mutual_fund

INTERNATIONAL INSTITUTE FOR LEARNING IN MANAGEMENT

BASIC OF MUTUAL

FUNDS

“Don’t trust your money, rather trust the trust which is trust worthy for your money

to grow”!!!!!!!!!!!

RAJESH PAUL

3RD SEMISTER

IILM(BS)

MUTUAL FUND IS SUBJECT MATTER OF MARKET

RISK,PLEASE READ THE OFFER DUCUMENT CAREFULLY BEFORE INVESTING………A KNOWN STATEMENT OF AN UNKNOWN INVESTMENT WORLD?????

watch out….INTERNATIONAL INSTITUTE FOR LEARNING IN MANAGEMENT

Disclaimer


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Mutual funds & MoreMutual funds– A risk free investment starts here……….


What is Mutual fund?Mutual fund is a collective investment vehicle where

investors money get invested into the market by some experienced professionals based on their risk appetite ,time horizon & so on for some investment goal.

It’s a trust that pools money of the investors who share common financial goal.

It’s a professionally managed investment scheme that collects the investors money & invest the same into stocks, bonds, debentures, short-term money market instruments etc.


Facts & figures of Mutual funds

First Mutual fund was introduced by UTI in 1964 as “UNIT 64”.First non-UTI Mutual fund was “SBI Mutual fund” in 1987 as public

sector bank owned MF.

First private sector with Mutual fund was “Kothari Pioneer” introduced in 1993.

The ratio of MF investment to household savings in 7.9%.

MF is growing in India at faster rate(22%) than USA (6.6%),France(9.8%) in 08-09

Total MF industry in the world is 26 trillion USD.Total MF advisor in India is 50000.

Total MF industry in India is more than five lakh crore.

There are 41 MF ,maintaining more than 1000 schemes.


Why Mutual funds lure investors?Mutual funds are professionally managed investment scheme to

hedge the risk of returns.It can build a diversified portfolio which helps to balance the

risks .Customized investment plans can be made, keeping time, risk

appetite , financial goals of investors in mind.

For investing in MF , investors don’t need specialized knowledge about financial market.MF is one of the most strictly regulated investment schemes in India.

Minimize the directs effect of stock market volatility.MF investment can be made with minimum money, hence effective scheme for small investors.


Mutual funds work

Investors pool there money in registered

MF

MF invests this money

in securities

Generates return in pooled

investment

Returns passed to the

investors

1

2

3

4

Flow of investmentFigure 1


sponsors

Trustee

Assets manageme

nt company

Bank

Non ban

k

Distributio

n agent

bankers

R&T agent

custodian

Figure 2

Structure of MUTUAL FUND


Components of MUTUAL fund

Old adage--”Don’t put your all eggs into one basket”

probably, was in the minds of those who formed MUTUAL FUND…….

Diversification --- the “D” word


sponsors

Sponsors are similar to the promoters of the company.Sponsors can be a bank or it can be a non-bank institution.

Provides at least 40% of the total capital of AMC.

must have a good financial track records in the last 5 years.

It registers with SEBI,the market regulator, for forming MF.Bank owned MF also needs RBI permission for the same.

forms trust & appoints trustees.1/3 of the trustees are appointed out of

sponsors.


Good financial track records

Financial activities must have carried out at least last financial years.“net worth” is positive in the all immediately preceding five years.“net worth” is [fixed assets + current assets – current liabilities]Net worth of the immediately

preceding year of the year of capital contribution to AMC must be more than its contribution.

The sponsor must have had positive PAT[profit after tax] at least three out of immediately preceding five years.

[As per chapter II of SEBI (Mutual fund) regulations Act 1996]


Trust & it’s trustees

Once trust is created & get it registered ,it becomes MUTUAL FUND.

The responsibility of trust is to look after whether AMC is working as per stated objectives or not. 2/3 of the trustees must be independent i.e. they aren’t sponsors.

It’s the trustees who appoint Asset management company & custodian to manage the money of the investors as per pre-determined goals.

Trustees look after investors grievances .Investors can sue trustees in case of malfunctioning of activities.They are the care taker of investors’ money.Trustees meet at least twice with AMC in two months, hence at least twelve meetings in a year.


Custodian & Depositary

Custodian is a separate entity, which is appointed by board of trustees.It’s main role is to keep the physical assets of the investors.

some time it also tracks various corporate actions of the companies where investors’ money is invested .

It also works for settling the claims of investors.

