Mutual Funds

Mutual Fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, shortterm money market instruments, and/or other securities

Mutual Fund flow cycle

Source: AMFI

Mutual Fund Basic Terminology
An Asset Management Company is the fund house or the company that manages the money. The Mutual fund is a trust registered under the Indian Trust Act. It is initiated by a sponsor. A sponsor is a person who acts alone or with a corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund.

Functional Entities in MF Operations
Trust or Trustee Company Asset Management Company (AMC) Custodian Registrars/Transfer Agents Distributors
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

Undertakes the administration & investment activities of the fund

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

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

They are the funds distributors/underwriters to handle the sales of units The underwriters act as an wholesale selling units to the brokers who in turn sell to the retail investors

Mutual Fund Basic Terminology
‡ NAV - The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced Rs 10. Later, depending on the value of the investments, this price could rise or fall

± Mutual funds only calculate their NAVs once per trading day, at the close of the trading session.

‡ Portfolio -This is the term given to all the investments made by the fund as well as the amount held in cash. ‡ Load - This is a fee that is charged when you buy or sell the units of a fund.
± The load is a percentage of the NAV. ± According to the new SEBI regulations, the entry/exit load would be removed.

Mutual Fund Basic Terminology
‡ Corpus - The total amount of money invested in the fund is called the corpus ‡ AUM - Assets Under Management is the total value of all the investments currently being managed by the fund. Let's say the corpus is Rs 12,000 but, due to a rise in the price of the shares it has invested in, the value of the units has increased. So the Rs 12,000 invested is now worth Rs 15,000. This figure is referred to as AUM. ‡ NFO - A New Fund Offering is the term given to a new mutual fund scheme.

Mutual Fund Basic Terminology
‡ Public Offering Price (POP) - The public offering price (POP) is the price at which shares are sold to the public. For funds that don't charge a sales commission (or "load"), the POP is simply equal to the Net Asset Value (NAV). For a load fund, the POP is equal to the NAV plus the sales charge. As with the NAV, the POP will typically change on a day to day basis. Mutual Fund Family - A mutual fund family is a group of mutual funds that is managed by the same company. It is usually easy to switch money between mutual funds that are part of the same family.

How to invest in a mutual fund
A one-time outright payment If you invest directly in the fund, you just hand over the cheque and you get your fund units depending on the value of the units on that particular day. Let's say you want to invest Rs 10,000. All you have to do is approach the fund and buy units worth Rs 10,000. There will be two factors determining how many units you get. The Net Asset Value is the price of a unit of a fund. Let's say that the NAV on the day you invest is Rs 30. So you will get 333.33 units (Rs 10000 / 30). Periodic investments( SIP) Here, every month, you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund. Let's say the NAV on the day you invest in the first month is Rs 20; you will get 50 units. The next month, the NAV is Rs 25. You will get 40 units. The following month, the NAV is Rs 18. You will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

Advantages of Mutual Funds
‡ ‡ ‡ ‡ ‡ ‡ ‡ Professional Management Diversification Convenient Administration Lower Transaction costs Transparency Liquidity Mobilizes savings into the market

Basis for Classification
Sectoral funds are most risky Money market funds are least risky Equity funds require a long investment horizon Liquid funds are for short term liquidity needs Equity funds suit growth objective Debt funds suit income objective



Investment Objective

Different type of Funds
‡ Closed-end funds: A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. ‡ Open-end funds: Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets ‡ Large cap funds: Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies

Different type of Funds
‡ Mid-cap funds: Mid cap funds are those mutual funds, which invest in small / medium sized companies ‡ Equity funds: Equity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Eg- SBI Magnum, Fraklin India Prima ‡ Bond Funds: A mutual fund that invests in several different types of medium and long-term government securities in addition to top quality corporate debt. Eg UTI Liquid Cash Plan, HDFC Cash Managemnt Fund, Birla Cash Plus

Different type of Funds
‡ Growth funds: Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. Eg Reliance Growth Funds ‡ Balanced funds or Hybrid Funds: It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds SBI Magnum balanced Fund, Tata Balanced Fund ‡ Value funds: Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation.

Different type of Funds
‡ Gilt Funds: A mutual fund that invests in several different types of medium and long-term government securities in addition to top quality corporate debt. Gilts originated in Britain. Eg. ICICI Prudential gilt. ‡ Aggressive Growth funds: These funds invest in the securities with high risk and high return. ‡ Enhanced index: This is an index fund which has been modified by either adding value or reducing volatility through selective stock-picking. ‡ Exchange Traded Funds(ETFs): These represent a basket of securities that is traded on an exchange, similar to a stock.

