MUTUAL FUNDS

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

What is Mutual Fund:

A Mutual Fund is a trust pools the savings from number of investors share a common financial goal a diversified portfolio of financial instruments equities, debentures / bonds or other instruments the fund is then deployed in: investment alternatives Income is shared by unit holders In proportion to their investment

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

Emergence of Mutual Fund in India

Mutual funds in India began in 1964 Unit Trust of India (UTI) was the first Remains the market leader even today Having about 68% of the market share Lost monopoly in 1987 With entry of public sector mutual funds Promoted by public sector banks and insurance companies Industry was open to foreign institutions in 1993 Real competitive structure began only then
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT
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FEATURES / ADVANTAGES OF MUTUAL FUND

Professional management

Diversification
Convenient administration Return potential Low Costs Liquidity Transparency
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT
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MUTUAL FUND OPERATION FLOW CHART

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

PARTIES INVOLVED

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

Constitution and management of Mutual Funds Mutual fund shall be in the form of a trust Trust deed shall be registered under Indian Registration Act, 1908 Sponsor and Trustees shall be the parties to the Trust Deed Who can be a trustee Person of ability, integrity and standing Shall be independent (not associate with sponsor) Cannot be a trustee of more than one fund unless he is an independent trusree
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT
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Incorporation of an Asset Management Company: Every mutual fund shall have an AMC Incorporated under Companies Act, 1956 AMC should be approved by SEBI Enter into an agreement with Trustees Shall formulate schemes Raise money against units Invest the funds in approved securities Distribute income to the shareholder of the funds
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT
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Registration of a mutual Fund: Sponsor with a sound track record Appoint Eligible trustees Execution and Registration of trust deed Incorporation of AMC Agreement of AMC with the Trustees Sponsor to contribute 40% of Net worth of AMC Appointment of a Custodian

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

ADVANTAGES OF MUTUAL FUNDS

Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Well Regulated
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT 10

TYPES OF MUTUAL FUNDS

Mutual Funds can be classified into four categories

Operational Classification Portfolio Classification

Geographical Classification
Structural Classification

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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Operational Classification
A).Open Ended Mutual Funds: A scheme of a mutual funds, which offers units for sale or has any outstanding redeemable units and one that does not specify any duration for redemption or repurchase of units

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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Operational Classification
B.) Close Ended Mutual Funds: Close Ended mutual funds have a definite period after which their shares units are redeemed. Close ended mutual fund schemes are generally traded among the investors in the secondary market since they are to be quoted on stock exchanges.

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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Operational Classification

C).Interval Funds:
Interval funds combine the features of open ended and close ended schemes. They are open for sale or redemption during predetermined intervals at NAV related prices.

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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Portfolio Classifications
Mutual funds differ with respect to their instruments. Therefore, different mutual funds are designed to meet the needs of the investors. Growth Oriented Funds:

The objective of such funds is to provide capital appreciation to their investors and accordingly a substantial portion of the quantity is invested in high growth equity shares and other equity related instruments. The scheme may or may not declare dividends.
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT
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Portfolio Classifications
Income Oriented Funds:

The main objective of this fund is to provide regular income to the investors in the form of dividends. The dividends may be cumulative or non cumulative on a quarterly, half yearly or yearly basis. Balanced Funds or Income and Growth Oriented Funds: These funds aim at distributing both income and capital appreciation to their investors. Technically, the corpus of this scheme is invested equally in high growth equity shares and in fixed income earning debentures. 16