Dematerialized units are held by Depositary

“Dematerialized” units are electronic form of physical units.


Asset Management Company AMC is the face of a Mutual fund.

AMC is appointed by Board of trustees to manage the fund of investors. Its issues prospectus, NFO[net fund offer, statements of offer documents [SID],invests investors money. In the market & so on behalf of Trustees. Minimum capital of an AMC is 10 core.

It’s the responsibility of AMC to appoint intermediaries, Bankers, Resister& transfer agents.It charges expenses for managing of funds which is borne by investors.

maximum expenses charged is stipulated by SEBI.50% of the directors should be independent.75% of UNIT HOLDERS can terminate appointment of an AMC.The chair man of AMC cant be a trustee of any other AMC.

AMC…..


RISK AHEAD!

Distribution agent: ! Appointed by Asset management company. ! Helps to distribute mutual fund on behalf

of AMC.

Banker: ! Maintains all the bank accounts for all the schemes.! Collection & Redemption of money.! Appointed by Asset management company.

Registrars & transfer agent[R&T agent]: ! It maintains accounts of each unit holder.

! Gives information regarding various circulars, NAV & so on.

! Appointed by AMC.


Types of Mutual Fund

Old Axiom of WALL STREET :“Buy the rumor ,sell the news.” choose the fund carefully, don’t get fused!


Types of mutual fundBy constitution

Open ended fund

Close ended fund

By load imposedLoad fund

No load fund

By nature of investmentEquity fund

Debt fund

Money market fund

By investment objectiveGrowth fund

Value fund

Income fund

By risk profile


Mutual fund by constitution:Open ended fund: 1.It can be bought or sold at any point of time.

2. Units are traded on the basis on NAV, which is published every day by AMC.

3. Investors can sell the units to MF. 4. Repurchase by MF can be made at minimum price of 93% of NAV of that unit & units can be sold at maximum price of 107% of NAV of that unit.

5. Unit capital changes with every transaction.

6. The differences between repurchase & sale price shall not exceed 7% of sale price.

Close ended fund: a. It can be bought or sold only at a specific period of time.

b. For selling of units it’s enlisted at recognized stock market.

c. Repurchase by MF can be made at minimum price of 95% of NAV, applicable to only those units which ware issued before amendment of SEBI (Mutual fund) Regulation 2009.d. Units has to be listed to recognized stock market at least 6 months prior to closer of fund.


Mutual fund by load imposedLoad fund: load is the expenses for advertisement, distribution, fund managers’ commission etc. charged on the price of unit.ENTRY LOAD: load that’s charged at the time of buying the units at a percentage basis on NAV.. But entry load is no longer in vogue as per SEBI regulation w.e.f. Auguest,2009.EXIT LOAD: exit load is charged at the time of selling of units on price at a percentage basis on NAV.DEFFERED LOAD: charged on price in various intervals at the time of holding.CONTINGENT DEFFERED SALES CHARGE: a type of exit load, charged at the time of selling prior to its investment period. Meant for

CLOSE ENDED FUND.

NO LOAD FUND: no load is charged, at any point of time.NAV is calculated after calculating of all expenses.


By nature of investmentEquity fund: a fund where investment in Indian companies’ shares is

minimum 65% of its average weekly NAV.

Types Objective & investment policyIndex fund Invest in index like SENSEX & NIFTY.Sector fund Invest in shares of specific sectors, like real estate.Large cap fund Invest in shares of large cap companies, whose market

capital is more than 10 billion USD. Like this Small cap, Mid cap fund.

Equity linked saving sachems

Invest to avoid tax, invest in shares.

Growth fund To increase the capital growth.Diversified fund Invest in various sectors’ equity to minimize the sector

specific risksAggressively growth fund

Invest in growth shares ,comparatively, riskier than growth fund. Types of Equity fund

table 1


Debt fund: fund is invested in a short term debt instruments such as Bonds, Treasury bills, Government securities, corporate debt papers etc.

it is less risky than Equity funds, thus less return.since in debt instruments return is guaranteed, investors

are assured of returns. “Slow but steady” --- what the investors believe in. How debt fund is

priced?Debt fund is priced as per present value. Its valued based on present value of future flows of cash.

If coupon rate[rate of interest on debt paper] is 10%Redemption value is Rs. 20000, time period for holding is 5 years.Present value? PV

=

Redemption value( 1 + rate of interest)

= 2oooo

5

(1+.10)512418.42

Why Bond price & its interest have inverse relationship?


