Mutual Funds & AMCs

1. Concept, Origin and Growth of MFs.

2. Constitution & Management of MFs-Sponsors, Trustees, AMCs and
Custodians
3. Classification of MF schemes.
4. Advantages & disadvantages in MF schemes.
5. NAV and Pricing of MF units
6. Recent trends in MFs in India
What Is Mutual Fund?

A Mutual Fund is a trust that pools together the
savings of a number of investors who share a
common financial goal.
The money thus collected is then invested in
capital market instruments such as shares,
debentures and other securities.
Mutual Funds provide facility to small investors to obtain the benefits of portfolio investment
under the aegis of professional management.

Initially MFs could invest only in financial assets.

In 2006 they were permitted to invest in physical assets.

In 2006 Gold ETF was launched

Since 2008, MFs have been permitted to invest in real estate . Eg. ICICI Prudential AMC is one of
the pioneers in identifying Indian Real Estate Investments as an essential asset class, Kotak Realty
Fund.
History of the Indian Mutual Fund
Industry
The mutual fund industry in India started in
1963 with the formation of Unit Trust of India, at
the initiative of the Government of India and
Reserve Bank.
The history of mutual funds in India can be
broadly divided into four distinct phases:
First Phase 1964-87
Unit Trust of India (UTI) was established on
1963 by an Act of Parliament. It was set up by
the Reserve Bank of India and functioned under
the Regulatory and administrative control of
the Reserve Bank of India.
The first scheme launched by UTI was Unit
Scheme 1964 (US-64). At the end of 1988 UTI
had Rs.6,700 crores of assets under
management.
Second Phase 1987-1993 (Entry of
Public Sector Funds)
1987 marked the entry of non- UTI, public sector
mutual funds set up by public sector banks and Life
Insurance Corporation of India (LIC) and General
Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non- UTI Mutual Fund
established in June 1987.
Third Phase 1993-2003 (Entry of
Private Sector Funds)
With the entry of private sector funds in 1993, a new
era started in the Indian mutual fund industry, giving
the Indian investors a wider choice of fund families.
Kothari Pioneer was the first private sector Mutual
Fund.


In 1993 was the year in which the first Mutual Fund
Regulations came into being, under which all mutual
funds, except UTI were to be registered and
governed.
How did US-64 first get into a crisis?
In 1998, media reports appeared claiming that things were seriously wrong with US-64. For the first time in its 32 years
of existence, US-64 faced depleting funds and redemptions exceeded sales. Between July 1995 and March 1996, funds
declined by Rs 3,104 crore.

An ICFAI case study quoted analysts as saying that the depleting corpus coupled with the redemptions could soon result
in a liquidity crisis.

Soon, reports regarding the lack of proper fund management and internal control systems at UTI added to the growing
investor frenzy. By October 1998, US-64's equity component's market value had come down to Rs 4,200 crore from its
acquisition price of Rs 8,200 crore.

The net asset value (NAV) of US-64 also declined significantly during 1993-1996 due to turbulent stock market
conditions. One survey cited US-64's NAV at Rs 9.68. The US-64 units, which were sold at Rs 14.55 and repurchased at
Rs 14.25 in October 1998, thus were around 50% and 47%, above their estimated NAV.

In June 1999, the government brought out all PSU stocks in the portfolio of US-64 for Rs 3,300 crore, although their
market value was only Rs 1,516.74 crore.

For US-64, it was still worse as UTI had bought PSU stocks at a predetermined price and under government diktat during
the 1994-95 disinvestment programme.

In 1999, on the recommendations of the specially appointed Deepak Parikh Committee which went into the US-64
controversy, UTI restructured US-64, shuffling 80% of the corpus into 50 top performing scrips.

he US-64 scheme was ranked next to gold in an investors survey done before 2001. Newspapers,the lethargic
government in power, corrupt politicians, vested interests all played their part in the downfall of this homespun flagship
scheme.
Fourth Phase since February
2003
In February 2003, following the repeal of the Unit Trust of India
Act 1963 UTI was divided into two separate entities.
One is the Specified Undertaking of the Unit Trust of India with
assets under management of Rs.29,835 crores as at the end of
January 2003. This functions under rules framed by GOI.
The second is the UTI Mutual Fund Ltd, sponsored by SBI,
PNB, BOB and LIC. It is registered with SEBI and functions
under the Mutual Fund Regulations.
MFs are liquid
As you would have learnt earlier, liquidity is all about
having access to the money youve invested at your
convenience. After all, what is the point of getting high
returns if you cant use the funds when you need it?
Solid liquidity gives you the advantage of getting your
money when you need it the most.