Different type of Funds
‡ Money market funds: A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. ‡ International mutual funds: International mutual funds are those funds that invest in non-domestic securities markets throughout the world. ‡ Regional mutual funds: Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund's local region.

Different type of Funds
‡ Sector funds: Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. ‡ Index funds: An index fund is a mutual fund or exchange-traded fund that aims to replicate the movements of an index of a specific financial market. ‡ Fund of funds: A fund of funds (FoF) is an investment fund that holds a portfolio of other investment funds rather than investing directly in shares, bonds or other securities.

Different type of Funds
‡ Real estate Stocks: These are from firms involved in real estate such as builder, supplier, architects and engineers, financial lenders, etc. ‡ Venture Capital Funds: Venture Capital Mutual Funds invest in the start-up and new companies.

Investment Strategies
Bottomup Investing TopDown Investing
Takes into consideration the fundamental factors involved driving the stock performance before considering the economic prospects which affect the industry and within which the company operates.

This first takes view on the Economy and then looks at the industry scenario to assess the potential performance of the company.

Strength SEBI/AMFI have taken an active role in protecting investors interest through regulations certifications and code of conduct Open product architecture i.e. distributors offer a range of Mutual fund products to choose from

Weakness Limited channels of distribution i.e. banks and agent account for more than 70% of distribution of mutual funds Lack of effort of wealth managers in educating the market about the mutual products has been the cause of low penetration

Opportunities Mutual fund investment as a % of Household savings invested in financial assets is less than 1%

Threats Large number of substitutes available to Indian investor- Deposit, equities and real estate.

Because of the economic growth, investors are actively diversifying their income into various funds. Mutual funds in India permitted to invest up to 10 % of the net assets abroad in foreign securities

In India low risk investment products like PPF offer high returns.

Has often added as Absence of global a counterbalance to policies on global equity market mutual funds volatility and market liquidity

As more foreign players enter India through the JV route, investors in India will need to educate themselves about abroad risks

The effect of slowdown
‡ The Mutual Fund Industry was hardhit by economic slowdown. ‡ Positive impact
± Investors who used to directly invest in the market have started investing through Mutual Funds. ± MF Companies were able to pick some good stocks at a very low price from the market ± The MF s have started looking more into the fundamentals and are now playing safe.

Tax Benefits
‡ Section 10(33) of the Income Tax Act, 1961 : The dividend received by the investors from the scheme will be exempt from income tax for all categories of investors under Section 10(33) of the Income Tax Act, 1961 ‡ Wealth Tax Benefits: Mutual Fund units are exempt from Wealth Tax.

Tax Benefits
‡ Capital Gains benefit under Section 112 of the Income Tax Act, 1961
± Long-term capital gains in respect of Units held for a period of more than 12 months will be chargeable under Section 112 of the Income Tax Act, 1961, at a concessional rate of tax @ 20% (excluding surcharge) ± From the full value of consideration, the following amounts would be deductible to arrive at the amount of capital gains: ‡ Cost of acquisition as adjusted by Cost Inflation Index notified by the Central Government ‡ Expenditure incurred wholly and exclusively in connection with such transfer ± Investors can also opt to pay tax @10% (excluding surcharge) on such Long Term Capital Gains, but without the cost inflation indexation benefit.

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.

Source: AMFI

Ratings of Mutual funds in India

The Road Ahead
‡ The Mutual fund industry is expected to increase its share from present 6.5% of GDP to 21% in next 10 years. The size of the industry is expected to grow to 1,65,000 crore ‡ The Steps taken by the RBI for Financial inclusion and the Financial Literacy of the Rural Sector is likely to mobilize the savings of the Households into the Financial Markets.
± The Mutual Funds is the most likely route provided the risk averse nature of the Indian Investors.

‡ The growing GDP of the country is likely to increase and the key driver to utilize this growth would be the product innovation to cater to the needs of investors with different risk appetite.

The Road Ahead
‡ Service Innovations would play a key role to tap the potential. ‡ Distribution Front The distribution has to be improved in order to serve the rural market and tier 2 and tier 3 cities. ‡ Technology Innovations like call-centres to handle investor queries, transaction facility through phones and providing information through the use of SMS s.

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