MUTUAL FUNDS

Presented By:-

Parshva Doshi- 926

Chhavi Saraogi- 910
Apurva Gupta- 907

MUTUAL FUNDS

Meaning and Introduction:Definition:According to SEBI (mutual funds) Regulations Act 1993

defines mutual fund as, a fund established in the form of
a trust by a sponsor to raise monies by the trustees
through the sale of units to the public under one or more
schemes for investing in securities.

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.

Mutual funds have a fund manager who invests the money on

behalf of the investors by buying / selling stocks, bonds etc.

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.

ORIGIN AND DEVELOPMENT

OF MFs
Origin in 19th Century
MF emerged in U.K. and in U.S as investment
management institutions in early 20th Century.
In 1822 an investment trust called Societe General de
Belgigue was formed in Belgium.
In 1868 Foreign and Colonial Government Trust was
established in U.K.
Currently, the worldwide value of all mutual funds totals
more than $US 26 trillion.
5

INDIAN MUTUAL FUND

INDUSTRY

The mutual fund industry in India started in 1963 with the

formation of Unit Trust of India.

The history of mutual funds in India can be broadly divided

into four distinct phases :-

First phase (1963-87)

Second phase (1987-93)
Third phase (1993-2003)
Fourth phase (since FEB 2003)

First phase (1963-87)

Established in 1963.

It was set up by RBI and functioned under the regulatory

authority of RBI.

In 1978 UTI was de-linked from the RBI and IDBI took over
the regulatory and administrative control.

The first scheme launched by UTI was Unit Scheme 1964

(US 64).
7

Second phase (1987-93)

Entry of Public Sector Funds.

Public sector banks like LIC and GIC entered in

the industry.

SBI Mutual Fund was the first non- UTI Mutual

Fund established in June 1987.

Third phase (1993-03)

Entry of Private Sector Funds.

Kothari Pioneer (now merged with Franklin

Templeton) was the first private sector fund to be
registered.

Fourth phase (since Feb

03)
In February 2003, following the repeal of the Unit Trust of India
Act 1963 UTI was bifurcated into two separate entities.
1. 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. It functions
under the rules framed by GOI and does not come under the
purview of the Mutual Fund Regulations.
2. The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB
and LIC - registered with SEBI and functions under the
Fund Regulations

Mutual
10

IMPORTANT CHARACTERISTICS
OF A MUTUAL FUND

A Mutual Fund actually belongs to the investors who have pooled their
Funds. The ownership of the mutual fund is in the hands of the
Investors.

A Mutual Fund is managed by investment professional and other

Service providers, who earns a fee for their services, from the funds.

The pool of Funds is invested in a portfolio of marketable investments.

The value of the portfolio is updated every day.

The investors share in the fund is denominated by units. The value

of the units changes with change in the portfolio value, every day.

The value of one unit of investment is called net asset value (NAV).

The investment portfolio of the mutual fund is created according to

the stated investment objectives of the Fund.

11

OBJECTIVES OF A MUTUAL
FUND

To provide an opportunity for lower income groups to

acquire without much difficulty, property in the form of
shares.

To cater mainly of the need of individual investors who

have limited means.

To manage investors portfolio that provides regular income,

growth, safety, liquidity, tax advantage, professional
management and diversification.

12

MUTUAL FUNDS
ADVANTAGES

Professional Management

Diversification of portfolio

Convenient Administration

Return Potential

Low Costs

Liquidity for some schemes

Transparency

Flexibility

Choice of schemes

Tax benefits

Well regulated
13

MUTUAL FUNDS
DISADVANTAGES

MFs are subject to market fluctuation

No fixed return

Entry and exit load (abolish right now)

No Guarantees

Management Risk

14

ORGANISATION OF MUTUAL
FUND

15

Fund Sponsor

The Fund Sponsor

Any person or corporate body that establishes the Fund and

registers it with SEBI.

Forms a Trust and appoints a Board of Trustees.

Appoints a Custodian and Asset Management Company

either directly or through Trust, in accordance with SEBI
regulations.