In open ended funds, where you can buy and sell on
any business day, you can get your money back
generally within 3 working days. And to make things
even better, there is a 15% penalty imposed on the
Asset Management Company if you dont get your
money within 10 working days.

MFs reduce transaction Cost
The power of bargaining lies in buying
anything wholesale. The rate of buying in
wholesale will obviously be much lesser
compared to the retail rates. Now apply the
same principal to Mutual Funds and what do
you get? With many people pooling in their
savings, you get the advantage of the power
of bargaining which reduces the overall
transaction cost.
Tax Aspect

Gains on investments made for a period less than a year are short-term capital gains while
those from longer periods are called long-term capital gains. In the case of equity and
equity-oriented instruments, there is no long-term capital gains. However, when exiting
in the short term, the short-term gains are taxed at 15 per cent.

One, the Finance Minister seeks to change the definition of 'long term' for debt mutual
funds from the present 12 months to 36 months. Once this takes effect, the returns
that investors earn on debt funds in the first 36 months will be treated as 'short term'
capital gains. This will be clubbed with the investor's income and taxed at his income tax
rate. This is contrast to the earlier rule, where only investments held for less than 12
months were 'short term'. As a result of this move, investors who redeem debt fund
units within 1-3 years will end up paying a tax of 10-30 per cent on their returns,
instead of the 10 per cent they pay now.

Two, the budget also seeks to remove the concessional tax rate of 10 per cent on long-term
capital gains made from debt funds. Instead, the long term gains on these funds (held
for 3 years), will now be taxed at 20 per cent, after adjusting for indexation.


What is the tax liability on receipt of Income on
Mutual Fund Units?
As per Section 10(33) of the Income Tax Act, 1961
(Act) income received in respect of units of a
mutual fund specified under Section 10(23D) is
exempt from income tax in India and the mutual
funds are subject to pay distribution tax in debt-
oriented schemes.
The effective tax (DDT) paid by investor will be
28.33% w.e.f. October 1, 2014.

An arbitrage fund is technically an equity-oriented fund. However, rather than
investing only in equity stocks in the cash market, arbitrage funds objective is to
take advantage of price differentials between the cash and the derivatives market.
Some arbitrage funds also take naked exposure in equity over and above the pure
arbitrage play.
Eg.
Assume an asset currently trades at $100, while the one-month futures contract is
priced at $104. In addition, monthly carrying costs such as storage, insurance and
financing costs for this asset amount to $3. In this case, the trader or arbitrageur
would buy the asset (or open a long position in it) at $100, and simultaneously sell
the one-month futures contract (i.e. initiate a short position in it) at $104. The
trader would then carry the asset until the expiration date of the futures contract,
and deliver it against the contract, thereby ensuring an arbitrage or riskless profit
of $1.



CONSTITUENTS OF MFs

Fund Sponsor
Trustees
Asset Management Company
Custodians
Registrar and Transfer Agents
Distributors/ Agents
Mutual funds in India are governed by SEBI (Mutual Fund) Regulations, 1996,
as amended till date.

The regulations permit mutual funds to invest in securities including money
market instruments, or gold or gold related instruments or real estate assets.

Mutual funds are constituted as Trusts. The mutual fund trust is created by
one or more Sponsors, who are the main persons behind the mutual fund
operation.

Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund
trust, are the investors who invest in various schemes of the mutual fund.

In order to perform the trusteeship role, either individuals may be appointed
as trustees or a Trustee company may be appointed.

When individuals are appointed trustees, they are jointly referred to as Board
of Trustees. A trustee company functions through its Board of Directors.

