MUTUAL

FUNDS THE

MONEY MULTIPLIER

MUTUAL

FUNDS THE

MONEY MULTIPLIER Lalitha Thamaraipandy

Notion Press Old No. 38, New No. 6 McNichols Road, Chetpet Chennai - 600 031 First Published by Notion Press 2017 Copyright © Lalitha Thamaraipandy 2017 All Rights Reserved. ISBN 978-1-946641-19-9 This book has been published with all reasonable efforts taken to make the material error-free after the consent of the author. No part of this book shall be used, reproduced in any manner whatsoever without written permission from the author, except in the case of brief quotations embodied in critical articles and reviews. The Author of this book is solely responsible and liable for its content including but not limited to the views, representations, descriptions, statements, information, opinions and references [“Content”]. The Content of this book shall not constitute or be construed or deemed to reflect the opinion or expression of the Publisher or Editor. Neither the Publisher nor Editor endorse or approve the Content of this book or guarantee the reliability, accuracy or completeness of the Content published herein and do not make any representations or warranties of any kind, express or implied, including but not limited to the implied warranties of merchantability, fitness for a particular purpose. The Publisher and Editor shall not be liable whatsoever for any errors, omissions, whether such errors or omissions result from negligence, accident, or any other cause or claims for loss or damages of any kind, including without limitation, indirect or consequential loss or damage arising out of use, inability to use, or about the reliability, accuracy or sufficiency of the information contained in this book.

Dedicated to THE ALMIGHTY without whose grace this book would not have seen the light of the day

Contents Preface

xi SECTION I: INTRODUCTION

1. What is a Mutual Fund?

3

Back to Basics SECTION II: FUND ORGANISATION

2. Mutual Fund Constituents

Function Follows Form

3. Mutual Fund Structure

19

More Than a Legal Curiosity

4. Legal and Regulatory Framework

9

25

The Resilient Enabler SECTION III: FUND CONCEPTS

5. Core Concepts

35

Reinforcing the Roots

6. Myths Exploded!

49

Uprooting NFO and Dividend Weeds

7. Unloaded! 55

Yet Burdened?

8. Expenses Exposed!

65

Outlaw the Outlay SECTION IV: FUND FLAVOURS

9. Passing Through the Portals of Portfolio Classification

10. On to Operational Classification

79

Across Asset Classes Of Liquidity, Strategies, Selection and Capitalisation

101

viii  Contents

11. Geographical Classification of Funds

The Logic Behind Logistics

12. Speciality Funds

109 115

Speciality Genres SECTION V: FUND CHOICE

13. Comparison With Other Investment Avenues

14. Raison d’etre

167

One up on Counterparts 181

Ingenious Investment SECTION VI: FUND PERFORMANCE

15. Becoming an Informed Investor

Right Use of Knowledge

16. Performance Evaluation

243

The Third Dimension

21. Systematically Narrow Down Your Choices

239

Keep All Options Open

20. Turn to Towering Taxes

235

Returns Revisited – the First Dimension

19. The Taxing Question – Which Option to Opt For?

225

Risk – the Second Dimension

18. Delving Deep for Debt Funds

211

Returns – the First Dimension

17. Understanding the Risks

189

257

Yardsticks to Reach the Final Yard SECTION VII: FUND PLANS AND SERVICES

22. Mutual Fund Investment Plans

23. Mutual Fund Investment Services

265

Compounding – the Eighth Wonder of the World At Your Service

275

Contents  ix

24. Advent of Online Investing

297

Torrential Technological Triumph SECTION VIII: FUND FAREWELL

25. Behold, Hold and Fold

317

Nothing Lasts a Lifetime SECTION IX: FUND ADVICE

26. Do You Need a Financial Adviser?

A Caring Gardener…

27. How to Choose Your Financial Adviser

327 331

…Who Nurtures Plants That Bear Fine Fruits

Epilogue 335

Preface The high decibel advertisements for mutual funds cannot but be drowned in the ensuing din. Such is the voracity with which they are marketed. Books on this much-touted topic by stalwarts in the financial circles are available a dime a dozen. Therefore, the rationale for another book on this topic does not hold water. What then could be the motivation for yet another book on Mutual Funds? There is a dearth of books on this topic by Indian authors. It is my intention to encapsulate all that is there for you to know about Indian mutual funds in a lucid and concise style with a mark of authenticity, of course. In this book, it will be my endeavour to demystify the concept of mutual funds so that even a layman can reap the benefits it offers and build his wealth. This book is not intended for professional investors but for ordinary investors, who need guidance while investing. The genesis of this book dates back to nearly a decade ago when I started writing a blog on the site www.indianmutualfund.blogspot.com titled “The Money Multiplying Matrix of Mutual Funds”. The rousing reception the site had with the investing public, notably the novices in this field, prompted me to go ahead with this book on mutual funds. The sole source of inspiration for this book was none other than my life partner, P. Palavesa Muthu, whose single-minded devotion and constant encouragement was instrumental in the transformation of my blog into a book. The entire credit for editing and fine tuning this book and giving it the present shape goes to my father, who instilled in me the love for the written word as a child. The willing co-operation of my family members – my mother, brother, sister, son and daughter – deserves special mention. Last but not least, I am indebted to the entire team of Notion Press for the excellent job done by them. Lalitha Kuwait, February 2017

