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3. Financial Instruments.pptx

  1. 1. Wealth Management MBA – Sixth Trimester Financial Instruments Best wishes Dr R Narayanaswamy
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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.
  6. 6. How a mutual fund is formed? Trust AMC sponsor • Sponsor • Trust • AMC
  7. 7. 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
  8. 8. 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
  9. 9. TERMS / JARGONS • NFO – Offer Document & Key Information Memorandum • Corpus • Unit • Scheme • Expense ratio • Portfolio turnover • Load • NAV
  10. 10. 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
  11. 11. Organizational setup CMD CEO CIO CUSTODIANS SECRETARIAL MARKETING FUND MANAGEMENT ACCOUNTS EQUITY RESEARCH CUSTOMER SERVICE BACK OFFICE OPERATIONS HUMAN RESOURCE DEVELOPMENT MIS
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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”
  16. 16. 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%
  17. 17. 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
  18. 18. 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.
  19. 19. 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.
  20. 20. 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.
  21. 21. Financial Instruments Exchange Traded Funds Introduction
  22. 22. 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.
  23. 23. MF vs ETF
  24. 24. 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
  25. 25. Uses • Efficient Trading • Asset allocation & Diversification • Managing Cash flows • Cash equitisation • Hedging risks • Arbitrage and covered options strategies
  26. 26. Reference • Please read through the article • Exchange Traded Funds by Ken Hawkins • Source: www.investopedia.com
  27. 27. 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 ?
  28. 28. Happy Learning Thank You

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