The Sponsor:

Sponsor is defined under the SEBI regulations as any person who, acting
alone or in combination with another body corporate, establishes a
mutual fund.
Sponsor is the promoter of the fund.
Sponsor could be a bank, a corporate or a financial institution.
Sponsors then form Trust and appoint Board of Trustees.
The sponsor also appoints Custodian.
Sponsor signs the trust deed with the trustees.
Sponsor creates the AMC and the trustee company and appoints the
board of directors of companies, with SEBI approval.
Sponsor should have at least a 5 year track record in the financial
services business and should have made profit in at least 3 out of the 5
years.
The AMCs capital is contributed by the sponsor.
Sponsor should contribute at least 40% of the capital of the AMC.

The Trustees
A mutual fund in India is form as Trust under Indian Trust Act, 1882.
The trust-mf is managed by Board of Trustees.
The board of Directors i.e. Trustees do not manage the portfolio of securities directly
rather they appoint as AMC (Asset Management Company)
Trustees ensure that fund is managed by stated objective and as per SEBI regulations.
Trusts always work for the interest of unit holders.
The trust is created through a document called Trust Deed that is executed by sponsor
in favors of Trustees.
The Trustees being the primary guardians of unit holders funds and assets.
Trustees must ensure that the investors interests are safeguarded and that the AMC
operations are as per regulation laid down by SEBI.
SEBI mandates a minimum of 2/3
rd
independent directors on the board of the trustee
company.
Trustees are appointed by the sponsor with SEBI approval.
Trustees are required to meet at least 4 times a yea to review the AMC.
The trustees make sure that the funds are managed according to the investors
mandate.

Rights of Trustees:
The trustee appoints AMC with prior approval of SEBI.
They also approve each new scheme floated by AMC.
They have the right to request any necessary information from
the AMC concerning the operations of various schemes.
The trustees may take any necessary action against AMC if
they found AMC operations are not as per the SEBI
regulations.
Manages the mutual fund and look after the operations of the
appointed AMC.
Trustees receive fee for their services.
The investments are held by the Trustee
Trustees can seek remedial actions from AMC
Trustees can dismiss the AMC
The trustees shall quarterly review all transactions carried out
between the mutual funds, asset management company and
its associates..
Obligations of Trustees:
To ensure that funds transactions as per SEBI regulations
To ensure that the proper key person of AMC has been appointed. And also
operations of other staffs of AMC.
To ensure that the due diligence (care) has been given for empanelment of brokers.
Trustees Manages the Mutual Fund and look after the operations of the appointed
AMC
The investments are held by the Trustee
At least 4 members should be there in Board of Trustees.
2/3 members in the Board of Trustees should be independent.
Sponsors execute and register Trust Deed in favors of Trustees.
Trustee of one MF can not be a trustee of another MF, unless he/she is an
independent trustee in both the cases.
The appointment of all trustees has to be done with prior approval of SEBI.
Trusts are formed through Trust Deed
Trust ensures that AMC has not given any undue advantage to any associates.
Trustee ensures that AMC is managing the fund as per SEBI regulations
Meeting of Trustees should held once in every two months.
SEBI categorizes the Obligations of Trustees as
General Due Diligence &
Specific Due Diligence


Reliance Mutual Fund [Fund/RMF] has been sponsored and Settled by
Reliance Capital Limited (RCL). RCL is a RBI registered Non-Banking
Finance Company (NBFC) and has its business interests in Asset
Management, Life Insurance, General Insurance, Private Equity,
Proprietary Investments, Stock Broking, & other activities in the Financial
Services Sector.

Reliance Capital Asset Management Limited (RCAM) is an unlisted Public
Limited Company incorporated under the Companies Act, 1956 on
February 24, 1995, having its registered office at


RCAM has been appointed as the Asset Management Company [AMC] of
Reliance Mutual Fund by the Trustees of Reliance Mutual Fund vide
Investment Management Agreement (IMA) dated May 12, 1995 amended
on August 12, 1997, January 20, 2004 and February 17, 2011 in line with
SEBI (Mutual Funds) Regulations, 1996

