1. Mutual Funds as an investment vehicle
Presented by Gajendra Kothari, CFA July 24, 2010
Jagoinvestor Mumbai Meet

2. INDEX
1. Mutual Fund Concept
2. Organization of a Mutual Fund
3. Advantages / Disadvantages of Mutual Funds
4. Types of Mutual Fund Schemes
5. Computing Net Asset Value
6. Mutual Fund Investment Strategies
7. Myths / Facts about Mutual Funds
8. Mutual Funds Vs. Direct Equity Investments
9. Factors to consider before choosing a fund
10. Worldwide MF Industry
11. Mutual Funds – Performance
12. Mutual Fund Investment Blunders
13. Mutual Funds Taxation

3. “What is good for the client is
also good for the firm”
T Rowe Price Investment Services
6th largest fund house in the USA

4. CONCEPT
A Mutual Fund is a trust that pools the savings of a number of investors
who share a common financial goal.
The money thus collected is then invested in capital market instruments
such as shares, debentures and other securities.
The income earned through these investments and the capital
appreciation realized are shared by its unit holders in proportion to the
number of units owned by them.
Thus a 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.

5. INVESTOR PERSPECTIVE
Basics of Investments:
Risk Aversion Risk Management
Bank Deposits, PPF,
NSC, Insurance, Mutual Funds
Kisan Vikas Patra etc.
Low Risk/Low Return Managed Risk/High Return

6. MUTUAL FUND OPERATION FLOW CHART

7. FUND STRUCTURE
Fund Sponsor
Trustees
Asset Management Company
Depository R&T
Agent
Custodian

8. MUTUAL FUND STRUCTURE
This is just an illustration

9. BRIEF HISTORY
First Phase: 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of 1987, UTI had
Rs.6,700 crores of assets under management.
Second Phase: 1987-1993 (Entry of Public Sector Funds)
Marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life
Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual
Fund was the first non- UTI Mutual Fund established in June 1987. At the end of 1993, the mutual fund
industry had assets under management of Rs.47,004 crores.
Third Phase: 1993-2003 (Entry of Private Sector Funds)
1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged
with Franklin Templeton) was the first private sector mutual fund registered in July 1993. As at the end
of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.
Fourth Phase: since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI Mutual Fund Ltd was
formed and sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the
SEBI Mutual Fund Regulations. The AUM of 38 fund houses as at June 30, 2010 stands at
Rs 6,75,831 crores

10. MUTUAL FUNDS GROWTH OVER THE YEARS
Source: AMFI website

11. ADVANTAGES OF MUTUAL FUNDS
Professional Management
Diversification
Potential Higher Return Vs other Avenues
Low Costs
Liquidity
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated

12. DISADVANTAGES OF MUTUAL FUNDS
Management fees
Exit Costs
Potential poor performance
Complicated tax reporting issues
Potential market risk with all investments
Aggressive or unethical sales personnel / practices

13. REALITY CHECK….
In a country with a population of close to 120 crores, we at best
have about 1 crore investors – less than 1% ! (even that is
suspect)
4-5 crore mutual funds investors a myth; these are folios that
belong to about 60-70 lakh active unique investors
Households’ investments in capital market have fallen from a high
23.3% of gross financial savings in 1991-92 to a meagre 2.6% in
2008-09!

14. TYPES OF SCHEMES
By Structure
Open Ended Schemes
Close Ended Schemes
Interval Schemes
By Investment Objectives
Growth Schemes
Income Schemes
Balance Schemes
Money Market Schemes
Other Schemes
Tax Saving Schemes
Special Schemes
Index Schemes
Sector Specific Schemes
ETFs (including gold ETFs)
Fund of Funds
ULIPs

15. RISK-RETURN TRADEOFF

16. COMPUTING NET ASSET VALUE
For investors, the performance of their investment
depends on what happens to the fund’s per unit value, or
net asset value (NAV)
NAV = Market Value of Assets – Liabilities
Number of Shares Outstanding

17. MUTUAL FUND INVESTMENT STRATEGIES
Choose in funds consistent with your objectives,
constraints, and tax situation
Invest. Don’t speculate. (Stock market is not a casino)
Be regular
Own funds in different asset classes
Do your homework or hire wise experts to help you.
Monitor your investments at a regular interval.
Remember, no investment is forever.
Don’t panic.

18. MYTHS ABOUT MUTUAL FUNDS
Mutual Funds invest only in shares.
Mutual Funds are prone to very high risks/actively traded.
Mutual Funds are very new in the financial market.
Mutual Funds are not reliable and people rarely invest in
them.
The good thing about Mutual Funds is that you don’t have to
pay attention to them.

19. FACTS ABOUT MUTUAL FUNDS
Equity Instruments like shares form only a part of the securities held by
mutual funds. Mutual funds also invest in debt securities which are
relatively much safer.
The biggest advantage of Mutual Funds is their ability to diversify the
risk.
Mutual Funds are their in India since 1964. Mutual Funds market is
very evolved in U.S.A and is there for the last 60 years.
Mutual Funds are the best solution for people who want to manage
risks and get good returns.
The truth is as an investor you should always pay attention to your
mutual funds and continuously monitor them. There are various funds
to suit investor needs, both as a long term investment vehicle or as a
very short term cash management vehicle.

20. DIRECT EQUITY INVESTMENT VS. MUTUAL FUND INVESTING
Diversification is the key to success in equity investments. A diversified portfolio serves to
minimize risks. An individual investor may not have the capital to build a diversified
portfolio.
Professional Management by mutual funds ensure that the best avenues are tapped with
the aid of comprehensive information and detailed research.
Liquidity of mutual funds is high as you have daily repurchase options for open-end
funds.
Transaction costs are lower in mutual funds as compared to direct investment due to
economies of scale.
Convenience is high for mutual funds as they sell through service networks, banks and
other distributors. Many funds allow investors the flexibility to switch between schemes
within a family of funds.
Blue Chip portfolio available to investors for as low as Rs. 500/-.
High Service Standards maintained by mutual funds.
Transparency – High degree of transparency is maintained by the funds.