SEBI regulations also define that a sponsor must contribute

at least 40% to the net worth of the asset management
company.
16

Trustees
Trustees:

Created through a document called the Trust Deed that is executed by the
Fund Sponsor and registered with SEBI.

The Trust i.e. the mutual fund may be managed by a Board of Trustees i.e.
a body of individuals or a Trust Company i.e. a corporate body.

Protector of unit holders interests.

2/3 of the trustees shall be independent persons and shall not be
associated with the sponsors.

Rights and Roles of Trustees:

Approve each of the schemes floated by the AMC.

The right to request any necessary information from the AMC.

May take corrective action if they believe that the conduct of the fund's

17

AMC- Asset management Company

FUND MANAGERS (OR) THE ASSET MANAGEMENT
COMPANY (AMC)
AMC has to discharge mainly three functions as under:
1)

Taking investment decisions and making investments of the

funds through market dealer/brokers in the secondary market
securities or directly in the primary capital market or money
market instruments.

2) Realize fund position by taking account of all receivables and

realizations, moving corporate actions involving declaration of
dividends, etc to compensate investors for their investments in
units.
3)

Maintaining proper accounting and information for pricing the

units and arriving at net asset value (NAV), the information about
the listed schemes and the transactions of units in the secondary

18

Custodian

CUSTODIANS OF MUTUAL FUNDS:-

A custodians role is safe keeping of physical securities and also keeping a

tab on the corporate actions like rights, bonus and dividends declared by
the companies in which the fund has invested.

The Custodian is appointed by the Board of Trustees.

Mutual funds run by the subsidiaries of the nationalized banks have their
respective sponsor banks as custodians like Canara bank, SBI, PNB, etc.

Foreign banks with higher degree of automation in handling the securities

have assumed the role of custodians for mutual funds.

RESPONSIBILITY OF CUSTODIANS:-

Receipt and delivery of securities

Holding of securities.

Collecting income

19

AMFI

Association of Mutual Funds in India (AMFI) was

incorporated on 22nd August 1995.

AMFI is an apex body of all Asset Management Companies

(AMC) which has been registered with SEBI.

AMFI has brought down the Indian

Mutual Fund Industry to a professional
and healthy market
with ethical lines enhancing and
maintaining standards.

It follows the principle of both protecting and promoting the

interests of mutual funds as well as their unit holders.

20

The Principal objectives of

AMFI Promote

the interests of the mutual funds and unit holders and interact
with regulators- SEBI/RBI/Govt./Regulators.

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

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.

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.

21

SEBI Regulations
All mutual funds are regulated by the Securities
and Exchanges Board of India (SEBI).
It issued detailed guidelines for their setting up
and operation on 20th January, 1993.
The following are the highlights of SEBI regulations:

Mutual funds are to be established in the form of a trust under the

Indian Trusts Act, 1882 and operated by separate asset management
companies (AMC)

They have to set up a Board of Trustees and Trustee Companies and

constitute their Board of Directors.

The minimum net worth of AMCs is stipulated at Rs. 5 crore(later

increased to Rs. 10 crore).

The AMCs and trustees are to be two separate legal entities and an
arms length relationship must be maintained between the two.

22

SEBI Regulations

An AMC or its affiliate cannot act as a manager in any other

fund.

The AMCs are required to furnish SEBI their respective

Memorandum and Articles of Association for approval.

Mutual funds dealing exclusively with money market

instruments (Such as CDs, CPs and bill discounting) are to be
regulated by the Reserve Bank of India.

All schemes floated by mutual funds are to be registered with

SEBI.

There are some very detailed guidelines for disclosures in

offer document, offer period, investment guidelines etc.
NAV to be declared everyday
Disclose on website, AMFI, newspapers
Quarterly, Half-yearly results, annual reports
23

TYPES OF MUTUAL
FUNDS

By Structure
Open-Ended anytime enter/exit
Close-Ended Schemes redemption after period

of scheme is over, listed.