Capital protection funds: invest equity as well as debt instruments. main objective is to protect the capital value of the investment.

Fixed maturity funds: a close ended fund, invest in debt instruments whose maturity period is same as period of funds.

Gilt funds: invest mainly in central Govt. securities as well as state Govt securities.

Balance funds: its a hybrid

fund which invests partly in equity & partly on debt instruments to hedge the risk of market volatility.

Monthly income plans[MIP]: a hybrid plan which gives an option to the investors to reap monthly income.

Children benefit plans: invested mainly 5 to 15 years time horizon, with minimum part invested in equity with the intension to have adequate fund needed for children’ higher education.

Various types of Debt fund


Money market fundMoney market fund is a type of fund that invests money in “money

market”.Money market is a market[not necessarily a physical place, it can

be a virtual place as well ] where transactions are made through cash or cash equivalent. It lasts for a maximum period of one year. It’s a well organized market that provides short term financial support . Money market fund are popularly known as “LIQUID

FUND”Invests in commercial debt, treasury bills, certificate of deposits, interest rate swaps, collateralized borrowing & lending options for short period of time.The main advantage of liquid fund is its liquidity, i.e. it cant be sold & bought at any pint of time. How is it priced?

If fund remains invested in money market instruments more than 182 days its valued as MARK-TO-MARKET & fund that remains invested in money market instruments for less than 182 days its valued as COST PLUS INTEREST ACCRUED METHOD.


MARK-TO-MARKET: a process to price fund at per the market price prevailing in the market.

COST PLUS INTEREST ACCRUED METHOD:Cost price of fund is 25000, rate of interest of instruments where money invested in is 10% per month, invested for 90 days [less than 180 days].

total amount of interest is : 25000 * 10/100 *3/12=Rs 625

So interest per day will be= 625/90 = 6.944 approxPrice of fund=[cost price + days left for redemption * interest per day ]

Price of fund as per the method before 60 days before redemption is [25000 + 60 * 6.944]

=25416.66 before 30 days before redemption

=25000+30* 6.944 =25208.32


By investment objective

Growth fund: invest in “growth stocks” with the intension of capital appreciation.There is no scope to get monthly income like MIPs. dividend is reinvested to let the money grow. Value fund: invest in “value stocks” with the intension of booking profit in a short span of time.Income fund: invest in debt instruments to earn monthly income regularly.

Growth stocks: its that type of stocks which are in present giving high return, are traded in high price. like 2008 Real estate stocks in Indian share markets.

Value stocks: its that type of stocks which are in present not giving a high returns & under priced but there are high possibilities to up the price in near future. So judgment about this stocks must be firm, otherwise investors can suffer a huge loss.

value stocks are like “ low hanging fruits”

Risk & Return trade offR

ETURNS



Special types of Mutual fund

Index fund: a. it’s a type of equity fund invests in stocks consist of benchmark indices like, Sensex, Nifty, Bse 500 etc.

b. invests in stocks in the same proportion as they have on total capitalization of index. i.e. if RELIANCE ENERGY covers 20% of SENSEX[consists of 30 shares], fund manager invests 20% of its total fund in that share.

c. as and when any scrip changes in benchmark index ,fund also changes its portfolio accordingly. d. Since fund manager has very little thing to do as far as selection of shares is concerned, its known as “passively maintained fund”. Gold ETF[exchange traded fund]: 1. ETFs are like shares , which requires DMAT & TRADING a/c for trading.2. Invests in gold & gold related securities , that gives an extra leverage to investors’ portfolio.3. Each Gold ETF has underlying gold of certain quantity somewhere. Usually one G-ETF consist of 10 gram gold as underlying assets.4. ETF is issued through authorized participants(APs).


Portfolio reserve & cash component

How it works?

Step 1- authorized participants keeps gold and cash with AMC.Step 2- AMC gives some sets of units whose value of NAV is equal to the value of gold deposited by APs. The units is known as creation units.

it should be remembered that the NAV value creation units & value of gold should be equal at any point of time.In case of any difference cash component will be used for adjustment.Step 3-APs then divides the creation units into many small units for retail investors.

Line up of Gold ETF


Net Annual Value[NAV]What is NAV?NAV is the net amount of assets of a scheme of a MF that remain invested in market.NAV is actually the value of an unit.

