CA – INTER

13 MUTUAL
FUNDS

[Concept Explanation] Introduction

(1) What is a Mutual Fund? It is an intermediary between the investors and their investments.
They pool money from investors and invest on their behalf with professional management.

(2) Investors receive units (like how we receive shares in the equity market) in return of their
investment in any mutual fund.

(3) Based on exit conditions, there are 2 types of Mutual Funds – Open Ended and Close Ended.
Open ended funds mean that the investor can take entry or exit anytime (by selling the units
back to the fund) during the existence of the fund. Close ended funds refer to those where the
investors who subscribe to the units at the time of the launch cannot exit by selling units back
to the fund till the end date of the fund which is communicated to them at the start of the
issue. All close ended funds are compulsorily listed on the stock exchanges.

(4) Entry and Exit Load – Entry Load is the fee charged from the investor at the time of entry in
the fund. Exit Load is the fee charged from the investor at the time of exit from the fund.
Entry Load is now scrapped in India.

(5) Based on Investment Avenues, Mutual Funds can be classified as Equity Funds, Debt Funds,
Real Estate Funds or Commodity Funds.

(6) Benefits of Mutual Funds to investors:

(a) Professional Management
(b) Affordable Portfolio Diversification
(c) Economies of Scale
(d) Transparency
(e) Liquidity
(f) Tax Benefits
(g) Convenience/ Comfort of Investment
(h) Regulatory Comfort
(i) Systematic Options

Financial Management 1 Mutual Funds

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(7) Limitations of Mutual Funds to investors:

(a) Lack of Customization of Portfolio
(b) Choice Overload
(c) Not Control over Costs
(d) No Guaranteed Returns

(8) The most important term we need to understand in Mutual Funds is the NAV. NAV is the
Market Price per unit (just like equity shares have MPS, Mutual fund units have NAV)
Generally, the Face Value is ` 10 per unit. But as the Market Value of the Investment held
by the fund grows, the market price of the units i.e. NAV grows.
Market Value of Assets - Liabilities
NAV =
No. of units

(9) There are various options available for an investor like:

(a) Dividend Option
(b) Dividend Reinvestment Option
(c) Growth Option

(10) For any investor, Return from a Fund for a given period is calculated as follows:
NAV1 - NAV0 + D1
× 100
NAV0

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Financial Management 2 Mutual Funds