AMCs
The role of AMC is to act as investment manager of trust
The AMC (as appointed by trust/sponsor) require approving by a SEBI
The AMC supervision under its own board of directors and also the directors
of trustees and SEBI
The trustees are empowered to terminate the appointment of AMC and
appoint a new AMC with prior approval of SEBI and unit holders.
Manage different investment schemes as per investment management
agreement with the trustees.
The AMC of a MF must have a net worth of at least Rs.10 Crores at all times.
Director of AMC should have complete finance professional experience.
The AMC always act in the interest of unit holders (investor)
The AMC gets a fee for managing the funds, according to the mandate of the
investors
At least of the AMCs Board should be of independent members
An AMC can not engage in any business other than portfolio advisory and
management
An AMC of one fund cannot be Trustee of another fund
AMC should be registered with SEBI
AMC signs an investment management agreement with the trustees

Obligation of AMC & its directors
Investment of the fund according to the SEBI
regulation & trust deed.
They are answerable to the trustees and must
submit quarterly reports to them on AMC
activities and compliance with SEBI regulations
Each day NAV is updated on AMFI website by 9
pm
In the event of merger or consolidation of
schemes, the unit holders are intimated through
a letter giving them option to exit at prevailing
NAV without exit load.


Custodians
For safekeeping of physical securities of MF custodian is appointed by
board of trustees.
The custodian should be registered with SEBI. Dematerialized forms of
securities are held in the custody of Depositories Participant.
The investors fund and the investments are held by the custodian,
who is the guardian of the funds and assets of the investors.
Sponsor and the Custodian cannot be the same entity

Function of Custodian
Responsible for the securities held in the mutual funds portfolio
Keep an investment record of the mutual fund
Collect dividends and investment payments due on
the mutual funds investment
Track corporate actions like bonus issues, right offers, offer for sale,
buy back and open offers for acquisition.

Registrars & Transfer Agents
They are responsible for issuing and redeeming units of
the MF and providing other MF related services to
investors
Register and Transfer (R&T) Agents manage the sale and
repurchase of units and keep the unit holders accounts.

Functions of Registrars
Process investors application
Record details of investors
Send information to investor
Process dividend payout
Incorporate changes in investor information
Keeping investor information up to date

Distributors
AMC appoints a distributor (also called MF advisor, agent, broker, intermediaries etc)
who sells units MF to investors on the behalf of fund house.
A sponsor or an associate may act as distributors of AMC. For example, Bank which is
sponsor of Mutual Fund Company may act as distributor also for selling its mutual
funds products
AMC has the right whether to impanel (appoint) or not distributor for selling his MF
scheme.
They also have the right of commission structure which they offer to distributor
You may find different commission structure for different AMC scheme.
A distributor can act for several or all MF
For all employees and distributors of MF, AMFI certification test has been made
mandatory by SEBI
All distributors are required to be registered with AMFI and obtain AMFI Registration
Number (ARN)
The commission received by the distributors is split into initial commission which is
paid on mobilization of funds and trial commission which is paid depending on the
time the investors stay with the fund.


Get yourself certified (if not previously certified) by National Institute of Securities Markets (NISM), by
taking the NISM Mutual Fund Distributors Certification Examination. National Institute of
Securities Markets (NISM) is a public trust, established by the Securities and Exchange Board of
India (SEBI), the regulator for securities markets in India. NISM seeks to add to market quality
through educational initiatives

MUTUAL FUND DISTRIBUTORS

Finance Minister, in his Budget Speech
announced that "Mutual fund distributors will be
allowed to become member in Mutual Fund
segment of Stock Exchange so that they can
leverage the stock exchange network to improve
their reach and distribution.
As per the present arrangement, investors can
transact in mutual fund schemes at the stock
exchange platform through registered
brokers/clearing member of a recognized stock
exchange who have obtained ARN from AMFI.
Sources

http://amfitest.blogspot.in/2009/03/chapter-
2-fund-structure-and_28.html
http://www.sebi.gov.in/acts/mfreg96.html


CLASSIFICATION OF MF SCHEMES
9. Offshore funds
10. Mid cap funds
11. Large cap funds
12. Equity MFs
13. Arbitrage funds
INDICES and Nifty Midcap 50
CLASSIFICATION OF MF SCHEMES
1. Close-end funds
2. Open end funds
3. Income funds
4. Growth funds
5. Balanced funds
6. Money Market funds
7. Sector funds
8. Index funds
http://www.sebi.gov.in/faq/mf_faq.html


