MUTUAL FUNDS

An introduction to the
concept

Roll No. Name

Mane
32
Shubhangi
41 Phalke Rupesh

42 Rakesh Kumar

43 Rane Sandesh

44 Rao Sanjith
 Mutual fund Myths and Performance 5
evaluation
Selection of mutual funds, Mutual fund 4
analysis
3
Loads & fees, Mutual Funds Pricing
Structure in India, Key Terms, Types of 2
Funds
Introduction MF, Benefts of Mutual 1
Funds
Contents
History
Unit Trust of India was the frst mutual
fund set up in India in the year 1963.
In early 1990s, Government allowed
public sector banks and institutions to
set up mutual funds.
The regulations were fully revised in
1996 and have been amended
thereafter from time to time.
SEBI has also issued guidelines to the
mutual funds from time to time to
protect the interests of investors.
Phases in Mutual Funds -
India
First Phase - 1964- -1987
Second Phase - 1987-1993
Entry of Public Sector Funds
Third Phase - 1993-2003
Entry of Private Sector Funds
Fourth Phase - since February 2003
WHAT IS A MUTUAL FUND?
A Mutual Fund is a trust that pools the savings
of a number of investors who share a common
investment objective, in turn buy assets
Mutual Fund is the most suitable investment for
common man as it offers an opportunity to
invest in a diversifed, professionally managed
basket of securities at a relatively low cost
The wide investible universe includes stocks,
bonds, money market instruments and other
types of securities which aids diversifcation
Owner of a mutual fund unit gets a proportional
share of the funds gains, losses, income and
expenses
Collective pooled
investment
Sandes Sanjit
h h

Mone
Where? y to
Inves
t Returns

Market
Fee
s
Smart Market
Person Invests
Rakesh
Working of a Mutual Fund

Investo
Passed rs Pools
their
Back to
money

Fund
Returns Manage
r

Generat Invests
es Securiti in

es
Mutual Funds

X
Fund
Manager

Bond
Mutual Stock Deriv s/
Y
Fund s atives
Debt

Z
Benefits of Mutual Funds
Benefits of Mutual Funds
Diversification:
Investments in broad
cross- section of industries
and sectors
Lowers the Risk Quotient
in the portfolio as seldom
do all securities fall at the
same time in the same
proportion
Mutual Funds are a cost
effective way of investing
in various asset classes in
the lowest cost
Different category of
schemes offer varied
choices for diversifcation
for all investors
Benefits of Mutual Funds
Well Regulated:
All Mutual Funds are
registered with SEBI

SEBI has enlisted strict

regulations which have to
be mandatorily abided by
all Mutual Funds

The provisions of these

regulations are designed
in a
manner to protect the
interests of investors
Benefits of Mutual Funds
Return Potential:
Aimed at beating the
Benchmark leads to Higher
Returns to Investors
Over medium to long term,
they provide higher returns
due to investment in
diversifed basket of
securities
Low Costs:
Provides the cost efficient
option to invest in various
securities across asset
classes in a portfolio
Benefts of Scale in
Brokerage, Custodial and
other fees leads in to lower
costs for investors
Benefits of Mutual Funds
Liquidity:
Open-Ended Schemes
offered by Mutual Funds
provide easy redemption
facility as per requirement
of the investors
In case of Close-ended
schemes, the schemes are
listed on the stock
exchange wherein the can
sell investor the units
For certain schemes which
are not listed on the stock
exchange, periodical
redemption facility is
provided by the Mutual
Fund
Benefits of Mutual Funds
Transparency:
Periodic and regular
information/update is
provided in terms of value
of investment via an
account statement

Disclosure on the specifc

investments made by
respective scheme, the
proportion invested in each
class of assets and the
fund managers
investment strategy and
outlook is also provided via
Monthly Fact Sheets
published by Mutual Funds
Benefits of Mutual Funds
Flexibility & Variety:
With various types of
schemes offered by
various players, investors
have a variety of
investment options to
choose from

Investment features such

as Lump Sum, Systematic
Investment Plan
Systematic Withdrawal
Plan, etc. assist the
investors to invest or
redeem from their
investments as per their
needs
Benefits of Mutual Funds
Professional
Management:
Team of Experienced and
Skilled Professionals take
care of Investment
Management
Analysis of companies
performance and prospects
before selecting suitable
investments to achieve the
objectives of the scheme
Convenient Administration
aids avoidance of problems
such as Delayed Payments,
Bad Deliveries, etc.
The Structure of Mutual
Funds