24

Mutual funds scheme

types

Equity Diversified Schemes- Invest in equity

Sectors Schemes Focus on particular sectors

Index Schemes Invest in all Stocks comprising the index

Equity Tax saving Scheme Demand a lock in period of

3 years

Dynamic Funds Alter the exposure to different assets

classes based on market scenario

Debt Schemes Invest in medium and short term debts

Floating Rate Funds Invest in debt securities with

floating interest rates
25

Modes of receiving income on mutual investment

Growth Plan Dividend is neither

declared nor paid out

Income Plan Dividend are paid out

Dividend Re-Investment plan

Dividend is declared but not paid out

26

Mutual fund investing

Strategies

Systematic Investment Plans. Entails

an investor to invest fixed sum of money at
regular intervals

Systematic withdrawals plans. Allowed

to withdraw a fix sum of money at regular
intervals

Systematic transfers plans. Allowed to

transfer a specified amount from one
scheme to another on periodic basis
27

Important Points Related to a

Mutual Fund
Entry

Load

Investors have to bear expenses for availing of the

services of the mutual fund.

The first expense that an investor has to incur is by

way of Entry Load.

This is charged to meet the selling and distribution

expenses of the scheme.

A major portion of the Entry Load is used for paying

commissions to the distributor
28

Offer Document:- It contains all details of the

scheme

Key Information Memorandum:- The

important information the investor must know
in case he does not want to read the entire
offer document

Fund Fact Sheet:- This gives the yearly

details of the performance of the mutual fund
29

Expense Ratio:- is defined as the ratio of expenses

incurred by a scheme to its Average Weekly Net
Assets. It means how much of investors money is
going for expenses and how much is getting invested.
This ratio should be as low as possible.
Portfolio Turnover:Fund managers keep churning their portfolio
depending upon their outlook for the market, sector
or company.

Exit Loads:As there are Entry Loads, there exist Exit Loads as
well.

30

Mutual Funds- Taxation

In India all MFs registered with SEBI are eligible for

benefits under section 10 (23D) of the Income ax Act, 1961.
They get their entire income exempt from income-tax

MFs have to pay an income distribution tax of 12.8125 %

except for open ended equity schemes.

As per Finance Act , 2005 income received by investors

under the schemes of mutual funds is totally free from tax
under section 10 (35) of the act.

There is no wealth tax applicable on any mutual fund

schemes

Gift Tax as applicable to any other asset will be applicable

to units.
31

Mutual Funds- Taxation

(Contd.)

Under section 2 ( 29A) any unit of the scheme is treated as

long term capital assets if it is held for a period of more than 12
months preceding the date of transfer. The capital gains arising
from the transfer of long term capital asset will be taxable at
the rate of 10 percent without indexation or 20 percent with
indexation, whichever is lower. However there is no long term
capital gain tax on equity oriented mutual fund schemes

Any unit of the scheme is treated as short term capital assets

if it is held for a period of not more than 12 months preceding
the date of transfer. The capital gains arising from the transfer
of short term capital asset will be taxable at normal rates to the
assessee in case of non-equity oriented schemes. In case of
equity oriented schemes it is 10 percent where securities
transaction tax has been paid.
32

NAV Calculation

NAV is the current market value of all the schemes assets minus
liabilities divided by the total number of units outstanding.

Calculation of NAV is an intensive process that takes place in a

short time frame at the end of each business day.

The funds pricing process begins at the close of the stock

exchange
NAV of a mutual fund is expressed as:Market value of investments + Receivables + Other
accrued income + Other assets -Accrued expenses - Other
payables- Other liabilities
No. of units outstanding as on NAV date
33

Example of NAV
calculation
Computation of NAV of a Mutual fund
scheme
Cash and equivalent holding stocks held and
market price:
10,000 shares of A co. @ Rs 50 = 500,000
20,000 shares of B co. @ Rs. 30 = 600,000
50,000 shares of C co. @ Rs. 8 = 400,000

Rs.
200,000
Rs.
1500,000

Total Assets
Less: Liabilities
Total Net Assets
Scheme units outstanding
NAV per unit

Rs.
1700,000
Rs.
100,000
Rs.
1600,000
100,000
Rs.