CLASSIFICATION OF Mutual Fund Schemes
ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME : While launching new
schemes, Mutual Funds also declare whether this will be an open ended scheme
(i.e. there is no specific date when the scheme will be closed) or there is a closing
date when finally the scheme will be wind up. Thus, according to the time of
closure schemes are classified as follows :-

(a) OPEN ENDED SCHEMES
(b) CLOSE ENDED SCHEMES

Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription
and repurchase on a continuous basis. These schemes do not have a fixed
maturity period. Investors can conveniently buy and sell units at Net Asset
Value (NAV) related prices which are declared on a daily basis. The key
feature of open-end schemes is liquidity.

Open Ended Fund- Reliance Small Cap
Reliance Small Cap-Open Ended
Reliance Small Cap-Open Ended
HSBC Mid Cap-Open Ended
HSBC Mid Cap-Open Ended
Close-ended FUND / Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7
years. The fund is open for subscription only during a specified period
at the time of launch of the scheme. Investors can invest in the scheme
at the time of the initial public issue and thereafter they can buy or sell
the units of the scheme on the STOCK exchanges where the units
are listed. In order to provide an exit route to the investors, some close-
ended FUNDS give an option of selling back the units to the mutual
fund through periodic repurchase at NAV related prices. SEBI
Regulations stipulate that at least one of the two exit routes is provided
to the investor i.e. either repurchase facility or through listing on stock
exchanges. These mutual funds schemes disclose NAV on daily basis.
Close ended fund-reliance close ended equity fund
Close ended fund-reliance close ended equity fund
Close ended fund-UTI
Performance of UTI MF
Mutual Fund Service System (MFSS) is an
online order collection system provided by
NSE to its eligible members for placing
subscription or redemption orders on the
MFSS based on orders received from the
investors. NSE launched India's first Mutual
Fund Service System(MFSS) on November 30,
2009 through which an investor can subscribe
or redeem units of a mutual fund scheme.


The value of all the securities in mutual FUNDS portfolio is calculated daily. From this, all
expenses are deducted and the resultant value divided by the number of units in the fund is the
funds NAV or its Net Asset Value.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income
to investors. Such schemes generally invest in fixed income
securities such as bonds, corporate debentures, Government
securities and money market instruments. Such funds are less
risky compared to equity schemes. These funds are not
affected because of fluctuations in equity markets. However,
opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of change
in interest rates in the country. If the interest rates
fall, NAVs of such funds are likely to increase in the short run
and vice versa. However, long term investors may not bother
about these fluctuations.

Entry and Exit Load
Entry load is an upfront charge levied by a mutual fund on an investor on the
purchase of units of mutual fund. w.e.f. 1
st
august 2008 government has done
away with entry load.

Exit Load is a charge levied as a percentage of the existing NAV at the time of
exit. Out of the exit load charged, MFs can keep a maximum of 1% for selling
and marketing expenses as stipulated by SEBI.
INCOME FUNDS_SBI MAGNUM
INCOME FUNDS_SBI MAGNUM
INCOME FUNDS-Reliance Dynamic Bond Fund
Bond markets and its dependency on interest rates

The prices of fixed income securities are governed by the interest rates prevailing in the market.
Interest rates and prices of fixed income securities are inversely proportional. If the interest rates
increase from the current level, the prices of fixed income securities decrease. Similarly, if the
interest rates decrease, the prices of fixed income securities increase.

For example, consider a 10 year government bond which has a face value of 1000 a coupon rate of
8% i.e. one receives an interest payment of 80. If the lending rate has been increased to 10%, the
new bonds with the same face value of 1000 and tenure of 10 years provide a coupon rate of 10%.
This makes the existing bonds at 8% coupon rate less attractive and it will be traded below its face
value in the market. Let us assume that the existing bond is now being traded at 900. The yield of
the bond is increased to 8.89% (80/900 *100) from the initial 8%.

