Slides

2. Wealth Management
MBA – Sixth Trimester
Financial Instruments
Best wishes
Dr R Narayanaswamy

3. Financial Instruments
Example Invest Return Maturity
PPF Yes Yes Yes
Bank 5 Year Deposit Yes No No
Equity based Instruments No Yes Yes / No
Deposits No No No
T
A
X
B
E
N
E
F
I
T
s

4. Choice of financial instruments
• Bank accounts – Savings, RD & Fixed Deposits
• Post office Schemes
• Mutual funds & ETF
• NBFCs & Company fixed deposits
• Unit linked insurance plans
• Tax free Bonds
• Inflation Indexed Bonds
• Debentures
• NPS
• Equity shares – IPO & secondary market
• Futures & Options
• P2P Lending
• Alternative Investments Market

5. Post Office Investments
• Savings Account
• Recurring Deposit
• Time deposits
• POMIS – Post Office Monthly Income Scheme
• PPF – Public Provident Fund
• NSC – National Savings Certificate – 5 Yr
• SCSS – Senior Citizen Savings Scheme
• Sukanya Samriddhi Yojana
• Please refer to the latest guidelines issued by India Post

6. Mutual Fund - Meaning
• A mutual fund is nothing but a pooling of
funds from various people for their mutual
benefits. The collected funds are invested
in both financial and real assets in line with
the objectives of the schemes and as
desired by the investors.

7. How a mutual fund is formed?
Trust
AMC
sponsor
• Sponsor
• Trust
• AMC

8. Evolution of Mutual Funds in India
• First Phase – 1964 to 1987 – UTI monopoly regime
• Second Phase – 1987 to 1993 – Public Sector
monopoly
• Third Phase – 1993 to 1996 – Private Sector entry
• Fourth Phase – 1996 to 1999 – SEBI Regulations
• Fifth Phase – 1999 to 2004 – M&A
• Sixth Phase – Post 2004 - Growth

9. Organisational Structure
 Fund Sponsor - A Sponsor must contribute at
least 40% of the net worth of AMC & possess
a financial track record over 5 years.
 Mutual Fund as Trust - Holds the assets for
the benefit of unit holders, who are the
beneficiaries of the trust.
 Asset Management Company (AMC) -
Net worth of at least Rs.25 crs at all times

10. TERMS / JARGONS
• NFO – Offer Document & Key Information
Memorandum
• Corpus
• Unit
• Scheme
• Expense ratio
• Portfolio turnover
• Load
• NAV

11. Problems of a layman if he/she enters the market directly
• Which company’s share to buy / sell
• What price to buy / sell
• When to buy / sell

12. Organizational setup
CMD
CEO
CIO
CUSTODIANS
SECRETARIAL
MARKETING
FUND MANAGEMENT
ACCOUNTS EQUITY RESEARCH
CUSTOMER
SERVICE
BACK OFFICE
OPERATIONS
HUMAN RESOURCE
DEVELOPMENT
MIS

13. Investment Options and developments in MF Industry
•Lump sum; SIP; SWP; STP
•Dividend Payment ; Dividend Reinvestment;
Growth Plan
•Direct System
•Capital Protection Funds
•T+1 Redemption
•Direct Credit

14. Investment Options and developments in MF Industry
•Trigger option
•Arbitrage Funds
•Fixed Maturity Plan
•Quant Funds
•Fund of Funds
•Color Indication – Blue, Yellow and Brown

15. Advantages of investing in mutual funds
• Professional management
• Low costs
• Liquidity
• Very well regulated by SEBI
• Low start up investment
• Choice of schemes and flexibility
• Transparency
• Tax benefits
• Diversification

16. How to choose a mutual fund
• Good promoter group
• Track record of performance
• Compare the industry players
• Investor service (Easy means of entry / exit)
• Consistency of returns
• Rating and rankings – Value Research
• Fund managers track record
• Transparency
• Refer “Fund Fact Sheet”

17. Ideal Financial plan for investors
• Aggressive plan ( 20 – 35 age group)
Growth - 75%,balanced - 20% and liquid 5%
• Moderate plan ( 35 – 55 age group )
Growth – 35%, balanced – 30%, income – 20% and
liquid – 15%
• Conservative plan ( above 55 years )
Growth – 20%,balanced – 10%,income – 40% and
liquid – 30%

18. Capital Growth:
Risk: Medium to High
Period: 3 to 5 yrs
Income:
Risk: Medium to Low
Period: 1 to 3 yrs
Capital Protection:
Risk: Low to Medium
Period: Less than1 yr
Investment Pyramid
STOCKS
GROWTH
FUNDS
BONDS
DEBENTURES
INCOME / BOND FUNDS
COMPANY FIXED DEPOSITS
CASH / LIQUID FUNDS
SHORT-TERM DEPOSITS / GOVT.PAPER

19. Mutual funds vs Hedge funds
• Objective - Hedge funds aim at absolute return while
mutual funds aim at relative return
• Legal Structure - In US, hedge funds are limited
partnerships where as mutual funds are operated as
companies. In India, very recently SEBI introduced
guidelines for Alternative Investments.
• Strategies - Hedge funds have wider freedom, which
includes short selling, leveraging, using hedging
products, etc, while framing investment strategies
while mutual funds have limitations.

20. Mutual funds vs Hedge funds
• Primary Source of return - While return and risk are
determined by market for mutual fund, it is the
strategy of manager that decides the same for hedge
funds.
• Cultural Style - Hedge funds are lean and mean while
mutual funds are large and cumbersome
• Liquidity - Hedge funds have limitations with regard to
investment and redemption while mutual funds enjoy
daily liquidity
• Marketing - Hedge funds have limitations with regard
to marketing and selling its products while mutual
funds have broad access to retail market.

21. Mutual funds vs Hedge funds
• Business relationship – Manager and client co-invests
as partners in hedge funds while manager is an agent
for client in mutual funds.
• Fees - While fees are asset and performance based in
hedge funds, it is purely asset based in mutual funds.
• Please refer “SEBI (Alternative Investments Funds)
regulations, 2012” for more details.

22. Financial Instruments
Exchange Traded Funds
Introduction

23. ETF
• Exchange Traded Funds are essentially index funds that
are listed and traded on exchanges like stocks.
• An ETF is a basket of stocks that reflects the
composition of an index, like S&P CNX Nifty or BSE
Sensex.
• ETFs can be bought and sold throughout the trading
day like any stock.

24. MF vs ETF

25. Advantages
• Convenience
• Minimum investment
• Provides arbitrage between futures and cash
• Low cost
• Trade close to actual NAV
• Ability to put limit orders
• Tracking error low
• Highly flexible
• Fund with underlying securities
• Closely tracks the performance of index

26. Uses
• Efficient Trading
• Asset allocation & Diversification
• Managing Cash flows
• Cash equitisation
• Hedging risks
• Arbitrage and covered options strategies

27. Reference
• Please read through the article
• Exchange Traded Funds by Ken Hawkins
• Source: www.investopedia.com

28. Questions to think
• How many Mutual Fund Schemes to invest in ?
• Whether higher NAV means better ?
• Whether Debt schemes don’t give losses ? Or whether
NAV of Debt schemes will only go up ?
• If I have huge amount, how to invest the same when
lump sum method is not considered wise?
• Whether Sector funds or Thematic funds are good for
investments ?
• Why NAVs differ across Gold ETFs ?

29. Happy Learning
Thank You