MUTUAL FUNDS BASICS

Overview
An introduction to Mutual Funds
Types of Mutual Funds
Features of Mutual Funds
Common Myths
Asset Under Management
 Mutual Fund Basics
A mutual fund is a collective investment scheme in which
the money pooled in by a large number of investors.
 It is managed by a professional Fund Manager, who uses his
knowledge, experience and investment management skills
to invest it in various financial instruments.
 An investor owns units in the fund, which is based on the
amount invested.
 An investor is known as a unit holder.
 The increase in value of the investments along with other
incomes earned from it is then passed on to the investors /
unit holders in proportion with the number of units owned
after deducting applicable expenses, load and taxes.
 Mutual Fund Basics
 MFs in India follow a three-tier structure.
a) Sponsor (1st-tier)
b) Trust (2nd-tier)
c) AMC (3rd-tier)
 Mutual Fund Basics
 Trustees appoint the Asset Management Company
(AMC) to manage investor’s money.
 The AMC charges a fee for the services provided.
 The AMC’s Board of Directors must have at least
50% independent directors.
 The AMC has to be approved by SEBI.
 It functions under the board’s supervision and also
under the direction of the Trustees and SEBI.
 Asset Management Company
 AMC manages investor’s money on a day to day basis.
 The AMC cannot deal with a single broker beyond a
certain limit of transactions.
 AMC prepares Offer Documents
 It appoints intermediaries like independent financial
advisors (IFAs), national and regional distributors, banks,
etc.
 AMC is responsible for the acts of its employees and
service providers.
 Custodian
 The Custodian is appointed by the Board of Trustees.
 A custodian’s 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 also participates in a clearing and
settlement system through approved depository
companies on behalf of mutual funds, in case of
dematerialized securities.
 NFO
 The launch of a new scheme is known as a New Fund
Offer (NFO).
 Before investing in the NFO, the investor are expected to
read the Offer Document (OD) carefully to understand
the risks associated with the scheme.
 RTA
 Registrars and Transfer Agents (RTAs) perform the
important role of maintaining investor records.
 All NFO forms, redemption forms etc. go to the
RTA’s office where the information is converted
from physical to electronic form.
 RTA takes care of allotments, redemptions, exit
loads, folio numbers etc.
 NAV
 The NAV stands for Net Asset Value.
 Just like a share has a price, a mutual fund unit
has an NAV.
 The NAV represents the market value of each
unit of a fund or the price at which investors can
buy or sell units.
 The NAV is generally calculated on a daily basis,
reflecting the combined market value of the
shares, bonds and securities (as reduced by
allowable expenses and charges) held by a fund
on any particular day.
 EXPENSE RATIO
 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.
 It is not enough to compare a scheme’s expense
ratio with peers.
 The scheme’s expense ratio must be tracked over
different time periods.
 Ideally as net assets increase, the expense ratio of a
scheme should come down.
 PORTFOLIO TURNOVER
 Portfolio Turnover ratio indicates how
aggressively the portfolio is being churned.
 Fund managers keep churning their portfolio
depending upon their outlook for the market,
sector or company.
 Churning can be done very frequently or after
sufficient time gaps.
 A very high churning frequency will lead to
higher trading and transaction costs, which may
eat into investor returns.
 CASH LEVELS
 Cash level is the amount of money the MF is
holding in Cash, i.e. the amount not invested in
stocks and bonds but lying in cash.
 High cash levels can lead to under performance
in a bullish market.
 However in a falling market, high cash levels can
protect investors wealth from depleting.
 It is important to see why the fund is sitting on
high cash levels.
 Lack of opportunities, bearish view, redemption
pressures can be some of the reason.
 EXIT LOADS
 Exit Loads, are paid by the investors in the
scheme, if they exit before a specified time
period.
 It reduces the amount received by the investor.
 Not all schemes have an Exit Load, and not all
schemes have similar exit loads as well.
 Some schemes have Contingent Deferred Sales
Charge (CDSC).
 It is nothing but a modified form of Exit Load,
wherein the investor has to pay different Exit
Loads depending upon his investment period.
 Investors Rights and Obligations
 Investors are mutual, beneficial and proportional
owners of the scheme’s assets.
 The investments are held by the trust in its
fiduciary capacity.
 Investors have a right to receive dividends within
30 days of declaration.
 AMC must dispatch redemption proceeds within
10 working days of the request failing which it
has to pay an interest @ 15% or as may be
specified from time to time subject to
regulations.
 Investors Rights and Obligations
 Investors can obtain relevant information from the
trustees and inspect documents like trust deed,
investment management agreement, annual reports,
offer documents etc.
 They must receive audited annual reports within 6
months from the financial year end.
 Investors can wind up/terminate a scheme/AMC if unit
holders representing 75% of scheme’s assets pass a
resolution to that respect.
 Investors have a right to be informed about changes in
the fundamental attributes of a scheme.
 Investors Rights and Obligations
 Investors can approach the investor relations officer for
grievance redressal.
 In case the investor does not get appropriate solution,
he can approach the investor grievance cell of SEBI.
 The investors can also sue the trustees.
 The OD is a legal document and the investor is required
to read the OD carefully before investing.
 The OD contains all the material information that the
investor would require to make an informed decision.
 It is not mandatory for the fund house to distribute OD
but an abridged version (KIM) has to be provided.
 Open Ended and Close Ended
 An open ended scheme allows the investor to enter and
exit at his convenience, anytime.
 A close ended scheme restricts the freedom of entry
