B.E.T.

Sadathunnisa College
Bismillahnagar, Bengaluru - 560029
Affiliated to Bengaluru City University
NAAC Accredited B++, ISO Certified 9001:2015

Mutual Funds

Mutual Funds:
 A Mutual Fund is a company that pools money from many investors and
invests the money in securities such as stocks, bonds, and short-term debt.
 The combined holdings of the mutual fund are known as its portfolio.
 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.
 Mutual fund issues units to the Investors in with quantum of money invested
by them.
 Investors of mutual funds are known as unit holders.
 The profits or losses are shared by the investors in proportion to their
investments.
Features of Mutual Funds:
 Liquidity:
Investor can easily redeem the units of your mutual funds to meet any kind
of financial emergency. Based on the type of scheme, the redemption
amount is usually credited to your bank account within 3-4 business days
from the date of redemption. In the case of liquid funds, the amount is
credited on the next business day.
 Professional management:
Mutual funds are managed by professional fund managers who closely
watch the markets and make constant investment decisions based on the
fund's stated objective.
 Portfolio diversification:
Mutual funds are managed by professional fund managers who closely
watch the markets and make constant investment decisions based on the
fund's stated objective.
  Income tax benefits:
Both equity and debt funds carry their own unique tax benefits. For instance,
while debt fund investors benefit from indexation on long-term capital gains,
equity funds allow you earn exempted returns up to Rs 100,000 in a
financial year as long as you stay invested for 12 months or more.
 Investment flexibility:
One of the key features of mutual funds is the flexibility they offer. You can
either invest a large lump sum amount in the beginning or regularly invest
small amounts (as low as Rs 500 per month) in the form of a SIP
(Systematic Investment Plan).
 Low cost:
Mutual funds charge a small amount known as the expense ratio from
investors. The expense ratio is charged to cover operating expenses such as
management, administration, etc., and other charges.
 Properly regulated:
The Securities and Exchange Board of India (SEBI) regulates the mutual
fund market. Mutual funds have to strictly comply with SEBI (Mutual
Funds) Regulations, 1996, to ensure transparency and protection of investors
wealth.
 Ease of purchasing:
While you can invest easily through offline modes, online buying and selling
of mutual funds has made the lives of investors much easier.
Objectives of Mutual Funds:
 Growth funds:
Growth funds aim to achieve growth. All growth funds have the same
primary objective, which is to achieve capital appreciation between the
medium and long term. The corpus of these funds is usually invested in
small to large-cap stocks.
 Income funds:
Income funds aim at generating income at regular intervals of time. They do
not seek capital appreciation in the long run, and are ideal for those who
seek regular cash flow to meet their financial requirements. The corpus of
these funds is invested mainly in Income Instruments such as bonds, fixed
interest debentures, dividend paying stocks, preference stocks, etc.
  Value funds:
The main objective of value funds is to make investments in undervalued
stocks and achieve profits when the inefficiencies are corrected.
Benefits of Mutual Funds:
 Liquidity:
Open-ended mutual funds are highly liquid. Units in these funds are easy to
purchase and it is equally easy to exit from the scheme. However, most
funds charge an exit load at the time you sell the units of your scheme.
 Managed by experts:
Mutual funds are managed by experts. Investors require minimal knowledge
about mutual funds to invest in them. Professional fund managers do all the
work on behalf of investors, and make decisions regarding the kind of funds
to invest in, how long to hold them, etc.
 Diversification:
Investments are almost usually made in multiple asset classes such as
equities, money market securities, debt instruments, etc. so that the risk is
spread out. Doing this ensures that when one of the asset classes performs
poorly, returns can be generated from the other classes and compensate for
the losses.
 Meeting financial targets:
Investors access to a wide variety of mutual funds and can therefore, find
schemes that are ideal to meet their financial targets, be it in the long run or
in the short term.
 Low cost for bulk purchases:
The higher the number of mutual fund units purchased, the lower the cost as
there will be lower commission charges and processing fees.
 Systematic Investment Plans:
If you earn a monthly salary, you can set aside a certain amount each month
and the same will be invested in mutual funds, thereby giving you exposure
to the whole stock. SIPs can also help you benefit from market highs and
lows.
 Easy investment process:
Investment in mutual funds is a very easy process. All you have to do is
identify your financial goals and decide how much money you want to
 invest in order to achieve them and the fund manager will take care of the
rest.
 Tax efficiency:
Investment in tax-saving mutual funds such as Equity- Linked Savings
Scheme can help you avail tax benefits to the extent of 1.5 lakh. Although
you will have to pay tax on Long Term Capital Gains if the investment is
held for more than a year, you can still save a lot of money on tax under
Section 80C of the Income Tax Act.