Similarly, if the interest rates are slashed to 7%, the existing bonds at 8% coupon rate attract more
buyers. Now the bond trades at price higher than its face value. If the bond the trades at 1050, the
yield on the bond will be 7.62% which is lower compared to the initial rate of 8%. The yield of the
bond maintains a direct relation with interest rate and the price of the bonds maintain an inverse
relation. A drop in interest rates will create more demand for existing bonds in the secondary
market and increases the bond price. Similarly, when the interest rates increase, the existing bonds
are traded below their face value.


Growth/ Equity Oriented Fund
Such funds aim at capital appreciation by investing in
growth stocks. They build up a portfolio of stocks that
yield above average returns. They do not distribute
their income regularly but offer substantial capital
appreciation in the long run. However, growth funds
are more volatile.
Balanced Funds or hybrid funds
The aim of balanced funds is to provide both growth and
regular income as such schemes invest both in equities
and fixed income securities in the proportion indicated
in their offer documents. These are appropriate for
investors looking for moderate growth. They generally
invest 40-60% in equity and debt instruments. These
funds are also affected because of fluctuations in share
prices in the stock markets. However, NAVs of such
funds are likely to be less volatile compared to pure
equity funds.

Balanced Funds
Sector Funds-Banking
Sector Funds-Pharma
Fund of Funds
Fund of Funds-Commodity Oriented
ACTIVE AND PASSIVE Another distinction that is important for the investor is the difference between active and passive
FUNDS. This distinction is based on how the FUND manager views his role. Active funds are those that aim to beat the
MARKET benchmark. A benchmark is a reference point against which fund managers and investors can compare
performance. For example, most equity funds will have either the Sensex or the Nifty as benchmarks. The funds that want
to just mimic an index are called passive funds. Investors who want to have an investment vehicle that they want to
choose once and then just use over their investment lifetimes without worrying about whether their fund manager is
going to stay with the fund or whether he will sustain the performance or not choose passive funds. Investors who want
returns that are ahead of the MARKET and do not mind taking higher risk that comes due to fund manager choose active
funds. Active fund The reason for the existence of an active fund is to beat the benchmark it has chosen to
measure its performance against. Fund managers of active funds believe that they have the ability to select STOCKS and
time the market in a manner that makes the returns on their portfolio higher than what the market (in the form of the
benchmark) gives over a specific period of time. Active funds have fund managers who have the freedom to pick and
choose stocks they want to buy or sell. Of course, the freedom comes in an institutional structure with internal rules.
Since fund managers are actively involved, there are costs on research and transaction. The best performing active funds
have beaten their benchmarks by an average of 6% on a compounded annual growth rate basis over the last 10 years.
Passive fund Also called index funds since their only aim is to mimic an index they choose, passive funds dont
have fund managers. In fact, they dont need fund managers to manage them. They simply mimic their benchmark
indices.
They INVEST in scripsand in exactly the same proportionas they lie in their benchmark
indices. They move up and down as much as their benchmarks move. For example, a passive
fund on the Nifty index will buy all 50 stocks in the Nifty in the same proportion as are held
by the Nifty. Each time a stock is taken out or added to the Nifty index, the fund will do the
same. On a day-to-day basis, this makes for lesser work than those managing active funds.
Changes in the composition of the index are usually not more frequent than once a year.
However, individual weights of scrips in an index change every day and since index funds are
mandated to simultaneously change their scrip weights in the last half hour before the equity
market closes, by rebalancing their existing portfolios index funds do end up incurring some cost.
Investors can expect almost the same return as the index their FUND tracks, though there will be
a small difference between an index funds performance and that of its benchmarks. Called the
tracking error, this is caused because of the small cash component that every index fund keeps
(to face redemption pressures) and also the various costs it incurs (that eventually reduce your
funds net asset value) such as brokerage, advertising, MARKETING and so on. Costs are lower in
a passive fund compared with an active fund. Passive FUNDS are of two kindsindex mutual
funds and exchange-traded funds (ETFs). An ETF is a index fund with just one difference from
the investors point of view. Investors can buy and sell ETFs on the STOCK markets as ETFs need
to be listed on a stock exchange. ETFs come with several advantages over an index fund. First,
they have lower fees than index funds and lower tracking error. They also allow you the facility
of real-time buying and selling, unlike index funds that will give you the price once a day on
which you will INVEST.
Read more at: http://www.livemint.com/Home-Page/RJ7dH5aKxGvENYlvyeS9SK/Types-of-
funds.html?utm_source=copy
Exchange Traded Funds
An ETF is a diversified basket of securities that can be traded in real time like
individual stocks on an exchange. They are bought and sold throughout
the trading day like any stock. ETFs invest either in all stocks that comprise
the chosen index in proportion to the weightage given to the stocks in the
index or a representative sample of stocks that are included in the index.