and exit.
 In case of open ended schemes, investors can buy the
units even after the NFO period is over.
 The buy/sell of units takes place at the NAV.
 In order to provide entry and exit option, close ended
mutual funds list their schemes on stock exchanges.
 Sometimes, close ended funds also offer ‘buy-back of
fund shares/units”, thus offering another avenue for
investors to exit
 Equity Mutual Funds
 Equity Funds are defined as those funds which have at
least 65% of their Average Weekly Net Assets invested
in Indian Equities.
 These are by far the most widely known category of
funds though they account for roughly 30% of the
industry’s assets.
 Equity funds essentially invest the investor’s money in
equity shares of companies.
 Fund managers try and identify companies with good
future prospects and invest in the shares of such
companies.
 They generally are considered as having the highest
levels of risks and hence, they also offer the probability
of maximum returns.
 Equity Mutual Funds
 Equity Funds do not give any assurance of guaranteed
returns.
 Relatively safer types of Equity Funds include Index
Funds and diversified Large Cap Funds, while the riskier
varieties are the Sector Funds.
 Equity Funds carry the potential to deliver high returns
and the profits will be linked with the performance of
the company.
 Equity Funds invest in multiple companies (diversify)
that usually don’t belong to one or correlated sectors.
 In the long run, one needs to be guarded against
inflation and in the short run, market fluctuations.
Equity, though volatile, has proved to be a better bet
against inflation, provided one has a long term
investment.
 Equity Mutual Funds
 Equity Funds can be classified on the basis of market
capitalization of the stocks they invest in – namely
Large Cap Funds, Mid Cap Funds or Small Cap Funds –
or on the basis of investment strategy the scheme
intends to have like Index Funds, Infrastructure Fund,
Power Sector Fund, Quant Fund, Arbitrage Fund,
Natural Resources Fund etc.
 In the long run, one needs to be guarded against
inflation and in the short run, market fluctuations.
 Equity, though volatile, has proved to be a better bet
against inflation, provided one has a long term
investment.
 Equity Mutual Funds
 INDEX FUND
 DIVERSIFIED LARGE CAP FUNDS
 MIDCAP FUNDS
 SECTORAL FUNDS
 ARBITRAGE FUNDS
 MULTI-CAP FUNDS
 QUANT FUNDS
 P/ E RATIO FUND
 INTERNATIONAL EQUITIES FUND
 GROWTH SCHEMES
 ELSS
 FUND OF FUNDS
 Debt Mutual Funds
A Debt Mutual Fund works on borrowing. So
what are the conditions that are usually laid down
when one borrows?
 Reasonable assurance that the principal
investment will be returned.
 The interest that will be generated based on the
rate of interest (also known as the coupon rate).
 Tenure or the time over which the principal will
be returned.
 Debt Mutual Funds
 Debt Funds typically invest in G-secs, T-bills, CPs,
NCDs, CDs, CPs, Bonds and other fixed income
securities as well as lend money to large
organizations or Corporates, in return of a fixed
interest rate.
 Investing in Debt Mutual Funds would be ideal if
one is looking at a potentially higher return than
Liquid Funds over a medium term time horizon,
between 3 to 24 months.
 Liquid Mutual Funds
 Liquidity means the ability to immediately convert
your assets to cash.
 A highly liquid asset is as good as hard cash.
 Liquid Funds have the least risk factor and may give
returns that are slightly higher than a savings account.
 Liquid Funds invest in faster maturing debt securities,
therefore making them less risky.
 The closer the debt instrument is to its maturity, the
higher the chances and surety of you getting the
principal and interest (if any).
 Hybrid Mutual Funds
 As the name suggests, Hybrid Funds are those which
have a combination of asset classes such as debt and
equity in their portfolio.
 They invest in a blend of debt, money market instruments
and equity.
 Breaking it down even further, depending on the mix of
equity and debt, there could be various types of Hybrid
Funds as well.
 Exchange Traded Funds (ETF)
 ETFs are units which investors buy/sell from the
exchange, as against a normal MF unit, where the investor
buys/sells thru a distributor or directly from the AMC.
 ETFs have relatively lesser costs as compared to a mutual
fund scheme.
 ETFs issues units to few designated participants, who are
also called as Authorized Participants (APs), who in turn
act as market makers for the ETFs.
 APs provide two way quotes for the ETFs on the
exchange, which enables investors to buy and sell the
ETFs at any given point of time when the stock markets
are open for trading.
 Exchange Traded Funds (ETF)
 ETFs trade like stocks and Buying/selling ETFs is similar to
buying and selling shares on the stock exchange.
 Prices are available on real time and the ETFs can be
purchased through a CM just like one would buy / sell shares.
 There are huge reductions in marketing expenses and
commissions as the AP’s are not paid by the AMC, but they
get their income by offering two way quotes on the floor of
the exchange.
 Due to these lower expenses, the Tracking Error for an ETF is
usually low.
 Tracking Error is the Standard Deviation of the difference
between daily returns of the index and the NAV of the
scheme.
 Tracking Error is the acid test for an Index funds/ ETFs.
 Flexibility
 Investors have differing patterns of earning and spending,
which is why investments need to be flexible so as to allow
them to invest as per the situation.
 Mutual Funds have invest in various schemes, from money
market instruments to equities, thus catering to people
who’d like to invest for duration ranging from a day to
years.
 Minimum amounts of investment range from as low as Rs.
500, with no upper limit.
 In case of open ended funds, daily investment and
withdrawal is possible. Invested funds can be received
within 1 to 5 working days.
 There is no maintenance charge on the portfolios. One can
invest either directly with the AMC or through a Financial
Intermediary.
 Liquidity
 Liquidity is all about having access to the money
you’ve invested at your convenience.
 What is the point of getting high returns if you can’t use