 Safety:
If the investor assesses the fund house from which he purchases units of
mutual funds in addition to an assessment of the fund manager, his capital
will be safe.
 Automated payments:
Mutual fund houses encourage automated payments and you can have the
SIP amount paid directly on a certain date each month, thereby avoiding the
failure to make timely payments.
Drawbacks of Mutual Funds:
 High expense ratios and sales charges:
If you're not paying attention to mutual fund expense ratios and sales
charges, they can get out of hand. They have high costs associated with
them. If you exit before the stipulated time, you will have to incur exit
charges. You cannot withdraw the amount before the given time frame.
 Fluctuating returns:
Mutual fund returns are not guaranteed as they keep fluctuating according to
the market conditions. Hence, investors must be aware of the risk profile of
the fund before investing.
 Fund evaluation:
Many investors may find it difficult to extensively research and evaluate the
value of different funds. A mutual fund's net asset value (NAV) provides
investors the value of a fund's portfolio. However, investors have to study
various parameters such as sharpe ratio and standard deviation among others
to ascertain how one fund has fared compared to another which can be
complicated to some extent.
 Poor management:
Churning, turnover, and window dressing may happen if your manager is
abusing their authority. This includes unnecessary trading, excessive
replacement, and selling the losers prior to quarter-end to fix the books.
 Capital gains tax:
Both short-term and long-term capital gains from mutual funds are taxable.
 Poor trade execution:
If you place your mutual fund trade anytime before the cut-off time for
same-day NAV, you'll receive the same closing price NAV for your buy or
sell on the mutual fund. For investors looking for faster execution times,
maybe because of short investment horizons, day trading, or timing the
market, mutual funds provide a weak execution strategy.
 Entry or exit load:
Some mutual funds may charge either entry or exit load or both. They levy
this charge primarily to maintain their operations and pay staff salaries.
 Over diversification might cause lower profits:
While diversification might significantly reduce your risks, it may also
reduce your profit margin. This may become more prominent if you invest in
balanced or hybrid mutual funds.
 Difficult phases:
Although long-term investors seldom endure losses, you may have to suffer
a capital loss if you accidentally invest before a bad phase. Mutual fund
returns are never guaranteed. Hence, it is wise to know a little about the
economy and the fund performance before investing.
 Liquidity:
Fixed maturity and ELSS schemes come with a lock-in period. ELSS usually
has a lock-in period of three (3) years. And a fixed maturity plan’s lock-in
period depends on the instrument it invests in. For example, if it invests in a
bond with a 5-year maturity, you cannot withdraw the units before five
years.
 No control:
All types of mutual funds are managed by fund managers. In many cases, the
fund manager may be supported by a team of analysts. Consequently, as an
 investor, you do not have any control over your investment. All major
decisions concerning your fund are taken by your fund manager.
History of Mutual Funds in India:
First phase (1964-1987):
 The Mutual Fund industry in India started in 1963 with formation of UTI in
1963 by an Act of Parliament and functioned under the Regulatory and
administrative control of the Reserve Bank of India (RBI).
 In 1978, UTI was de-linked from the RBI and Industrial Development Bank
of India (IDBI) took over the regulatory and administrative control in place
of RBI.
 Unit Scheme (US '64) was the first scheme. launched by UTI.
 At the end of 1988, UTI had 6,700 crores of Assets Under Management
(AUM).
Second Phase - 1987-1993 - Entry of Public Sector Mutual Funds:
 The year 1987 marked the entry of 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.
 At the end of 1993, the MF industry had assets under management of 47,004
crores.
Third Phase 1993-2003- Entry of Private Sector Mutual Funds:
 In the year 1993, the first set of SEBI Mutual Fund Regulations came into
being for all mutual funds, except UTI.
 The erstwhile Kothari Pioneer (now merged with Franklin Templeton MF)
was the first private sector MF registered in July 1993.
 With the entry of private sector funds in 1993, a new era began in the Indian
MF industry, giving the Indian investors a wider choice of MF products.
 The initial SEBI MF Regulations were revised and replaced in 1996 with a
comprehensive set of regulations, viz., SEBI (Mutual Fund) Regulations,
1996 which is currently applicable.
 As at the end of January 2003, there were 33 MFS with total AUM of
1,21,805 crores, out of which UTI alone had AUM of 44,541 crores.
Fourth Phase - since February 2003 April 2014:
 In February 2003, following the repeal of the Unit Trust of India Act 1963,
UTI was bifurcated into two separate entities, viz., the Specified
Undertaking of the Unit Trust of India (SUUTI) and UTI Mutual Fund
which functions under the SEBI MP Regulations.
 With the bifurcation of the erstwhile UTI and several mergers taking place
among different private sector funds, the MF industry entered its fourth
phase of consolidation.
 Following the global melt-down in the year 2009, securities markets all over
the world had tanked and so was the case in India.