34

Measurement of fund
performance- Sharpe Ratio

The Sharpe ratio is one of the most useful tools for determining a
fund's performance. This measure is used the world over and there
is no reason why you as an in investor should not use it.

The Sharpe ratio represents this trade off between risk and returns.
At the same time it also factors in the desire to generate returns,
which are higher than those from risk free returns.
S= (Rp - Rf )

p
p = annualized standard deviation
Rp= annualized return
Rf= average yield on say treasury paper (taken as risk free)
35

Measurement of fund performanceSharpe Ratio (Contd.)

The Sharpe ratio is a measure of relative performance, in a

sense that it enables an investor to invest in two or more
opportunities.

If S = 0.8604 it means that the fund has generated 0.86

percentage point of return above risk free return for each
percentage point of standard deviation.

A fund with higher sharp ratio is preferable as it indicates

that the fund has higher risk premium for every unit of
standard deviation risk.

36

Arbitrage Funds

Arbitrage is a strategy, which involves simultaneous purchase and sale of

identical or equivalent instruments in two or more markets in order to benefit
from a discrepancy in pricing.

This strategy normally acts as a shield against market volatility as the buying
and selling transactions offset each other.

In an arbitrage transaction, returns are calculated as the difference between the

futures price and cash price at the time of the transaction.

Ideally the positions are held till the expiry of the futures contract when the
offsetting positions cancel each other and initial price difference is realized.

This arbitrage strategy makes the fund immune to market volatility i.e. the fund
will not be affected by market fluctuations.

Despite the fact that arbitrage funds offer investors the opportunity to benefit
from investments in equities by making use of derivatives, the fund cannot be
compared to conventional diversified equity funds, especially on the returns
parameter.

The returns from arbitrage funds would typically be much lower than those of
equity funds.

37

EXCHANGE TRADED
FUNDS

What is an ETF?
Open-End Mutual Fund.
Exchange traded fund tracking an index,

commodity, or set of bonds virtually every

asset class now.

Not actively managed.

38

ORIGIN
The

first ETF created was by Standard and Poor's

Deposit Receipt(SPDR), pronounced "Spider") in 1993.

SPDRs

gave investors an easy way to track the S&P

500 without buying an index fund, and they soon
become quite popular.

Designed
Listed

to compete with futures

on American Stock exchange

Benefits

Behave in the market just like a stock

Can be shorted, bought on margin, have

options traded on, and you can buy just a

single share.
Low cost, diversification, tax efficiency.
(Low turnover doesn't typically lead to big
capital-gains hits.)
Capital Gains generated from fund transactions
generally not taxable to the ETF investor.

Instant exposure, as opposed to mutual fund

delay

Familiar Ground ..Best of

both worlds
Like

an index fund..
Constructed to track index
Open ended mutual fund
Low expense ratio
Low turn over
Like a stock..
Trading flexibility intraday on
exchange
Real time price

What Are ETFs?: Creation Process

Cash
Brokerage
account

Investor

Cash
ETF
Authorized
Participants

Capital
Markets

ETF
Shares

Securities

Creation Units

Basket of Securities

ETF Fund Advisor

42

ETFs in INDIA
Nifty

BeES : the first ETF in India, is being

introduced by BENCHMARK, an Asset
Management Company on January 8, 2002.
Liquid BeEs: Invests in calls, Treasury Bills
and other short-term fixed-income securities.
The units can be bought from the NSE. The
minimum lot is one with a face value of Rs
1,000.
Bank BeES : is designed to provide returns
that closely correspond to the total returns of
stocks as represented by the CNX Bank Index.

GLOBAL ETFs
Types

of ETF available :
Commodities
Gold
Oil
Commodity indices
Fixed income
Govt.
Corporate
Currency

Why invest in GOLD??