21. WORLDWIDE MUTUAL FUND ASSETS
Worldwide MF Assets in Rs 1,064,00,000 crs (31st Dec’09)
India MF Assets in Rs. 6,75,831 crs (30thJun’10)
0.63% of the worldwide MF assets
1 USD = Rs 46.53 as at Dec 31, 2009 (trillions of U.S. dollars, end of Dec 2009) Source: Investment Company Institute

22. US LEADS THE WORLD MUTUAL FUND MARKET

23. WORLDWIDE MUTUAL FUND ASSETS BY TYPE OF FUND
Data as of Sep 2010 Source: Investment Company Institute

24. FACTORS TO CONSIDER BEFORE CHOOSING A FUND
Track record / experience of the fund house
Stability of the investment team / adherence to an investment process
Consistent performance of the fund across market cycles
Disclosure and service levels offered by the fund house
Relative performance among its peer group (across time periods)
Investment style (whether it suits your risk profile)
Look for Expense Ratio, Exit load etc

25. INVESTMENT MODES
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)

26. PERFORMANCE OF DIVERSIFIED EQUITY FUNDS
Performance as at July 19,2010

27. PERFORMANCE OF TAX-SAVING EQUITY FUNDS
Performance as at July 19,2010

28. PERFORMANCE OF BALANCED FUNDS
Performance as at July 19,2010

29. TWO GREATEST INVESTMENT BLUNDERS
1. Investing in the NFOs
2. Investing in the schemes
which gives high dividends

30. INVESTING IN NFOS
Its new (Old wine in a new bottle, participate in India’s
growth potential)
Its at Rs 10 i.e its cheaper than a existing fund whose
NAV is Rs.110
My neighbour is buying it
My distributor / agent has strongly recommended it.
I can make good profit in the short term

31. RS.10 OR RS.100 – NAV MAKES NO DIFFERENCE

32. DON'T FALL FOR THE DIVIDEND BAIT
The NAV falls to the extent of dividend payout
Expense incurred on advertisement campaigns
for spreading the word goes from your fund
It might be a sign of the fact that the fund
manager doesn't see any attractive investment
opportunities.
If the basis of investing in a scheme is flawed, so
is the investment

33. TAXATION - EQUITY MF ORIENTED SCHEME
Investor Category Short Term Long Term Dividend Dividend TDS
Capital Gain Tax Capital Gain Tax Income Distribution
(holding period (holding period Tax
< 12 months) > 12months)
Residential 15%* Nil Tax Free Nil Nil
Individual/ HUF
Partnership 15%* Nil Tax Free Nil Nil
Firms/AOP/BOI
Domestic Companies 15% *$ Nil Tax Free Nil Nil
NRIs 15%* Nil Tax Free Nil STCG- 15%*
LTCG – Nil
TDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual
*Additional education cess of 3% on the amount of tax
$ Additional surcharge of 7.5% and an education cess of 3% on the amount of tax

34. TAXATION - DEBT MF ORIENTED SCHEME
Investor Category Short Term Long Term Dividend Dividend Dividend TDS
Capital Gain Capital Gain Income Distribution Tax Distribution
Tax Tax – Other than Tax - Liquid
(holding (holding Liquid & Money & Money
period period >12 Market Market
<12months) months) Schemes Schemes
Residential As Per Tax 10%(20% with Tax Free 13.841% # 27.681%# Nil
Individual/ HUF Slab indexation)*
Partnership 30%* 10%(20% with Tax Free 22.145% # 27.681% # Nil
Firms/AOP/BOI indexation)*
Domestic 30%*$ 10%(20% with Tax Free 22.145% # 27.681%# Nil
Companies indexation)$^
NRIs As Per Tax 10%(20% with Tax Free 13.841% # 27.681%# STCG- 30%*
Slab indexation)* LTCG- 20%*
(After providing
for indexation)
TDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual
*Additional education cess of 3% on the amount of tax
$ Additional surcharge of 7.5% and an education cess of 3% on the amount of tax
#DDT includes 7.5% surcharge and 3% education cess

35. 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
fund.
It merges into another fund.
Change in management style or a change in the
objective of the fund.

36. BUYING MUTUAL FUNDS
Contacting the Asset Management Company directly
Web Site
Request for agent
Mutual Fund / Insurance Agents
Locate one on AMFI site
Financial Planners
ASK Wealth
Sykes & Ray FP
National Distributors
Birla Sunlife, Bajaj Capital
Banks
Net-Banking
Phone-Banking
ATMs
Online Trading Account
ICICI Direct, Motilal Oswal, Indiabulls

37. 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
Professional advisor

38. SIP CALCULATIONS
My
retirement
portfolio at
the end of my
50th Birthday
Atleast
15 crores
Monthly
pension
Rs 12 lakhs

39. EQUITY INVESTMENT WITH ZERO RISK
Post Office MIS (8%) SIP of Rs 2,800 in a
Investment : 6 lakhs good diversified Equity
Monthly income: Rs 4,000 fund for 6 years
After 30% tax : Rs 2,800 5 yr category average
per month return – 19.77%
At the end of 6 years you Value of SIP at the end
get = Rs 6 lakhs of 6 years : Rs 3.93
lakhs
Total Tax-free return = Rs 6 lakhs + Rs 3.93 lakhs = ~ Rs 10.00 lakhs
(Source valueresearchonline.com , As at July 19, 2010)

40. THANK YOU