 Most investors who had entered the capital market during the peak, had lost
money and their faith in MF products was shaken greatly.
 The abolition of Entry Load by SEBI, coupled with the after- effects of the
global financial crisis, deepened the adverse impact on the Indian MF
Industry, which struggled to recover and remodel itself for over two years, in
an attempt to maintain its economic viability which is evident from the
sluggish growth in MF Industry AUM between 2010 to 2013.
Fifth (Current) Phase since May 2014:
 SEBI introduced several progressive measures in September 2012 to re-
energize the Indian Mutual Fund Industry and increase MFs' penetration.
 In due course, the measures did succeed in reversing the negative trend that
had set in after the global melt-down and improved significantly after the
new Government was formed at the Center.
 Since May 2014, the Industry has witnessed steady inflows and increase in
the AUM as well as the number of investor folios (accounts).
Systematic Investment Plan (SIP):
 Systematic Investment Plan (SIP) is an investment route offered by Mutual
Funds wherein one can invest a fixed amount in a Mutual Fund scheme at
regular intervals– say once a month or once a quarter, instead of making a
lump-sum investment.
 The installment amount could be as little as INR 500 a month and is similar
to a recurring deposit.
 It’s convenient as you can give your bank standing instructions to debit the
amount every month.
  SIP has been gaining popularity among Indian MF investors, as it helps in
investing in a disciplined manner without worrying about market volatility
and timing the market.
 Systematic Investment Plans offered by Mutual Funds are easily the best
way to enter the world of investments for the long term.
 It is very important to invest for the long-term, which means that you should
start investing early, in order to maximize the end returns.
Systematic Transfer Plan (STP):
 A systematic transfer plan allows investors to shift their financial resources
from one scheme to the other instantaneously and without any hassles.
 This transfer occurs periodically, enabling investors to gain market
advantage by changing to securities when they offer higher returns.
 It safeguards the interests of an investor during market fluctuations, to
minimize the damages incurred.
 The primary advantage of opting for an STP is the streamlined process of
fund transfer and utilization. As the money is automatically adjusted
between the selected funds, investors can benefit from the seamless and
efficient allocation of the available resources.
 A systematic transfer plan Mutual Funds can only shift the financial
resources of an investor between various funds operated by a single asset
management company; inter shifting between multiple schemes offered by
several companies cannot be done.
Systematic Withdrawal Plan (SWP):
 SWP mutual funds are one of the most popular types of mutual fund
schemes.
 The name stands for Systematic Withdrawal Plan, which means that you can
withdraw money from your account at any time without incurring any
penalty or tax burden.
 This makes them a great choice for investors who want to make regular
investments over time, but need to be able to access their money when they
need it.
 SWP funds are also known as systematic savings plans (SSPs). They are an
excellent way to invest small amounts regularly and let compound interest
do its thing over time.
Net Asset Value:
 NAV represents the price at which a mutual fund may be bought by an
investor or sold back to a fund house.
 A mutual fund's NAV is an indicator of its market value. Therefore, NAV
can be viewed to assess the current performance of a mutual fund.
 By determining the percentage increase or decrease in the NAV of a mutual
fund, an investor can calculate the increase or decrease in its value over
time.
 A mutual fund's NAV is usually calculated by a fund accounting firm hired
by the mutual fund or the mutual fund house itself.
 It is mandatory, as per SEBI guidelines, that all mutual funds publicly
display their NAV by updating it on the AMC & AMFI ( Association of
Mutual Funds in India) website on every business day.
Calculation of NAV:
 Net Asset Value = (Total Asset Value - Expense Ratio) / No. of outstanding
units
 Where "Total Asset Value' is the market value of the investments of the
mutual fund (latest closing price on the relevant stock exchange) in addition
to any accrued income and receivables less accrued expenses, outstanding
debt to creditors and other liabilities.
 Expense ratio includes it's management charges, operating costs, transfer
agent costs, custodian and audit charges, and distribution and marketing
expenses.
Problem:
Let's assume an investor chooses to invest 1,00,000 in two separate schemes A and
B. Scheme A has a net asset value of 10, while scheme B has a NAV of 50, and
both schemes return 10% per month.Though Scheme A appears cheaper as 10,000
units can be acquired while only 2000 of scheme B's units can be acquired for the
same price, but it's not the case. Let's see how.
 Every month, due to the 10% return, the NAV increases.
 Next month, A's NAV is 11 and B's is 55.
 In both cases, the value of your 1,00,000 investment has grown 1,10,000 in
one month.
 Hence, high or low NAV is not related to the returns you an generate from a
mutual fund scheme.
 As long as the schemes deliver the same turns the difference in their NAV is
not significant.
 The difference between schemes A and B is that the investor gets more units
in the first case than in the latter case.