NISM_VA_Ch_12_Mutual Fund Scheme Selection

Module Name Mutual Fund Scheme Selection July 13, 2022

Objectives By the end of the session you will be able to: • Understand the scheme selection based on investors need, preferences and risk-profile • Know the risk level in mutual fund schemes • Get clear idea on how to select the scheme based on investment strategy of mutual fund • Know the Fund performance, fund portfolio, fund age, fund size, portfolio turnover and scheme expenses • Understand the selection of mutual fund scheme offered by different AMCs or within the scheme category • Get clear idea on selecting options in mutual fund schemes • Recognize the dos and donts while selecting mutual funds schemes

Scheme Selection Based on Investor Needs, Preferences and Risk Profile Core & Satellite Investor Need Portfolio Investment Time Risk Profile Of Horizon Investor Age Of The Investor Asset Allocation 3

Risk Return Hierarchy of Mutual Funds Hybrid Equity Funds Funds Debt Funds Liquid Funds 4

Risk Return Hierarchy of Debt Funds Medium to Long long duration duration funds funds Low Short Medium duration duration duration funds funds funds Liquid Ultra short funds duration funds Overnight funds 5

Hierarchy of Credit Risk in Debt Funds Credit Risk Funds Banking and Corporate PSU Fund Bond Fund Guilt Fund 6

Risk Return Hierarchy of Equity Mutual Funds Mid Cap Small Cap Funds Funds Multi Cap Funds Large Cap Large and Mid Funds Cap Funds 7

Risk Return Hierarchy of Diversified to Concentrated Funds Sector Funds Focused Thematic Funds Funds Diversified Funds 8

Risk Return Hierarchy of Hybrid Funds BalancedHybrid AggressiveHybrid MultiAssetAlocation Fund Fund ConservativeHybrid Fund Funds DynamicAsset EquitySavings AlocationFund Fund ArbitrageFund 9

Scheme Selection Strategy: Active v/s Passive Funds ACTIVE PASSIVE With fund manager’s risk Without fund manager’s risk Returns expected to be more than market Returns expected to be in line with market Portfolio selection risk No Portfolio selection risk High fund management cost Low fund management cost Works with an investment strategy No investment strategy, simply mimics the market Aggressive objective Modest objective 10

Scheme Selection Strategy: Open v/s Close Ended Funds OPEN-ENDED CLOSE-ENDED Liquidity available Liquidity available through stock exchange Units bought and sold at NAV Price of units at exchange may be lower than NAV Investor’s can exit the fund anytime Investors need to match the maturity with Higher levels of liquid assets, diluting investment horizon the returns No need for liquid assets in a portfolio 11

Scheme Selection Strategy: Diversified v/s Sector / Thematic Funds DIVERSIFIED SECTOR / THEMATIC Multi sector exposure Concentration in single sector/theme Less risky More risky Time-in generates returns Timing generates returns Suitable for Core portfolio Suitable for a Satellite portfolio 12

Scheme Selection Strategy: Large Cap v/s Mid v/s Small Cap LARGE CAP MID/SMALL CAP Established companies Initial stage of growth Withstand economic downturn Fall behind in economic downturn Less risky More risky Moderate return when economyrecovers Higher returns when economyrecovers 13

Scheme Selection Strategy: Growth Funds Or Value Funds GROWTH FUNDS VALUE FUNDS Pick companies that are expected to grow Pick companies that are now cheap er than higher than market their actual valuation Fall behind in economic downturn Withstand economic downturn Ability to do well in falling marketalso Outperforms in bull market 14

Scheme Selection Strategy: International Equity Funds Suitable be part of Exposure to international satellite portfolio. equity along with exposure to exchange rate ofrupee. Can invest to diversify Can invest if overall domestic investments with returns (International internationalinvestments. equity + exchange rate movement) is attractive. 15

Scheme Selection Strategy: Fixed Maturity Plans Ideal when investor’s investment horizon matches with the fund’s maturity. Not suitable if funds may More predictable returns be required anytime. than conventional debt. An element of portfolio risk Superior returns than FDs. comes from exposure to corporate debt. 16

Scheme Selection Strategy: Short Duration Funds Some funds may take Invest in securities a little exposure in maturing between 1 and long term debt to benefit from interest 3 years. rate declines. When the interest rates Less volatile and are expected to go up can be a part of then short term debt can the Core portfolio. be a good option. 17

Scheme Selection Strategy: Liquid Schemes Low volatility Lowest risk and high liquidity Low returns Not advised Comparable for longer to savings periods as bank account investor will needlessly lose on higher returns Suitable for parking of funds 18

Scheme Selection Strategy: Floating Rate Funds Steady NAV even when interest rates are fluctuating Accrual strategy v/s higher income strategy Investor should check the strategy before investing Some funds focus on earning a higher total return, i.e. appreciation as well as income Fund managers change the duration of the fund based on expectation of interest rate movements 19

Scheme Selection Strategy: Hybrid Schemes May be taxed as debt or equity 01 Diversification across asset scheme depending on the classes in one scheme. portfolio mix. 02 06 Caution required for flexible Invest in a mix of debt and asset allocation schemes. equity. 05 03 Good for equity exposure, 04 Equity for appreciation and but with lower risk. debt for income. 20

Scheme Selection Strategy: Gold Funds Gold ETF is an efficient way Gold ETF not the same as of taking exposure in gold. Gold Sector Funds. Gold ETF tracks the Gold Sector funds invest in return on price of gold. gold mining and gold processing companies. 21

Selecting A Scheme Within A Scheme Category 06 01 02 03 04 05 Fund Fund Fund Fund Portfolio Scheme Performance Portfolio Age Size Turnover Expenses 22

Fund Performance Primary Criterion In Scheme Selection Cumulative Performance (CAGR) For Last 1/3/5 Returns Generated Relative To Its Years And Since Inception Benchmark Fund’s Performance Vis- Performance Seen For a-vis Peer Group Long Periods, At Least Long-term debt funds to be Last 5 Years seen for at least last 3 years 23

Fund Portfolio Equity  Level of diversification,  Market segment,  Extent of cash held,  Portfolio churn and strategy adopted. Debt  Average maturity,  Duration of portfolio,  Credit risk profile,  Contribution of interest and capital gains in total returns and liquid holding in the portfolio. 24

Selecting Option Within One Scheme Dividend Payout Taxation and Dividend Re-investment Liquidity are the main factors to decide Growth on the Option to be chosen 25

Do’s and Don’ts in Selecting Mutual Fund Schemes Investors Asset Investment Consistent Allocation Objective and Methodlogy for Investment Strategy Scheme of Scheme Selection 01 03 05 02 04 06 Suitability Chasing Past Taxes and Loads Peformance 26

Summary: • In order to evaluate and select various mutual fund schemes, it is important to take a look at the risk-return profile of the various scheme categories. • For the purpose of selection of mutual fund schemes, the investment objective, the investment strategy and the portfolio characteristics are important factors. • An investor has to be comfortable with the AMC, before investing in any of its schemes.

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