1. a) What is mutual fund? Mutual fund is a trust, that pools the savings of a number of investors.

The money thus collected is then invested by the fund manager on behalf of the investors in different types of securities. The incomes earned through these investments are shared by its unit holders in proportion to the number of unit owned by them.

Investors

Fund manager

Return

Securities

Mutual fund trusts and corporations are also known as flow-through entities. For tax purposes, a flow-through entity treats the taxable income earned inside the entity as if you held the investments directly, instead of through the fund. The income that is distributed, or flowed out to you, keeps its identity. For example, dividend income remains dividend income, and capital gains remain capital gains when they are flowed out (or distributed) to investors.

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b) Give a brief History of Mutual Fund in India?

The first international stock mutual fund was introduced in US in 1940. Till 1960, the Indian Mutual fund Industry was non existence. In the year 1963 the Govt. of India took the initiative by passing UTI Act, under which the Unit Trust of India (UTI) was set up as a statutory body. The designated role of UTI was to act as a mutual fund. UTIs first scheme, called US-64, which was an open ended scheme, was launched in 1964. Till 1987 UTI was the only mutual fund in the market since no one else was legally allowed to set up mutual funds. In 1987, other public sector institutions like Banks, Financial Institutions, and Insurance companies started establishing mutual funds, following the governments decision to allow them to do so. State Bank of India became the first one to launch a mutual fund when it launched SBI mutual funds in November, 1987. It was followed by CanBank Mutual Fund, LIC Mutual Fund etc. In the year 1992, The Government of India allowed private sector players to set up a Mutual fund. Subsequently to this, a number of private sector Mutual Funds came up. A few of them are Kothari Pioneer Mutual Fund, ICICI MF, Birla MF, Morgan Stanley MF, Tauras MF etc.

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c) Describe the role of the different players of Mutual Fund in India?

There are four players of Mutual fund in India. These are Securities Exchange Board of India, Asset Management company, Intermediaries and Investors. i) Securities Exchange Board of India: - The
Securities Exchange Board of India (SEBI) is the regulatory authority for all Mutual Funds. SEBI Has laid down the rules & guidelines regarding the obligation of the entities involved in the Mutual Fund, establishment of mutual fund, launching of diff. scheme, Investment & its valuation, financial reporting, conduct & operation of mutual fund etc. It is mandatory on the part of the mutual fund to comply with all the norms laid down by SEBI. ii) Asset Management company: - The role of AMC is highly significance in the MF operations. They are the fund managers i.e. they invest the investors money in various securities after proper research and analysis. They also look after the administrative functions of a mutual fund for which they charge management fees. iii) Intermediaries: - The role of intermediaries is also important. They act as link between the mutual fund companies and investors. The intermediaries include brokers, sub-brokers, investment houses. They provide guidance to the investors regarding investment in various mutual fund schemes. iv) Investors: - investors subscribe to the unites issued by the mutual funds in the hope of getting return by accepting some sort of risk. The investors money is managed and invested in various securities by Asset Management Companies (AMC).

2. a) What are the Major Advantages of Mutual Fund? Investment in stocks bonds and other financial institutions require considerable expertise and constant supervisions, to enable an investor to take an informed decision. Small investors usually do not have the necessary expertise and time. This is an important popularity of Mutual Fund. Some of the other advantages are listed belowi) Portfolio Diversification: - diversified Investment improves the risk return profile of the portfolio. Small investors may not have the huge amount of capital that would allow optimal diversification. Since the corpus of fund in Mutual fund is subsequently big as compared to the Individual Investment, Optimum diversification possible. ii) Low Transaction Cost: - The transaction of a mutual fund are generally very large. These large volumes attract lower brokerage commissions and other costs as compared to the smaller volumes of the transaction entered by the individuals. iii) Availability of various schemes: - Mutual fund generally offers a number of schemes to suit the requirement of investors. iv) Liquidity: -A Mutual Fund generally stands ready to buy and sell its units on regular basis. Thus it is easier to liquidate holdings in a mutual fund as compared to direct investments in securities. v) Tax Benefits: - In India, dividend received from most of the Mutual Funds is tax free in the hands of the investors.

vi) Flexibility: - In Mutual Fund, investors have the option of transferring their holdings from one scheme to another. vii) Professional Management: - Mutual Funds are managed by professional managers, who have the requisite skills and experience to analyze the performance and prospects of companies. They make possible an organized investment strategy, which is hardly possible for individual investors. b) What are the major disadvantages of Mutual fund? Investment in Mutual Funds has its disadvantages as well. The investors can not choose the securities they want to invest in or the securities they want to sell. Risk of the Fund Manager:- The investors may face the risk of the fund manager not performing well. If the fund managers compensation is linked to the funds performance, he may be tempted to show good results in short terms without paying attention to the expected long-term performance of the fund. This would harm the long term interest of the investors. Management Fees: - There is some management fees are charged on investing in mutual fund. It reduces the return available to the investors. Market risk: - If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance.
2. 1. 2. 3. 4.

