tax Dividend Income in investors hands Dividend Distribution Tax Other than Liquid) TDS Individuals/HUFAs per slab 10% (20% with indexation) Tax freeNIL Partnership Firm/AOP/BOI 30%* 10% (20% with indexation) Tax freeNIL Corporates30%* 10% (20% with indexation) Tax freeNIL NRIsAs per slab 10% (20% with indexation) Tax free STCG–30.9% LTCG–20.6% (after providing for indexation) Particulars Debt Schemes 12.5% 30%* 12.5%

55. 55 Using Tax Provisions Smartly Double Indexation Benefit: Investment in the growth option enables an investor to earn tax efficient returns Example: Mr Akbar has invested Rs 150,000 in HDFC Fixed Maturity Plan in March 2009. Kindly calculate the post tax returns under the following scenarios: (A) If he redeems the unit in March 2010 at Rs 160,000 (B) If he redeems the units in April 2010 at Rs 160,000 The following cost inflation index are available as follows 447 for FY 2007-08, 463 for FY2008-09, 480 for FY2009-10 and say 490 for FY 2010-11

56. 56 Using Tax Provisions Smartly Double indexation Benefit (contd..) Indexed cost of acquisition : (Index value of the year of sale * Cost of Acquisition Index value of the year of cost)

57. 57 Using Tax Provisions Smartly Double indexation Benefit (contd..)

58. Thank you Enjoy the Evening