Alternative Assets
Classification

Improving stability of
returns
Gold

improves stability and predictability

of portfolio returns.
It is not correlated with other assets
because the gold price is not necessarily
driven by the same factors that drive the
performance of other assets.
Adding gold to a portfolio adds an entirely
different class of asset because it is both
a monetary and a commodity asset.
Safe haven that attracts investors

Indian Scenario
India

is the worlds largest gold

consumer , approx 20-25% (800
tonnes+) of world production is
consumed in India.
Social consumption of Gold for many
Indians.
Gold is acquired and stored in form
of
jewellery, coins,
gold deposits,etc.

Indian Scenario
There is a need for an instrument
which is :
Small denomination
Cost efficiency
Convenience for long term holding
Transparency
Liquidity
Tax efficiency
GOLD beES can fulfill all this needs

GOLD beES
Are intended to offer investors a
means of participating in gold bullion
market without the necessity of
taking the actual delivery of Gold.

What is FMP?
A

close ended debt fund having fixed

maturity period.
Invests only in debt and money
market securities normally maturing
in line with the time profile of each
plan.
Thus each plan will have
- A separate portfolio
- A different maturity date.

Positioning
A product offering better tax efficient
returns than Bank/ Postal Fixed.
Deposits and other contemporary
products.
The one indicating predictable returns
with its distinctive portfolio maturity
profile.
A tool to hedge against the interest rate
movements.

How it is considered to be
insulated from Interest Rate Risk?

Investment in the plan are aligned with the

duration of the FMP.
For example:
- most of the investments in a 90 days FMP would
be in 90 days debt/money market instruments.
- most of the investments in a 180 days FMP would
be in 180 days debt/money market instruments.
Therefore, it would be almost insulated from
Interest Rate Risk.

Beneficial for
Risk

averse investors seeking a

higher return compared to
bank/postal deposits without
compromising on safety of capital.
To achieve asset allocation
objectives and portfolio
diversification.
Conservative Investors/ First time
investors

Mutual Fund Risk

Associated

Market Risks Market value of security in future

Political Risks Change in tax laws, etc

Inflation Risks Future changes in interest rates

Business Risks Uncertainty concerning future existence

Economic Risks Uncertainty in economy

55

Major players in Indian

mutual fund industry
Birla Mutual Fund

HDFC Mutual Fund

BOB Mutual Fund

HSBC Mutual Fund

Canara Bank Mutual Fund

ING Vysya Mutual Fund

Chola Mutual Fund

Kotak Mahindra Mutual Fund

Deutsche Mutual Fund

Franklin Templeton

DSP Merrill Lynch Mutual Fund

LIC Mutual Fund
Prudential ICICI Mutual Fund

Investments
HDFC Mutual Fund

Reliance Mutual Fund

HSBC Mutual Fund

SBI Mutual Fund

ING Vysya Mutual Fund

Franklin Templeton Investments

Escorts Mutual Fund

56

Some of Indias Best Fund Managers:(Business Today- Aug 2010)

Apoorva Shah- DSP BlackRock Top 100 Equity Fund

Prashant Jain:- HDFC Top 200

Omprakash Kuckian- Reliance Regular savings (Equity)

Anand Shah:- Canara Robeco Infrastructure Fund

Sunanina Da Cunha and Prakash Dhonde- Birla Sun

Life Floating Rate Long Term

Ramanathan K- ING Dividend Yield

57

Latest News On Mutual

Funds

Assets Under Management Of MFs are down by 1.5 percent.

HDFC Asset Management has been barred from trading in the

stock market by Securities and Exchange Board of India (SEBI)
because it found the equities dealer involved by leaking key
information in advance.

There are a lot of complaints from the customers investing

in Mfs these days. Most of the complaints are with respect
to the redemption proceeds and non-receipt of dividends.

IDFC MF declares a dividend of 20%

SBI MF launches funds for PSUs. The name of the fund will is
SBI PSU.
58

Mutual Funds Dos & donts

Assess your self.

Try to understand where money is going.

Dont rush in picking funds

Invest dont speculate.

Dont put all oranges in 1 basket.

Be regular.

Keep track of your investments.

Know when to sell your mutual funds.

59

Mutual Funds Are Subject To

Market Risks , Please Read The
Offer Document Carefully Before
Investing !!!!!

Thank You !!!

60