the funds when you need it?
 In open ended funds, one can buy/sell on any business
day and get the payment within 3 working days.
 There is a 15% penalty imposed on Asset Management
Company if you don’t get your money within 10
working days.
 Transparency
 While investing in Mutual Funds, the money is handed
over to a professional, whose entire job is to keep track
of markets and look out for the best possible
opportunities for the investor.
 Mutual Funds publish monthly fact sheets which basically
lists out all the important facts one needs to know about
the scheme.
 Details of the companies and the amount invested in each
company and the rating of the company’s issuance in case
the instrument is a debt instrument.
 Past returns, dividends and performance ratios.
 In addition, the NAV is published on AMFI and on each of
the fund company websites on a daily basis, ensuring that
you’re always in the loop about your investments.
 Diversification
 “Don’t keep all your eggs in one basket”, diversifying your
investments will help you lower your risk.
 By spreading out your money across different types of
investments, investing in multiple companies and investing
in more than one sector, you ensure that you always have a
back-up plan intact.
 So when you look to invest, always consider a wide range
of options.
 Equity Mutual Funds invest in shares of various companies
whereas Debt Funds invest in government securities, NCD,
CDs, CPs bonds and other fixed income securities.
 Thus as an investor, you will be able to have a diversified
investment basket.
 Lower transaction costs
 The power of bargaining lies in buying anything wholesale.
The rate of buying in wholesale will obviously be much
lesser compared to the retail rates.
 Apply the same principal to Mutual Funds and what do
you get? With many people pooling in their savings, you
get the advantage of the power of bargaining which
reduces the overall transaction cost.
 As per prevalent tax laws, under provisions of Section 10
(23D) of the Act, any income received by the Mutual Fund
is exempt from tax; which simply means that funds don’t
pay any tax on the gains obtained from selling
securities that they buy on behalf of their investors.
 Some Common Myths
MUTUAL FUNDS ARE FOR EXPERTS
 Part of the fear of Mutual Funds is that everything
will go above your head and that only experts in
finance can understand how they work. This is not
true at all! Unlike the equity market, you don’t have
to take the call on when to buy or sell shares, the
fund manager will do it for you. It is his job to track
various sectors and companies. He will help you
decide where to invest your money. So in actuality,
even if you aren’t a financial expert, you will still have
access to someone who is, and with his help there’s
no doubt you will make the right decisions.
 Some Common Myths
MUTUAL FUNDS ARE ONLY FOR LONG TERM
 Long-term investments have a slight advantage,
but that doesn’t mean that Mutual Funds are only
for such investors. In fact, there are various
short-term schemes where you can invest from a
day to a few weeks.
 Some Common Myths
MUTUAL FUND IS AN EQUITY PRODUCT
 People usually associate Mutual Funds with
Equity Funds, but this is not entirely true. Mutual
Funds invest in a variety of instruments ranging
from equity to debt. Within debt they may invest
in debt instruments that mature in a day (also
known as Money Market Instruments) to those
that mature in 1 or even 10 years.
 Some Common Myths
MFs with Rs. 10 NAV is better than MF’s with Rs.25 NAV
 This simply comes down to a subconscious movement
towards what seems to be cheaper.
 The fact is that what matters is the percentage return on
invested funds.
 Given a similar performance level of 10% appreciation, a Rs.
10 NAV will rise to Rs. 11 whereas a fund with a NAV of Rs.
200 will rise to Rs. 220.
 The reality is, due to an already demonstrated performance,
the chance of the Rs. 200 scheme posting the 10%
appreciation is higher than the one that has just started its
journey.
 Instead of concentrating on a “low” NAV and more number
of units, it is worthwhile to consider other factors like the
performance track record, fund management and volatility
that determine the portfolio return.
 Some Common Myths
One needs a large sum to invest in Mutual Funds
 Most funds today allow investments as low as Rs.
1000, with no limits on the maximum amount.
 In fact, even for Equity linked savings schemes the
amount is as low as Rs. 500.
 There is no monthly or annual maintenance
charge even if you don’t transact further.
 Mutual Funds also offer the SIP facility in many of
their schemes which allows you to invest small
amounts of your choice regularly.
 Some Common Myths
One needs to have a demat account to buy MF’s
 There are multiple ways in which you can buy
Mutual Funds, some of which are:
 Offline: By filling up a form through financial
intermediaries like independent financial advisors,
banks, financial distribution houses etc.
 Online: Through the many accessible distributor
websites and through AMC websites
 If you have a Demat account, you can even
consolidate the Mutual Fund holdings along with
other holdings in the Demat account.
 You can even buy Mutual Funds through the same
intermediary who helps you buy and sell shares on
exchanges.
 Some Common Myths
Funds with a higher NAV have reached the peak
 A common misconception because of the general association of
Mutual Funds with shares.
 Mutual Funds invest in shares, so they can get in and out
whenever the Fund Manager deems appropriate. If the Fund
Manager feels that a stock has peaked, he can choose to sell it.
 The NAV is nothing but a reflection of the market value of the
shares held by the fund on any day. In all probability the NAV is
high on account of a good performance over the years.
 Imagine two schemes. Scheme A is a new scheme with an NAV
of Rs. 15 and Scheme B is an old scheme with an NAV of Rs.
150. If the holdings of both these schemes increase by 10%, the
NAV of both schemes will go up by 10%. The NAV of scheme A
will be Rs. 16.5 and that of scheme B be Rs. 165. So you realize
that it doesn’t really matter if the NAV is Rs. 15 or Rs. 150.

