Mutual funds

What is a Mutual Fund?

A mutual fund is a pool of money managed by a professional money manager.

What is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Concept
A Mutual Fund is a trust that pools 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.

Concept
The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.
Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost

What is a Mutual Fund?

The objective and the risk level are outlined in a document called a prospectus. The prospectus provides detailed guidelines for the types of investments the manager can purchase.

Mutual Fund Operation Flow Chart

How to Set up a Mutual Fund / organization structure of Mutual Fund

Organizational Structure of MF
SEBI (mutual fund) Regulation,1996 Structure of MF in India SPONSER

TRUSTEE

Custodian
AMCs

Distribution/Agents

Auditors

Banker

R&T Agents

Functional Entits in MF Operations

Trust or Trustee Company

They form mutual funds under existing Trust or Companies Acts Trust managed by the Trustees and Trustee Companies are managed by the Board of Directors

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders.

Asset Management Company (AMC)

Undertakes the administration & investment activities of the fund

12

Asset Management Company

Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
13

Custodian

He/ She is an independent entity who is responsible for safekeeping the funds assets

Registrars/Transfer Agents

They handle sales and redemption related activities of the fund They also maintain records of the shareholders and send the payment cheques to the investors
14

Distributors
15

Ratings of Mutual funds in India

Working of a Mutual Fund

INVESTORS Passed back to INVESTORS GET A BLEND OF LIQUIDITY RETURNS & SAFETY RETURNS
MUTUAL FUND LARGE CORPORATE SPECIALISTS MANAGE

Pool their money with

FUND MANAGEMENT

Generate PORTFOLIO YIELDS HIGH RETURN TO MFs

Invest in

SECURITIES

INVEST IN BALANCED PORTFOLIO

What are the fees?

Mutual funds can either be purchased through a:

1 Front-end load: An investor pays a fee upfront (usually, a percentage of the total investment).

(Note: Now there is front and Back end fees)

18

What are the fees?

:

Back-end load: An investor doesn't pay an initial fee, but they are locked into the fund family for a predetermined period of time (outlined in the prospectus). If the investor holds the fund to "maturity "of the "contract," they will never pay a fee. But, if they choose to redeem early, they will have to pay a redemption fee, which decreases on a percentage basis every year the fund is held.

19

Pricing Methods
Pre specified Pricing
Historical Pricing Prospective Pricing

Loaded Pricing

20

Net Asset Value (NAV)

NAV is defined as the value of each share of mutual fund and it is usually expressed as per-share amount. Net Asset Value is calculated on a daily basis after the trading closes.

Computing Net Asset Value

For investors, the performance of their investment depends on what happens to the funds per share value, or net asset value (NAV). NAV= Market Value of Assets Liabilities Number of Shares Outstanding

NAV1=NAV0+All Incomes-All Distributed Example: NAV0=Rs.100, Distributed 1) Net Realized Gains=Rs.2 and 2) Net Investment Income=Re.1. NAV1= Rs.100-Rs.2-Re.1=Rs.97

Frequently Used Terms

Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a backend load. This is also called Bid Price.

23

Frequently Used Terms

Redemption Price Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load Is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes that do not charge a load are called No Load schemes.
24

Frequently Used Terms

Repurchase or Back-end Load Is a charge collected by a scheme when it buys back the units from the unit holders.

25

TYPES OF MUTUAL FUNDS

Type of Mutual Fund Schemes Investment Objective Special Schemes

Structure Open Ended Funds

Growth Funds Income Funds

Industry Specific Schemes

Close Ended Funds Interval Funds

Index Schemes
Sectoral Schemes

Balanced Funds
Money Market Funds

27

What are the different types of mutual fund schemes?

Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

28

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.

29

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.

30

Close-ended Fund/ Scheme

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 generally on weekly basis.

31

Schemes according be classified as Objective: A scheme can also to Investment

growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows

32

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.

33

Growth / Equity Oriented Scheme

The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

34

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.
35

Income / Debt Oriented Scheme

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.

36

Balanced Fund

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.

37

Balanced Fund
These are appropriate for investors looking for moderate growth. They generally invest 4060% 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.