NAV=

Net assets of a schemeNumbers of outstanding units

Net assets = market value of investment + receivables +other accrued income + other assets – payables – outstanding liabilities .

open ended fund issues 1000 units @ 10 each, NAV will be Rs 10.[1000* 10/1000]

Now if market value of investment becomes Rs. 6000, previously it was Rs. 2ooo.So net increase in assets is [6000-2000]= Rs 4000. now the net assets will be Rs 14000. & NAV will be Rs. 14000/1000=Rs 14 per unit. Rs 4000 {14000-10000} is unrealized capital gain.


Regulations of MUTUAL FUND Invest in debt securities[Rated] issued by single issuer max. 10% of

scheme’s NAV, extendable to 15% with the permission of Trustee. No bar in Govt. securities[G-SEC].

Invest max. 10% of scheme’s NAV in unrated securities issued by single issuer. total investment in that securities is max. 25% of NAV.

Maximum investment in a single security is 10% of NAV of the scheme. No fund, under all its schemes cant hold 10% of paid up capital. No scheme can invest in any unlisted securities of the Sponsors or its

group companies. It can invest max 25% of NAV of scheme in listed securities of Sponsors

or its group companies. Scheme can invest in unlisted securities of companies other than

Sponsors or its group companies max. 5% of NAV in case of open ended funds & 10% of NAV in case of close ended fund.

If scheme invests in other schemes of same or different AMC, no fees will be charged, aggregate inter scheme transfer cant exceed 5% of NAV.


Various investment plans

Systematic investment plans[SIP]1.a plan of investment where same amount of money in each

month is invested in buying MF unit as per the choice of investors. 2.the main advantage of SIP is average out the cost of investment. 3. SIP is generally made for meeting some particular goal of an investor. 4.investors buy more units when NAV of any fund is low[in Bear market] & vice-versa [in Bull market]with same amount of money that they invest in every month.


units purchased based on NAV if SIP of Rs 5000 each month.


Average out the cost of Investment if SIP is Rs 5000 p.m.


Systematic transfer plans[STP]It gives an opportunity to the investors to transfer specific amount of money in a different period of time from its savings a/c. the main advantage that an investor can reap is utilization of money for earning interest of savings a/c.

if a n investor has an SIP of Rs 5000 p.m., he can pay it in various installment in various days like 5th ,10th, 15th ,20th ,30th of a month. So the money that he pays on 30th for SIP, can earn interest of whole month. Systematic withdrawal fund[SWP]under this plan, money is invested for long period of time. investors get an opportunity to withdraw money from fund. The main difference between Monthly installment plans & SWP is , under MIPs investors can withdraw interest of funds but under SWP investors can withdraw the interest & principal as well.Mainly this plans is beneficial for post retirement benefit.


Growth optionGives an opportunity to the investors to increase capital value of the

fund.Beneficial for those who don’t want regular income from fund.Under this option only NAV of investment increases, neither there is

any increase in number of units nor any cash outflow from the fund.If an investor holds 100 units @ NAV of Rs 10 each prior to

dividend & dividend is Rs 12 per unit.NAV of each unit becomes [100+12]=Rs 112 each. number of units remain same. Dividend payout optionUnder this plan, investors can withdraw the dividend out of fund.NAV of fund decreases as dividend result in cash outflow. which

affects the net assets of the scheme.If NAV of an unit is Rs 112 before dividend ,after dividend it will be

Rs[112-12]=100. as cash outflow due to dividend is Rs 12, decreases the value of NET ASSTES of the scheme.


Dividend reinvestment plansUnder this option, dividend gets invested for buying more units.Although the NAV of the units don’t change, number of units changes.Units are bought with the money of dividend at existing market price of NAV.If an investor holds 100 units @ Rs 100 each, dividend per share is Rs 12 per unit. So total dividend for 100 units is Rs 1200. now under this plan ,the amount will be utilized for buying more units @ Rs 100 each .now the total number of units is 112 units.


Equity scheme* Non equity scheme

Long term capitalGain.[holding period >12months

0%

If indexation applies-20%If doesn’t -10%

Short term capital gain [holding period <12months@

15%Marginal rate of tax.[profit adds with income & tax as per slab]

* Minimum investment in Indian equities is 65% of its weekly NAV. 100% investment in foreign equities cant be treated as Equity scheme.@ security transaction tax[STT] charged @ 0.25% while exiting the fund.

_

Table 2 Rate of tax applies


Thank you….Rajesh Paul

For IILM(BS) Kolkata

mutual_fund

Education

Transcript of mutual_fund