5. Non-market risk: - Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries. 6. Interest rate risk: - Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively. 7. Credit risk: - Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating.
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c) What is NAV? How to calculate it? Explain with an Example?

The NAV (Net Asset Value) is the market value of the assets of the scheme minus its liabilities. The NAV per unit on any business day is computed as follows:NAV= {(Market value of the funds investment + Receivables + Accrued Income Liabilities Accrued expenses) / (Number of shares or unites outstanding)}

Example of calculation of NAV

Name of the scheme Size of the scheme Face value of the share ABC Rs400 cr. Rs10

No. of outstanding unites Market value of the funds investment Receivables Accrued Income Liabilities Accrued Expenses NAV = (560+4+4-2-2)/40 =

40 cr. (400/10) Rs560cr. Rs4 cr. Rs4 cr. Rs2 cr. Rs2 cr. Rs14.1 per share

A funds Net Asset Value is affected by four set of factors Purchase and sale of investment securities Valuation of all investment securities held Other assets & liabilities Units sold or redeemed

3. a) What are the different types of Mutual Fund? Classification based on the terms of the funds According to the terms of fund, Mutual Fund can be classified in two types. These are:a) Open Ended Fund: - An Open Ended Fund remains open for issue and redemption of its shares throughout its unlimited duration. b) Close ended Fund:- A Close ended fund is can issue shares only in the beginning, and can not redeem them or reissue them till the end of their fixed investment duration. Classification based on the investment objectives According to the investment objectives Mutual Funds are of six types:a) Income Fund:- The aim of such fund is to provide regular and steady income to investors. These funds generally invest in fixed incomes such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. These are suitable for retired peoples and others with a need for regular income. b) Growth Fund:- These funds provide capital appreciation over the medium to long term. These schemes normally invest a major portion of their funds in equities. These schemes are suitable for investors in their prime earning years or investors seeking growth over the long term. c) Balanced Fund: - These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while

providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks. d) Specialized Fund:- These funds invest in particular industries, instruments, sectors or markets. e) Tax Saving Funds: - These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. f) Money Market Mutual Fund (MMMF):- MMMF mobilizes savings from small investors and invest them in short term debt instrument or money market instrument. Classification based on the Geographical region According to the Geographical region Mutual Funds are of two types:a) Domestic Fund:- funds which mobilize resources from a particular geographical locality like a country or region are domestic funds. b) Offshore Funds: - Offshore funds attract foreign capital for investment in the country of the issuing company. Classification based on the Management Style According to the management Style Mutual Funds are of two types:a) Managed Funds: - The Funds which manage their corpus actively are called managed funds. b) Index Funds: - These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest

only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns. Classification based on the Basis of Load A fund incurs two types of costs - marketing cost and operating costs. While operating costs of the scheme are charged to the schemes earnings, the marketing cost may not be so charged. On the Basis of chargeability of marketing cost to the scheme, funds can be classified into Load fund and no load fund. a) Load Funds: - Load funds charge the marketing costs to the scheme. Load funds are of two types - front load and back load. i) Front load Fund: - In a front load fund, the load is charged at the time the investors invest in the fund. ii) Back load fund: - In the case of back load fund, investors are required to pay the load charges while exiting from the funds. b) No Load Funds: - No-load funds do not charge the marketing costs to the scheme. The no load funds recover the marketing costs as part of the management fees. 3. b) Describe the objectives of AMFI (Association of Mutual Funds in India )? AMFI (Association of Mutual Funds in India) is the industry association for the mutual fund industry in India which was incorporated in the year 1995.The Principal objectives of AMFI are: 1) To promote the interests of the mutual funds and unit holders and interact with regulators- SEBI/RBI/Govt./Regulators. 2) To set and maintain ethical, commercial and professional standards in the industry and to recommend and promote best business practices and code of conduct to be followed by members

and others engaged in the activities of mutual fund and asset management. 3) To increase public awareness and understanding of the concept and working of mutual funds in the country, to undertake investor awareness programmes and to disseminate information on the mutual fund industry. 4) To develop a cadre of well trained distributors and to implement a programme of training and certification for all intermediaries and others engaged in the industry.