1. Mutual Funds
and their importance in
Financial Planning

2. Mutual funds – what & how?
• Money pooled from investors with common
financial objective
• Investment of the pooled money in financial
assets – stocks, bonds, government securities etc
– with the aim of booking income and capital
growth
• Issue of ‘units’ to investors
• Sharing of gains/losses with unit holders

3. The Technique
• Pre-declared investment objective
• Pursuit of specific investment strategy
• Considers relative merit of each security/class of
security
• Constantly examines portfolio’s strengths in the
context of financial indicators, government
policy, economic climate
Mutual Funds and their importance in Financial Planning

4. Mutual Fund
The Aim
• Ensure satisfaction of investors by meeting these
prime goals:
• Safety, protection and growth of capital
• Generation and provision of income
• Each investor can use a combination of funds to create
a customised portfolio to reach his/her goals
Mutual Funds and their importance in Financial Planning

5. Mutual Fund
Advantages
• Professional management of pooled
investments, backed by research
• Instant diversification, even with a small amount
of capital
• Convenience – ease of entry and exit
• Low cost investment vehicles
• Multiple investor-friendly choices – growth,
dividend payout, dividend reinvestment
• Strict regulation by SEBI
• Transparency in reporting and compliance
Mutual Funds and their importance in Financial Planning

6. Mutual Fund
NAV
• Profitable investment activity leads to increase in
worth of each unit, reflected in net asset value
(NAV)
• Similarly unprofitable investments lead to a fall in
worth of each unit
• NAV is net assets divided by number of
units, expressed as a number
Mutual Funds and their importance in Financial Planning

7. Mutual Fund
Importance of NAV
• NAV rises when prices of investment held in a
fund’s portfolio increase; it declines when prices
fall
• For normal usage, NAV relates to per-unit
price, applicable for a given day
• NAV is a common point of reference in
investment circles
Mutual Funds and their importance in Financial Planning

8. Mutual Fund
A General Myth
• A fund with higher NAV is not necessarily worse
than another with lower NAV
• Comparing funds simply on the basis of NAV is
not a prudent idea
• There are more scientific ways of comparing
funds in the same category
Mutual Funds and their importance in Financial Planning

9. Mutual Fund
Suitable for Investors
• Money pooled from investors with common financial
objective
• Investment of the pooled money in financial assets –
stocks, bonds, government securities etc – with the
aim of booking income and capital growth
• Issue of ‘units’ to investors
• Sharing of gains/losses with unit holders
Mutual Funds and their importance in Financial Planning

10. Mutual Fund
SIP as a Tool for
Disciplined Growth of Capital
• Rupee Cost Averaging
• Even small investors can protect their
investments from the vagaries of the market
• SIPs are an organised, regulated way of meeting
the challenges of investing
• It is advisable to carry on SIPs over long term for
maximising returns
Mutual Funds and their importance in Financial Planning

11. Financial Planning – The Basics
• A process of meeting financial goals, backed by
suitable investments
• Planning considers many factors to guide an
individual towards realisation of objectives
• Requires complete and accurate risk profiling by
a qualified financial planner
• Each individual is unique. So each financial plan
is unique as well
Mutual Funds and their importance in Financial Planning

12. Financial Planning
Assessment of
Risk-taking Capability
• A detailed examination of specific risks is
needed; even large macro risks must be
analysed.
• Exact considerations include the following:
the individual’s age, investment horizon, present
financial status, commitments, liabilities, income-
generation capabilities, projected changes in
income
Mutual Funds and their importance in Financial Planning

13. Financial Planning
Asset Allocation
• Asset allocation: how investments should be
spread over various asset classes
• A reliable plan leads to accurate asset allocation
• A planner will recommend modifications in a
client’s allocations when his life stage changes
• New commitments, liabilities, windfall profits,
inheritances, medical crises will generally imply
fresh allocation strategy
Mutual Funds and their importance in Financial Planning

14. Financial Planning
Asset Allocation through
Mutual Funds
• Key questions: How much in debt funds? How much
in equity funds?
• Younger investors can generally focus more on
equity; this is more volatile. Debt is recommended
for older investors; this is more predictable. However,
there is no hard and fast rule!
• Even within the same asset class, allocations must be
done sensibly.
• Examples: How much in diversified growth funds?
How much in sectoral funds? How much in
international feeder funds?
Mutual Funds and their importance in Financial Planning

15. Financial Planning
Use of Mutual Funds for
Retirement Planning
• Funds are suitable for those who wish to build a
corpus for their years in retirement
• Apt for those who are planning to meet long
term goals, keeping specific needs in mind
• SIPs done for long periods can withstand the
impact of a fluctuating market
Mutual Funds and their importance in Financial Planning

16. Financial Planning
Use of Funds for meeting
Short- and Long-term Goals
Funds can help an individual realise aspirations like:
• Purchase of property
• Children’s education
• Marriage
• Commencement of a business enterprise
• Travel
• Repayment of loans
Mutual Funds and their importance in Financial Planning

17. Financial Planning
Two Critical Issues for
Fund Investors
• The importance of understanding one’s time
horizon
• The significance of backing each goal with the
required financial commitment
Mutual Funds and their importance in Financial Planning

18. Financial Planning
A few tips from a
Planner’s Desk
• Put money aside in liquid funds and fixed income funds
with near-term maturity to meet exigencies like an
imminent loan repayment
• Invest in conventional income funds and monthly
income plans (MIPs) to derive regular income for
meeting household expenses
• Invest in diversified multi-cap funds in order to build a
corpus for acquiring real estate or spend on a world tour,
perhaps a few years later
• Choose diversified growth funds to start SIPs for five, ten,
fifteen years. This will be a disciplined, bit-by-bit
investment programme aimed at retirement. Such an
exercise may be started with low-cost, passively-
managed index funds
Mutual Funds and their importance in Financial Planning