First ETF- Nifty BeEs- It is based on Nifty 50
GOLD ETF
If you believe that Nifty and Sensex will scale new peaks over the next three-
to-five years and are wondering how to bet on them, ETFs and
Index FUNDS are the two options that you can explore. Though both are
passively managed FUNDS and their returns closely track that of the
benchmark, they are not the same. Here are the differences.
How to buy them?
ETFs, as the name suggests, are TRADED on the exchange and are
bought and sold only through the exchange. ETFs being similar to equity
shares, you will need demat and broking accounts to buy them. But
Index FUNDS can be bought or sold directly from the fund house,
similar to other mutual fund schemes.
What about the costs?
Just as brokerage is charged on the value of equity shares that you buy or
sell, you will have to pay brokerage when you buy/sell ETFs. But in Index
funds you will have to pay an annual management fee. The expense ratio in
most Index funds may be upwards of 1 per cent, deductible every year. A
fund with a lower expense ratio may be desirable.
Are the returns divergent?

Even as both these funds passively track the underlying index, their returns may
be divergent. One unit of an ETF is theoretically equivalent to a tenth of the
underlying index value. But that is not always the case. Reason: these being
exchange-traded, liquidity has a bearing on the ETFs value and returns.
In the case of Index funds, the deviation in returns compared with the underlying
index can be much higher.
This is because these funds are allowed to hold some portion of their assets as
cash either to meet redemption requests from investors or to cushion against
volatility when the MARKETS are turbulent. This can impact returns. Also,
higher expense ratio can eat into the schemes gains.
Given that the management fee is to be deducted annually, one cannot rule out
lower returns for Index funds over the long term, compared with their underlying
index and ETFs of the same index.

How to choose?

While choosing an ETF, it is preferable to buy the most liquid ones. If you get
stuck with illiquid ETFs, not only will your returns suffer but selling them when
you need money may not be an easy proposition.
Likewise, when you are looking to invest in an Index FUND , go for the ones
with lower expense ratio, because high expense ratio can eat into your long-term
returns.

Charges


ETF - There are no recurring charges in case of ETFs. Apart from the annual maintenance charge
(1%) on your demat account the only other charge is transaction charge of maximum 0.5%. Overall
charges in an ETF would come to be about 0.5%.


Index FUND - This is the worst demerit of index FUNDS compared to ETFs. First there is the
fixed transaction fee of Rs 100 for all INVESTMENTS above Rs 10,000. Second there is a
recurring AMC charge called as expense ratio which presently ranges from 1% -1.8%. This is
deducted from your INVESTMENT even if there are no transactions. Finally if you
redeemINVESTMENT before exit period a flat percentage is deducted as exit load. This can be
ignored because anyway index funds are supposed to be held long term.


There is however a way to dodge some of these charges in index funds. Direct investment with the
AMC does not involve transaction fee and expense ratio of such plans are also lower. Since direct
was introduced only in January 2013 we are not sure how much the difference might come to.


Conclusion


Since the great advantage ETFs have over index funds seems to be in cost, we suggest if you
have a demat account you invest through ETF. Since SIP is not possible, youd have to motivate
yourself to invest in a disciplined manner. Others can choose SIP in direct plan of index funds of
one of the top AMCs.