SEBI Asset Management

Sponsor Company
Trustees/Trustee Custodian
Company Transfer Agent
Securities Exchange Board of India

Set up in the year 1992, with objective to to

protect the interest of investors in securities
and to promote the development of and to
regulate the securities market
Role of SEBI
Formulates policies and regulates the mutual
funds
It regulates the guidelines from time to time
All mutual funds whether promoted by public
sector or private sector entities including those
promoted by foreign entities are governed by the
same set of Regulations. All mutual funds are
subject to monitoring and inspections by SEBI
Sponsor
They are the Promoters of the Mutual Fund
They are given the charge to form a Trust
and appoint Trustees. They are also
responsible for appointing the Custodian
and AMC
Eligibility Criteria for Selection of Sponsors:
Over 5 year of sound fnancial Track Record
3 Year Proft making record
At least 40% contribution to AMC Capital
He must have net worth in the immediate
preceding year more than the capital
contribution in AMC
Trustees/Trustee Company
Fiduciary Responsibility for investor funds as a
Board of Trustees or Trustee Company
Appointed by Sponsor with SEBI approval. They
in turn appoint an Asset Management Company
(AMC) to manage the portfolio of securities
Registered ownership of investments is with
Trust. Trustees hold the Unit Holders money in
fduciary capacity
There should be at least 4 Trustees (2/3 should
be independent)
Right to seek regular information and remedial
action. All major decisions need trustee
approval
Asset Management
Company
The AMC is responsible for the operational aspects of
the Mutual Fund. It holds an Investment Management
agreement with Trustees. It is a SEBI registered entity
Requirement of minimum 10 crores of net worth to
be maintained at all times
At least 1/2 of the board members to be independent
and it cannot have any other business interest
Structured as a private limited company (Sponsors
and Associates hold capital)
AMC of one Mutual Fund cannot be trustee of another
Mutual Fund
75% of the Unit Holders jointly can terminate the
AMC appointment
Custodian, Registrar&Transfer Agent

Custodian
Responsible for the safe keeping of investments
of the funds and receipt of all benefts due to
the fund. Participates in Clearing System on
behalf of the Fund
Registered with SEBI

Registrar & Transfer Agent

Responsible for unit holders record
maintenance and servicing including purchase,
repurchase and transfer of units
Responsible for updating Investor Records and
Transactions
Types of Mutual Funds
Types of Mutual Funds
Open Ended
Can enter and exit the fund scheme at its NAV as there is no fxed
maturity
Variable Corpus and not listed
These funds charge a marginal exit load
Continuously selling and buying back from the fund, these funds
provide investors with a very useful and convenient investing vehicle
Close Ended
Applications to funds restricted to only NFO period and are launched
with a fxed maturity period
These funds are not allowed to charge Entry Load
Since the funds are listed, the existing & prospective investors can
buy or sell through the exchange
These funds generally carry a tenure of around 3 to 5 years
Interval
Combines the features of open-ended & close-ended schemes.
Units may be
traded on the stock exchange, or
may be open for sale, or
redemption
during pre-determined intervals at NAV related prices.
Types of Mutual Funds
Equity fund:
Maximum part of corpus invested into equities holdings.
Diversifed Equity Funds
Mid-Cap Funds
Sector Specifc Funds
Tax Savings Funds (ELSS)
Longer time horizon
Rank high on the risk-return matrix

Hybrid / Balanced funds:

A mix of both equity and debt funds
They invest in both equities and fxed income securities
Equity offers growth & debt offers stability in returns
Types of Mutual Funds
Debt funds:
Invests in debt papers
Government authorities,
Private companies,
Banks and fnancial institutions
Funds ensure low risk
Provides stable
Debt funds are further classifed as:
Gilt Funds
Income Funds
MIPs
Short Term Plans (STPs)
Liquid Funds
Money Market Funds:
Invests solely in money market instruments such as
Treasury bills
Goal - to preserve principal while yielding a modest
return
Low-risk, highest safety
Categories of Funds
Mutual Fund Type Objective Risk Who should invest
Money market Liquidity + Moderate Negligible Those who park their
/Liquid Funds Income + funds in current
Preservation of accounts or short-term
Capital bank deposits
Debt Funds Liquidity + Moderate Credit Risk & Interest Those with surplus
Income Rate Risk as per short/medium term
instrument maturity funds
period
Gilt Funds Security & Income Interest Rate Risk Salaried & conservative
investors
Hybrid Funds Growth & Regular Capital Market Risk & Salaried & conservative
Income Interest Rate Risk investors
Index Funds To generate returns To generate returns To generate returns
that are commensurate that are commensurate that are commensurate
with returns of with returns of with returns of
respective indices respective indices respective indices
Diversified Equity Long-term Capital High Capital Market Risk Aggressive investors
Funds Appreciation with long term outlook
Tax Planning Funds Growth with Tax Moderate Capital Investors with long
Planning Market Risk term outlook and tax
planning
Sector /Thematic Long Term Capital High Capital Market Risk Very aggressive
Funds Appreciation investors with long term
outlook
Saving options

Purchase

Lump
Sum Redeem

Switch
Mutual Fund
Investing Systematic
Investment Plan
(SIP)
Systematic
Periodic Withdrawal Plan
(SWP)
Systematic Transfer
Plan (STP)
Loads & Fees
Used to have entry loads (now banned)
i.e. 2% entry load
For 1,00,000 investment only 98,000
invested
Exit loads prevalent to prevent churning
Might vanish after a period
30 days, 1-2 years
Commissions paid to distributors who
intermediates your transactions
From management fees
Or Exit load
Loads & Fees
AMC charges a fee for Managing Money
Limited to 2.5% of Asset Under Management
Use Daily Average AUM
Deducted from NAV everyday
No proft sharing fee allowed
Higher the AUM lower the fees
Debt Mutual Funds have lower fees
Mutual Fund - Pricing
Initial investors pay money
Receive units Usually Rs. 10/unit
Rs. 10 is called Par Value or Face Value
Process called New Fund Offer (NFO)
Fund invests in whatever it is supposed
to
Stocks, Bonds, Derivatives
Everyday market price of each
investment will change
Stock prices go Up or Down
Mutual Fund - Pricing
Every Day, Funds portfolio is Market
to Market
Assume 2 investors in one fund
Sanjit Rs. 1,000
10,000 Units
h
Rupe Rs. 9,000
90,000 Units
sh
Rs.
10,000
Total 1,00,0
Units
00

NAV = Total Investment / Total Units

Mutual Fund Pricing
Fund invests on Day 2
Relianc
Infosys Portfoli
e Retain
16 Cash o of
50
Shares Rs.
Share Rs.
@ Rs. 1,00,0
@ Rs. 10,000 00
2500
1000

Portfolio Shares Price Value

Reliance 50 1,000 50,000
Infosys 16 2,500 40,000
Cash 10,000
Total 1,00,000
Mutual Fund Pricing
Day 3 Price changes
Reliance & Infosys go up by 20% (Example)
Management fees 2%/365 days for 2 days
Portfolio Shares Price Value
Reliance 50 1,000 1,200 60,000
Infosys 16 2,500 3,000 48,000
Cash 10,000
Management @2% for 2 -11.95
fees days
Total 1,17,988.05
No. of Units 10,000
NAV per Unit 11.7988
Mutual Fund Pricing
Investor holding went up with NAV
New investors only buy at new NAV
Units New Value Investe
NAV d
Day 3
Sanjith 1,000 11.7988 11798.80 10,000
Rupesh 9,000 11.7988 1,06,189. 90,000
20