Portfolio Classifications
Bond Funds: Bond funds are more liquid,

diversified and conservative investments with modest capital gains. These funds are expected to be very fixed requirement for those who desire safety. Stock Funds: Such funds are established for those who are willing to accept significant risks in the hope of a very high return. These are called common stock funds. The assets held in the fund are entirely the common stocks of diversified list of industrial corporations.
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT
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Portfolio Classifications
Index Funds: These funds invest only in those shares which are included in the market indices and in exactly the same proportion. Whenever the market index goes up, the value of such index funds also goes up. Industry Funds: The fund invests its resources particularly in industries with growth potential like cement, steel, jute, power, real estate etc. These funds carry high risks and gains as the

performance of these funds is directly exposed to a specific sector. (Infrastructure funds) Glit Funds
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT
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Portfolio Classifications
Tax Relief Fund: These are essentially close ended schemes. The investment would be high in equity

shares. The investor can claim deduction or rebate in the income tax to the extend of his investment in the fund, subject to the provisions of the Income Tax Act, 1961. Real Estate Funds: Real Estate funds are of the close end type. The fund is named so because of primary investment in real estate ventures. Such funds are of various types depending upon real estate transactions.
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT 19

Geographical Classification
Domestic Mutual Funds: Domestic mutual fund

schemes mobilize the savings of the countrys citizens. Off-Shore Mutual Funds: These funds enable NRIs and international investors to participate in the Indian capital market. Further, these funds are governed by the rules and procedures laid down for the purpose of approving and monitoring their performance by the Department of Economic Affairs, Ministry of Finance and the directions of RBI.
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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Structural Classification of Mutual Funds

From the point of view of financial market structure, mutual funds can be divided into two categories (a) Capital Market Mutual Funds and (b) Money Market Mutual Funds.
Investment in: short term debt securities, Such as deposits and bonds Focus on high yielding short term investments, Tax saving and appreciation

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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RISKS INVOLVED IN THE MUTUAL FUNDS Market risk:

Market influenced by outside factors
Affecting particular or all industries Prices of the scripts fall and rise without connection with the

performance of the Company

Inflation risk

Fall in rupee value Reduced purchase power Resulting in in-sufficient earnings

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RISKS INVOLVED IN THE MUTUAL FUNDS

Credit risk

Weak financial position of the borrowing company Affecting the payment of interest Affecting the repayment of principal amount

Investment risk

Investment may not be in proper sectors

Growth sectors might be ignored Resulting in lesser returns than anticipated

Liquidity risk

Affecting the sale value Hence returns not as anticipated

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT
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RISKS INVOLVED IN THE MUTUAL FUNDS

Other risks: Excessive diversification of the portfolio Focus only on blue chip securities Frequent buying and selling resulting in brokerage and commission Poor planning Negligence of the fund managers

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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Major Mutual Funds Companies in India

Public Sector Mutual Funds
Unit Trust of India (UTI) LIC Mutal Funds GIC Mutual Funds SBI Mutual Funds Canbank Mutual Funds BOI Mutual Funds Ind Bank Mutual Funds PNB Mutual Funds BOB Mutual Funds IDBI Mutual Funds IL & FS Mutual Funds
G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

Asset Manager
UTI AMC Ltd JBS AMC Ltd GIC AMC Ltd SBI Fund Management Canbank Investment BOI Asset Management Ltd Ind Fund Management PNB AMC Ltd BOB AMC Ltd IDBI Principal AMC IL & FS AMC Ltd
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Major Mutual Funds Companies in India

Private Sectors Mutual Funds Asset Manager ANZ Grindlays MFs ANZ Grindlays AMC Ltd Birla Mutual Fund Birla Sunlife AMC Ltd Cholamandalam MFs Cholamandalam Cazenov AMC Credit Capital Credit Capital AMC

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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COMPUTATION OF NET ASSET VALUE: It is a parameter used to measure the operational

efficiency of mutual funds. The intrinsic value of a unit

under a particular scheme is referred to as the NAV of the scheme. The value gives an idea of the amount that may

be obtained by the unit holder on its sale to the mutual

fund company.
Total net assets of the scheme No. of units(or) Net assets /shares(or) outstanding

G.Venkatachalam, M.Com, MBA, M.Phil,(Ph.D)/AP/MBA/JIT

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