Kotak PSU Bank ETF
Kotak PSU Bank ETF-Underlying CNX PSU Bank
CNX PSU BANK
ART FUNDS
1. Osians
2. Yatra
3. Crayon Capital
4. Indian Fine Art Fund
Innovative Funds
ETFs
Gold ETFs
Art Funds
SIPs: Systematic Investment Plan
REMS: Real Estate Mutual funds. Eg. ICICI
Prudential Real Estate Securities Fund - Retail Plan
(G)
Advantages of Mutual Funds
1. Professional Management
2. Diversification
3. Lower Transaction Cost
4. Liquidity
5. Flexibility and Choice
6. Good Regulations
7. High Returns
8. Easy access to information
Settlement in MFs
All requests for subscription and redemption are settled on
individual basis and only to the extent of the FUNDS /units
paid in by participants/clients on the settlement day. Receipt
and transfer of funds and units for subscription are done on a
T+1 day basis. . Receipt and transfer of mutual fund units for
redemption is done on T day and is conducted for units in
dematerialised form only. The transfer of funds for redemption
is carried out on a T+1, T+2 and T+3 basis depending upon the
category of funds.
The net asset value (NAV) of a mutual fund
indicates the price at which the units of that
mutual fund are bought or sold. It represents
the fund's market value after subtracting the
liabilities. The NAV per unit is derived after
dividing the net asset value of the fund by the
total number of its outstanding units.
The formula for calculating NAV:

How is NAV calculated?
The value of all the securities in mutual funds
portfolio is calculated daily. From this, all
expenses are deducted and the resultant
value divided by the number of units in the
fund is the funds NAV or its Net Asset Value.
Pricing of Units
Open ended fund should publish the sale and purchase price of units at least once a week in a
daily newspaper with all India circulation. Repurchase price should not be lower than 93% and
sale is not higher than 107% of the NAV. The difference between repurchase price and sale price
of the units should not exceed 7% of the sale price.

A Mutual Fund should deduct from the repurchase proceeds of close ended scheme launched prior to
April 2009 such proportion of initial expenses of the scheme as are attributable to the units being
purchased if (i) the scheme is launched after May 2006 but prior to May 2008 and
(ii) Initial expenses in respect of the scheme are announced in the books of accounts of the scheme in
accordance with the applicable regulations.
Performance Evaluation
1. Sharpe Ratio
2. Treynors Ratio
3. Jensens Measure

Sharpe Ratio

=Average return on the portfolio t during a

period.
RFR= Average risk free rate of return during the
same period

= Standard Deviation of the return of portfolio t

is the risk premium

Treynors Ratio

=Average return on the portfolio t during a period.

RFR= Average risk free rate of return during the same
period
= Beta coefficient of the return of portfolio t

is the risk premium

Sharpe ration measure the risk premium of the fund
per unit of systematic risk
A portfolio with higher

is preferred.
Beta
=

= correlation of returns of the fund with market

Beta is a statistical tool, which gives you an idea of how a fund will
move in relation to the market. In other words, it is a statistical
measure that shows how sensitive a fund is to market moves. If the
Sensex moves by 25 per cent, a fund's beta number will tell you
whether the fund's returns will be more than this or less.

The beta value for an index itself is taken as one. Equity funds can have
beta values, which can be above one, less than one or equal to one. By
multiplying the beta value of a fund with the expected percentage
movement of an index, the expected movement in the fund can be
determined.
Jensens Measure

=Average return on the portfolio jduring a period.

RFR= Average risk free rate of return during the same period

= Systematic risk of portfolio j

t
= Forecasting ability of fund manager

is the risk premium

= average return of a market portfolio for a specific period

The model attempts to measure if more than expected return are being earned for portfolios
riskiness. It is a measure of absolute performance of a portfolio on a risk adjusted basis.
Question
Rank the following funds according to (i) Sharpe (ii)
Treynor Ratio and (iii) Jensens measure. Risk free rate of
return is 8%
Fund Average Annual
Return (%)
Standard Deviation
(%)
Correlation with
market
P 22 15 0.75
Q 15 10 0.50
R 19 22 0.35
S 12 7 0.90
Market Portfolio 12 10
Ans (i) 0.93, 0.70, 0.50, 0.57

(ii) Beta values: 1.125, 0.50, 0.77, 0.63; 0.124, 0.14, 0.143, 0.063

(iii)alpha = 0.095, 0.05, 0.0792, 0.0148