SECTION I

INTRODUCTION

A

s Benjamin Franklin succinctly put it, “An investment in knowledge always pays the best interest.”

Mutual fund – a globally proven investment vehicle – is slowly but steadily finding a place in the investment itinerary of Indians. There is no magic formula for successful mutual fund investing… all it requires is common sense, emotional discipline and a clear understanding of the concept. John C. Bogle, in his preface to Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor rightly pointed out, “intelligent investing turns out to be little more than common sense and sound reason. The sooner investors realise that elemental principle, the better will be their ability to accumulate the maximum possible amount of capital for their financial security.” “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework”, so said Warren Buffet in his preface to the fourth edition of Benjamin Graham’s The Intelligent Investor. In this book, Mutual Funds: The Money Multiplier, the concept of mutual funds has been introduced against the backdrop of investment planning. Such a holistic view will enable readers to place mutual fund investing in a proper perspective. Due care has been taken to ensure that readers understand the concept and enrich their knowledge and wealth. Minute details are dealt with precision and clarity to drive home the concept and prepare the readers to fearlessly enter the world of mutual funds. Welcome to the world of Mutual Funds…

Chapter 1

What is a Mutual Fund? Back to Basics

Mutual Funds Defined and Explained SEBI (Mutual Fund) Regulations, 1993, define a mutual fund as “a fund established in the form of a trust by a sponsor to raise money by the trustees through the sale of units to the public under one or more schemes for investing in securities in accordance with these regulations.” At the outset, it would be best to limit ourselves to explaining mutual funds in layman’s terms. A graphic description of the constituents and legal composition of mutual funds in the subsequent section will serve as a selfexplanatory follow-up to the formal, legalistic definition above. In common parlance, a mutual fund is an investment vehicle that enables a number of investors with common financial goals to pool their money and have it jointly managed by a professional investment manager. A mutual fund pools the money of many investors and invests it in shares or debentures, bonds, etc. The fund manager invests the money in a portfolio of marketable securities in accordance with specific investment criteria, which are spelled out in the prospectus, the official booklet that describes the mutual fund. Investors, therefore, know what they are getting into and can match their investment objective to that of a fund. The pooled money has greater buying power than one investor alone can command. A fund can own hundreds of different securities. Thus, its success is not dependent on how just one or two companies perform, but on the performance of all the stocks or securities which the fund is holding. The ownership remains in the hands of the investors who have pooled in the funds. A mutual fund is, thus, a financial intermediary that is managed by investment professionals and other service providers, who earn a fee

Mutual Funds tHe

Money Multiplier

H

ow can you build wealth with the most elusive combination – COMMON SENSE and KNOWLEDGE? Mutual Funds: The Money Multiplier answers this question and takes you on a journey into the world of mutual funds. In a language that is both eloquent and understandable, this book cracks the code on building wealth the mutual fund way. A matrix (3×3) approach has been adopted, with the book having been divided into nine sections. All the topics have been analysed threadbare against the backdrop of investment planning, so as to offer a holistic view of wealth creation for you. With Mutual Funds: The Money Multiplier as your guide, you will discover how to make investing a winner’s game. With in-depth insights and practical advice, this book provides a timeless blueprint for effective and low-stress investing for the layman. This book can be a resource for generations to come.

Lalitha Thamaraipandy is a prolific writer and consultant in the field of finance and investments. Lalitha started her career as an Investment Analyst with fundamental analysis of equities as her area of core competence. She has been prudently managing equity and mutual fund portfolios and offering investment advice. She heads the Finance Department of Golden Palm Petroleum Services Company W.L.L., Kuwait. A brilliant blogger on Indian mutual funds, she has been publishing articles on Indian mutual funds on a weekly basis in www.indianmutualfund.blogspot.com since September, 2006. She also maintains a comprehensive website on mutual funds www.mfmazetomatrix.com. She addresses NRIs in Kuwait at seminars on topics related to finance and investments. She attempts to help the uninitiated investors to invest knowledgeably and profitably through this book. Price 400