Introduction to Mutual funds

Here is a real life case – the name has been changed though.

My presentation for this session can be downloaded from http://www.slideshare.net/sgrajasekharan/wealth-management-session-2

Rashmi had finished her MBA in 2008  – lived in Bangalore with her friends –– was employed in a mid tier IT services firm – had a saving of about 20 K per month. She had come to me for advice regarding investments - this was in Aug 2009. She had looked at options like recurring deposits, fixed deposits, and post office schemes. She knew investment in equity was a high risk / high returns option - was not sure where to start.

Post discussing her needs the following points emerged:

1.       She must not use the Fixed deposit, Recurring deposit or Post office schemes as the returns from these schemes just match the inflation levels in India.

2.       She must not buy specific stocks directly as she is not got enough hands on knowledge in stock markets.

3.       She must look at a time frame of at least 3 years for any investment – in fact the longer the better.

4.       She must start immediately as she had not done anything on these lines since she started earning one year back.

5.       We decided that it was a good time to invest in mutual funds that had equity investments – it would give her

a.       the returns that equity investments gave with a lower risk vis a vis direct equity investment as the MF’s were diversified.

b.      access to professionals who managed the funds at a cost that was miniscule

c.       the flexibility to invest every month through Systematic investment plans if she wanted

d.      there was transparency on the value, as the Net Asset Values of the MF’s were calculated daily for the open ended funds

e.      she had the freedom to exit anytime after paying the exit load

f.        she had many choices as to which MF to invest in.

Deciding on which MF to invest in was the next step – the key factors that we took into consideration was

·         the past performance of the fund, even though we knew that the past performance does not guarantee future performance

·         the ratings for the MF - we got it from http://www.moneycontrol.com/mutualfundindia/ and http://valueresearchonline.com/

·         look at the background of the fund manager and see how successful he has been

·         look at the offer documents of the MF and see the detailed investment objectives

·         look at the size of corpus that the fund is managing –the larger the better

Based on these parameters, Rashmi invested in two equity funds through the SIP route – where the money is transferred every month from her bank account automatically.

Today, in Sept 2010, she is glad that she took these steps as her investment has appreciated by over 30%  in the past 12 months.

 She intends to continue with this SIP for the next two years and as of now she is educating herself on the other investment options available in India.

This case sums up what we discussed in the class -although in a different format - for more information - you can download the ppt -the url is shared early in the blog.