Stock went up 20%, NAV only went up 18%

Mutual Fund Pricing
NAV prices are declared @ 9 P.M. every
day
You can buy at todays price upto 3 P.M.
After that tomorrows price
Small cash is held up by funds for
redemption
Above that, holdings are sold
You can buy or sell fractional units
If NAV = 11.7988, you can buy Rs. 1000
worth
You will get 84.7544 Units
Taxation in Mutual Funds
Equity Funds Other Funds
Long Dividend Distr
Term Liquid/Money Market
Short Short
Capital Tax Funds Tax
Entity Term Term Long Term
Gains Deducte Deduct
Type Capital Capital Capital
Tax & d at Liquid / ed at
Gains Gains Gains Tax
Dividend Source Money Source
Tax Tax Others
Distribut Market
ion Tax Funds
10% without
Resident As per
Indexation or
Individual 15% Nil Nil Income 25% 12.50% Nil
20% with
/HUF Slab
Indexation
Associatio
n of 10% without
As per
Person / Indexation or
15% Nil Nil Income 25% 12.50% Nil
Body of 20% with
Slab
Individual Indexation
s
10% without
As per
Partnershi Indexation or
15% Nil Nil Income 25% 20% Nil
p Firm 20% with
Slab
Indexation
10% without
Domestic As per
Indexation or
Companie 15% Nil Nil Income 25% 20% Nil
20% with
s Slab
Indexation
Risks in Mutual Funds
Market Risk
The time of broad market changes, the stock prices of both an
outstanding, highly proftable company and a fledgling corporation may
be affected. This change in price is due to "market risk". Also known as
Systematic risk
Inflation Risk
Also known as "loss of purchasing power" Whenever inflation rises faster
than the earnings on your investment, you run the risk that you'll
actually be able to buy less, not more. Inflation risk also occurs when
prices rise faster than your returns
Credit Risk
In short, how stable is the company or entity to which you lend your
money when you invest? How certain are you that it will be able to pay
the interest you are promised, or repay your principal when the
investment matures?
Interest Rate Risk
Changing interest rates affect both equities and bonds in many ways.
Investors are reminded that "predicting" which way rates will go is rarely
successful
Risks in Mutual Funds
Exchange risk
Risk associated with changes in exchange rates may have
a positive or negative impact on companies which in turn
would have an effect on the investment of the fund
Investment Risks
The sectoral fund schemes, investments will be
predominantly in equities of select companies in the
particular sectors. Accordingly, the NAV of the schemes
are linked to the equity performance of such companies
and may be more volatile than a more diversifed portfolio
of equities.
Changes in the Government Policy
Changes in Government policy especially in regard to the
tax benefts may impact the business prospects of the
companies leading to an impact on the investments made
by the fund
Selection of Mutual Funds
Need Assessment
Understanding ones needs and setting realistic
investment goals
Aids selection of right funds for investment

Asset Allocation
Knowledge of asset classes before investment
Need Assessment helps in dictating the combination of
asset classes for investment

Performance Analysis
Track Record of Schemes to be one of the parameters
Consistency and stability in returns to be given higher
weightage
Selection of Mutual Funds
AMC Experience
Fund House vintage should be understood. Expertise in
understanding assets a key parameter
Product & Service capabilities to be reviewed thoroughly

Asset size
Too large and too small corpus size have both pros and cons
Fund Selection should be preceded by peer comparison to
arrive at ideal corpus size of the funds

Investment Objective
Synchronization of investment objectives helps in setting the
expectations right for the investments
Risk-Return payoff of the fund should be understood
Analyzing Mutual Funds
Assessment of your risk tolerance

Importance of diversifcation

Should hold Min 6 mutual funds

Should be able to earn 16% plus with

a beta equivalent to 1.0 or slightly
less
Analyzing Mutual Funds
Portfolio Analysis:
identifes the process of investing by fund
managers that leads them to pick certain
kinds of securities.
Three factors of Portfolio Analysis:
Growth
buy stocks in companies whose earnings are
growing rapidly.
Value
bargain hunters seeking stocks with low prices
compared to intrinsic value.
Company Size
specialize in small companies or large cos.
Analyzing Mutual Funds
Sector Weights
the investor must compare the fund to its
relevant indexes - S&P 500 Growth Index and
the S&P 500 Value Index
Attribution Analysis
Top-down approach & bottom-up approach to
stock-picking
Performance Analysis
Track Record of Schemes
Consistency and stability in returns
Expense Ratio
Fund Manager History
Mutual Fund - Myths
The Conventional Wisdom Myth
Looking at the Historic Trends
The Diversifcation Myth
If you own at least 10 different mutual
funds youll have a diversifed portfolio
The Momentum Myth
The easiest way to beat the market is to
buy last years top-performing funds
The Five-Star Myth
The best funds to buy are those rated 4
or 5 Stars
Mutual Fund - Myths
The Market Timing Myth
The safest strategy is to move everything
into money market funds when the market
is declining and switch everything back
into stock funds when the market is rising
The Long-Term Performance Myth
The best measure of a funds quality is its
long-term performance
The New fund Myth
You should wait until a fund has at least a
3-year track record before investing.