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CA - FINAL

MUTUAL FUNDS

FCA, CFA L3 Candidate


5.1

Mutual Funds
Study Session 5

LOS 1 : Introduction
A mutual fund is a common pool of money into which investors place their contributions that are to
be invested in accordance with a stated objective.

A Mutual Fund is the most suitable investment for the cautious investors as it offers an opportunity
to invest in a diversified professionally managed basket of securities at a relatively low cost.
Mutual fund is a type of passive investment. If investors directly investment in market is known as
active investment.

LOS 2 : NAV (Net Asset Value) per unit


As per SEBI Regulation, every mutual fund company should calculate its NAV on a daily basis
(excluding holidays)
𝐍𝐞𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐒𝐜𝐡𝐞𝐦𝐞
NAV =
𝐍𝐨.𝐎𝐟 𝐮𝐧𝐢𝐭𝐬 𝐎𝐮𝐭𝐬𝐭𝐚𝐧𝐝𝐢𝐧𝐠
5.2 MUTUAL FUND

Net Assets i.e. Total Assets – Total External Liabilities


= [Market Value of Investments + Receivables + Accrued Income + Other Assets]

[Accrued Expenses + Payables + Other liabilities]
Note:
❖ NAV signifies the realizable value that the investor will get for each unit that one is holding, if the
scheme is liquidated on that date.
❖ NAV is calculated for each Scheme & not for whole Company.
❖ While using NAV, we should always give preference to market value, If market value is not given
then use book value.

LOS 3 : Calculation of Return (HPR)


Investors derive three type of Return :-
(i) Cash Dividend
(ii) Capital Gain Disbursements
(iii) Change in the Fund’s NAV per unit (Unrealized Capital Gain) [Closing NAV – Opening NAV]

[𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐍𝐀𝐕 – 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐍𝐀𝐕]+ 𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝 𝐫𝐞𝐜𝐞𝐢𝐯𝐞𝐝+𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐆𝐚𝐢𝐧 𝐑𝐞𝐜𝐞𝐢𝐯𝐞𝐝


Return = × 𝟏𝟎𝟎
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐍𝐀𝐕

LOS 4 : Different Plans Under Mutual Fund


1. Dividend Payout Plan : Under this plan, Mutual Fund Co. declares & distributes dividend to its
unitholders on regular basis.
Impact : NAV will fall & no. of units will remain same.
2. Bonus Plan : Free units are distributed to the unitholders like bonus shares.
Impact : NAV will fall & no. of units will increase.
3. Growth Plan : Neither dividend is distributed nor are bonus units given. NAV will be increase to
the extent of growth.
Impact : NAV will change according to the mkt only & no. of units will remain same.
4. Dividend Re–investment Plan : Although dividend is declared but it is not paid. Amount of
dividend is again re-invested at the ex-Dividend NAV price prevailing at the time of declaration.
Impact : NAV will fall & no. of units will increase.

LOS 5 : Expense Ratio


𝐄𝐱𝐩𝐞𝐧𝐬𝐞 𝐈𝐧𝐜𝐮𝐫𝐫𝐞𝐝 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭
Expense ratio =
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐍𝐀𝐕
5.3

Note:
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐍𝐀𝐕+𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐍𝐀𝐕
Average NAV =
𝟐

LOS 6: Relationship between Return of Mutual fund, Recurring Expenses,


Issue Expenses & Return Desire by Investors (Indifference Point)

Required return by investors


= (Return of Mutual fund – Recurring Expenses) (1 – Issue Expenses)

LOS 7: Entry Load & Exit Load


Entry Load is paid by the investor at the time of purchase of Mutual Fund unit.

Sale Price of NAV = NAV (1 + Entry Load)

Exit Load is paid by the investor at the time of selling of mutual fund units.

Realized value of NAV = NAV (1 – Exit Load)

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