CHAPTER 12: MUTUAL FUND SCHEME
SELECTION
12.1 Scheme Selection based on Investor needs,
preferences and risk-profile
The selection of a mutual fund scheme for an investor will depend upon the need that the
investor has from the investment. The investor may need long term appreciation in the value of
his investment, or the investor may need periodic income from the investment
i. Blue – principal at low risk
ii. Yellow – principal at medium risk
iii. Brown – principal at high risk
12.2 Risk factor from – Low risk to high risk
1. Liquid funds – Debt funds – Hybrid funds – Equity funds
2. Overnight funds – Liquid funds – Ultra short duration funds – Low
duration funds – Short duration funds – Medium duration funds –
Medium to long duration funds – Long duration funds
3. *Gilt fund – Banking and PSU fund – Corporate bond fund – Credit
risk fund
4. Large cap funds– Large and mid-cap funds– Multi cap funds– Mid-
cap funds–Small cap funds
5. Diversified funds – Focused funds – Thematic funds – Sector funds
6. *Arbitrage fund – Conservative hybrid fund – Dynamic asset
allocation fund – Multi asset allocation fund – Balanced hybrid
fund – Aggressive hybrid fund
12.3 Scheme Selection based on investment strategy of mutual funds
a. Active Fund v/s Passive Funds
b. Open-ended funds v/s close-ended funds
c. Multi-cap, Large-cap, Mid-cap, Large and Mid-cap Funds,
d. Sector Funds and Thematic Funds
e. Growth or Value funds
f. International Equity funds – Host Fund (Invest outside India)
g. Fixed Maturity Plans - These are close-ended debt funds. Fixed Maturity Plan is ideal
when the investor’s investment horizon is in sync with the maturity of the scheme
h. Liquid Funds- The comparable for a liquid scheme in the case of retail investors is a
savings bank account. Funds for very short periods up-to 91 days
Gold Funds
Investors need to differentiate between Gold ETF and Gold Sector Funds.
a. Gold ETFs whose performance would track the price of gold.
b. Gold sector funds is linked to the profitability of these gold companies.
12.4 Selection of Mutual Fund scheme offered by different AMCs or within
the scheme category
a. Fund Manager
b. Fund Performance - The mutual fund provides the cumulative performance
of the scheme (i.e. in terms of CAGR), the benchmark and the additional
benchmark, depending upon the type of scheme, for the last 1 year, 3
years, 5 years and since inception
c. Fund Age- A fund with a long history has a track record that can be
studied.
d. Portfolio Turnover
Pension Fund
a. Pension Fund invest in mutual fund scheme
b. Pension fund are regulated by PFRDA
NPS – National Pension System
a. NPS is regulated by PFRDA Pension Fund Regulatory and Development
Authority of India
b. Pension system has 2 account
i. Tier 1
ii. Tier 2
Tier 1 – Pension Account (Withdrawal not allowed)
Tier 2 – Savings Account (Withdrawal allowed). Pre-requist Tier 1 A/c
c. To open tier 2 account Tier 1 account should be active
d. Investor will get PRAN number (Permanent Retirement Account Number)
Formula:
Assessment of Financial Goals:
The costs mentioned above, in today’s terms, need to be translated into the rupee requirement in
Future. A = Rupee requirement in future
A = P X (1 + i)^n
Assessing the Fund Requirement
Investment requirement? P = Cost in today’s terms
P = A ÷ (1 + r)^n
Alternate Financial Planning Approaches
1. The financial plan detailed above is a “goal-oriented financial plan” – a financial plan for a
specific goal related to the aspiration to make the son a doctor
2. An alternate approach is a “comprehensive financial plan” where all the financial goals of a
person are taken together, and the investment strategies worked out on that basis
The steps in creating a comprehensive financial plan, as proposed by the Certified Financial Planner –
Board of Standards (USA) are as follows:
Establish and Define the Client-Planner Relationship
Gather Client Data, Define Client Goals
Analyse and Evaluate Client’s Financial Status
Develop and Present Financial Planning Recommendations and / or Options
Implement the Financial Planning Recommendations
Monitor the Financial Planning Recommendations
As a structured approach, the sequence of decision making is as follows:
Scheme selection:
Step 1 – Deciding on the asset class such as equity, debt, gold and others
Step 2 – Selecting a scheme category based on strategy and style within the scheme type.
For example, large-cap or mid-cap funds, diversified or focused
Step 3 – Selecting a particular scheme from a category based on its performance
Step 4 – Selecting the right option within the scheme.
Model Portfolios
1. Young call centre / BPO employee with no dependents – 80%-20%
50 percent diversified equity schemes (preferably through SIP); 20 percent sector funds; 10
percent gold ETF, 10 percent diversified debt fund, 10 percent liquid schemes.
2. Young married single income family with two school-going kids – 60%-40%
35 percent diversified equity schemes; 10 percent sector funds; 15 percent gold ETF, 30 percent
diversified debt fund, 10 percent liquid schemes
3. Single income family with grown up children who are yet to settle down - 60%-40%
35 percent diversified equity schemes; 10 percent Index fund, 15 percent gold ETF, 30 percent
diversified debt fund, 10 percent liquid schemes.
4. Couple in their seventies, with no immediate family support – 25%-75%
15 percent diversified equity index scheme; 10 percent gold ETF, 30 percent diversified debt
fund, 30 percent MIP, 15 percent liquid schemes
Life Cycle and Wealth Cycle in Financial Planning
Life Cycle Wealth Cycle
Accumulation - This is the stage when the investor gets to build his wealth.
Childhood
the life cycle from Young Unmarried to Pre-Retirement
Transition - Transition is a phase when financial goals are in the horizon. E.g.
Young Unmarried house to be purchased, children’s higher education / marriage approaching
etc.
Inter-Generational Transfer - During this phase, the investor starts thinking
Young Married about orderly transfer of wealth to the next generation, in the event of
death
Married with Young
Children - Insurance needs Reaping / Distribution - It is the parallel of retirement phase in the Life
– both life and health - Cycle
increase with every child
Married with Older
Children
Sudden Wealth - Winning lotteries, unexpected inheritance of wealth. Block
Pre-Retirement the money by investing in a liquid scheme.
Retirement