38

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money, government securities, etc..
39

Money Market or Liquid Fund

Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods

40

Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

41

Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc . These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms.
42

Index Funds

Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

43

What are sector specific funds/schemes

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.

44

What are Tax Saving Schemes?

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
45

Bond Funds
These funds have portfolios consisting mainly of fixed income securities. The main thrust of these funds is mostly on income rather than capital gains

46

Aggressive Growth Funds

These funds are capital gains oriented and thus the thrust area of these funds is capital gains. Hence these funds are generally invested in speculative stocks. They may also use specialized investment techniques like short term trading etc.
47

Off Shore Mutual Funds

The sources of investments for these funds are from abroad. They are regulated by the provisions of the foreign countries where those funds are registered .

48

Advantages of Mutual Funds

Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated
49

Regulatory Framework
SEBI Mutual Fund Regulations(1996) Indian Trusts Act Registrar of Companies takes care of the Compliances

Company Law Board is responsible for levying penalties.

History of Mutual Funds

51

 Historians are uncertain of the origins of investment funds; some cite the closed-end investment companies launched in the Netherlands in 1822 by King William I as the first mutual funds
52

while others point to a Dutch merchant named Adriaan van Ketwich whose investment trust created in 1774 may have given the king the idea. Ketwich probably theorized that diversification would increase the appeal of investments to smaller investors with minimal capital.
53

The name of Ketwich's fund, Eendragt Maakt Magt, translates to "unity creates strength". The next wave of near-mutual funds included an investment trust launched in Switzerland in 1849, followed by similar vehicles created in Scotland in the 1880s.
54

 The modern mutual fund was first introduced in Belgium in 1822. - Societe Generale de Belgiue

55

 The present version mutual funds came into existence in 1924, in Boston. Massachusetts Investors Trust introduced the Modern Mutual Funds and the funds were available from 1928.
56

 At present this Massachusetts Investors Trust is known as MFS Investment Management Company.

57

History of Mutual Fund

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 .

58

History of Mutual Fund

First Phase 1964-87 Second Phase 1987-1993 (Entry of Public Sector Funds) Third Phase 1993-2003 (Entry of Private Sector Funds) Fourth Phase since February 2003
59

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. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964.
60

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 followed by Canbank Mutual Fund (Dec 87),

61

Second Phase 1987-1993 (Entry of Public Sector Funds)

Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
62

Third Phase 1993-2003 (Entry of Private Sector Funds)

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. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

63

Third Phase 1993-2003 (Entry of Private Sector Funds)

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.
64

Third Phase 1993-2003 (Entry of Private Sector Funds)

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.
65

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated 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, representing broadly, the assets of US 64 scheme, assured return and certain other schemes.

66

Fourth Phase since February 2003

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. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.
67

Mutual Fund Companies in India

ABN AMRO Mutual Fund | Bank of Baroda Mutual Fund Benchmark Mutual Fund | Birla Sunlife Mutual Fund | Canbank Mutual Fund | DBS Chola Mutual Fund |
68

Mutual Fund Companies in India

Deutsche Mutual Fund | DSP Merrill Lynch Mutual Fund | Escorts Mutual Fund | Fidelity Mutual Fund | Franklin Templeton | HDFC Mutual Fund | HSBC Mutual Fund
69

Mutual Fund Companies in India

ING Vysya Mutual Fund | JM Mutual Fund | Kotak Mahindra Mutual Fund | LIC Mutual Fund | Morgan Stanley Mutual Fund | Principal Mutual Fund | Prudential ICICI Mutual Fund |
70

Mutual Fund Companies in India

Reliance Mutual Fund | Sahara Mutual Fund | SBI Mutual Fund | Standard Chartered | Sundaram BNP Paribas | Tata Mutual Fund | UTI Mutual Fund
71

Distribution ChannelsMutual Funds

Individual Agents Distribution Companies Banks and Non-Banking financial companies Direct Marketing Channels

72

MARKETING OF MUTUAL FUNDS

Product Focus The performance of the fund in giving returns to its investors. The way in which that particular fund was marketed. Customer Ownership Focus Specialized Product & Service Focus

Marketing Strategies:
Direct marketing Personal Selling Telemarketing Direct mail Advertisements in newspapers and magazines Hoardings and Banners Internet Selling through intermediaries Joint Calls