19. Financial Planning
Enabling Clients
to Realise their Goals
A financial planner writes a plan and makes
recommendations. He also re-evaluates the plan from time
to time. He does the following:
• Sits with his client to gather data
• Take into account all factors, including life expectancy,
inflation, tax laws, economic trends
• Assesses client’s risk profile
• Performs tasks related to goal setting, budgeting, asset
allocation, investment planning, tax planning, retirement
planning
Mutual Funds and their importance in Financial Planning

20. Financial Planning
Recommendations
with regard to Funds
When a planner has to recommend funds, he must know
their scope, nature and purpose. A particular fund may be
chosen for the following reasons:
• Investment objective – whether this suits the client’s
precise requirement
• Quality of the portfolio
• Past performance – this is the commonest yardstick. No
guarantees for the future
• Promoters’ track record and standing
• Service standards
Mutual Funds and their importance in Financial Planning

21. Financial Planning
The Finest Funds
will Make a Difference!
• Suitability of the products is the planner’s
principal consideration
• Along with conventional products, there is a
variety of ‘new’ funds available
• Exchange traded funds, gold exchange traded
funds, international feeder funds, thematic funds
and the like have further embellished the world
of funds
Mutual Funds and their importance in Financial Planning

22. Can Mutual Funds
help in Tax Planning?
• Planners often recommend Equity Linked Savings
Schemes (ELSS). These offer two advantages: tax savings
and the potential to generate returns over their lock-in
period of three years.*
• Funds are generally said to be tax-efficient. The
government has over the years taken a benign view of
capital gains recorded by long-term investors as well as
of dividends paid by funds
*DTC proposes changes in tax laws

23. Enter Early, Invest Regularly
Two mantras repeated constantly by all planners who
recommend funds:
• The earlier the better – chances of optimising returns are
stronger
• Regularity of investment has no substitute
The moral: Short-term volatility is here to stay; so remain in
funds for long periods

24. A Study of Risks
Many risks threaten the modern-day investor. These frequently stem
from:
• changes in government policy
• harsh economic and political swings
• decline in corporate profitability
• unfriendly interest rate
• high inflation
• high tax rates
• volatile market conditions
Also, an investor may have to bear the impact of job-loss,
divorce, ailment etc. A plan will fail if these risks are not
considered as part of the big picture

25. Investors’ Risk-taking Ability
Investors may be:
• Traditional (unadventurous)
• Restrained (reserved)
• Hard-hitting (daring)
An individual’s risk-taking ability will determine what sort of
funds will suit him
The higher the risk, the greater is the chance of being
rewarded. Yet nothing is assured or guaranteed

26. An Eye on Costs
A planner keeps a vigil on costs when it comes to recommending
mutual funds
• Certain costs are unavoidable, others are not. In some cases,
operational inefficiencies add to a fund’s costs. This is reflected in
expenses run up by the fund in question
• Frequent churning of fund holdings is best avoided as this adds to
transaction costs
• Funds can be compared on the basis of their costs too
• A financial planner often looks at ‘net returns’ when comparing
performances. He is concerned with an investment's real return
after all costs are deducted

27. Risks in the
World of Mutual Funds
No investment is without some risk or other. Some funds
are riskier, others are relatively low-risk in nature. There are
risks even for an early starter and regular investor.
Generally...
• Equity funds: High risk, high potential returns
• Debt funds: Low risk, stable returns
The chances of risks impairing a mutual fund portfolio
(leading to under-performance) will reduce if the right
strategies are followed

28. Risks in the
World of Mutual Ffunds
Some of the specific risks to consider are:
• Market Risk – the possibility that prices will generally
drop over short, medium or even long periods
• Fund Manager Risk – the possibility that an actively-
managed mutual fund will fail to pursue its investment
strategy properly
• Industry/Sectoral Risk – the possibility that stocks in a
certain industry will fall due to developments concerning
that industry

29. Risks in the
World of Mutual Ffunds
• Inflation Risk – the possibility that price increases will adversely
impact a fund's real inflation-adjusted returns
• Interest Rate Risk – the possibility that returns will decline as a result
of changing interest rates
• Credit Risk – the possibility that a bond issuer will fail to repay
interest and principal
• Exchange Rate Risk - the possibility that returns will be affected
because of fluctuations in the value of the currency vis-à-vis another
currency

30. Financial Planning
Some Caveats for
Mutual Fund Users
• A plan that recommends mutual funds is likely to
fail if there is...
• Inadequate diversification
• Over- or under-allocation to a particular asset
class
• Poor portfolio quality because of wrong choices
• A common pitfall: Over-stated rewards, under-
emphasised risks
Mutual Funds and their importance in Financial Planning

31. Financial Planning
The Rewards are Waiting
A good financial plan, which guides the client towards
investment in the right mutual funds, will be able to:
• Spread his investments over the chosen funds in the
most desired manner
• Derive the most optimum returns, leading to superior
stability, protection, income generation or capital
appreciation
• Meet the investor’s expectations, leading to fulfilment of
aspirations
Thus, a good plan strengthens the investor’s fortunes: he
can now meet his financial objectives according to the
timelines that are envisaged in the plan
Mutual Funds and their importance in Financial Planning

32. THE END.
Mutual Funds
and their importance in
Financial Planning