 Total Assets
 Assets managed by the Indian mutual fund
industry has grown from Rs.9.02 trillion in March
2014 to Rs.11.34 trillion in December 2014. This
is an absolute growth of 25.7% in assets from the
start of this financial year.
 Scheme wise composition of assets

Schemes Composition of Assets

Debt Oriented Schemes 45.33%

Equity Oriented Schemes 29.71%

Liquid/ Money Market 23.01%

ETFs 1.95%
 Scheme wise composition of assets
 The share of equity oriented schemes in mutual
fund assets has been growing since March 2014,
increasing from 22% to 30% in December 2014.
The proportionate share of debt-oriented
schemes has fallen from 52% to 45% during the
same period.
 Investor Type-wise Composition
 Individual investors account for about 46% of
mutual fund assets, of which high net worth
investors (HNIs) as a category account for about
26%
 Institutional investors account for 54% of the
mutual fund assets, of which corporates are the
larger chunk at about 47%. The rest are Indian and
foreign institutions.
 Investor Categories
 Institutionalinvestors dominate liquid and money
market schemes (92%) and debt-oriented
schemes (60%).
 Equity-oriented schemes derive almost 86%
assets from individual investors (Retail + HNI)
 Composition of Investors’ Holdings
 Individualinvestors primarily hold equity oriented
schemes; while institutions hold liquid and debt
oriented schemes.
 55% of individual investor assets are held in equity
oriented schemes.
 90% of institutions assets are held in liquid /
money market schemes and debt oriented
schemes.
 Institutional & Individual Investors
 Individual investors increased their investment in
mutual funds from Rs.3.99 lakh crores in March
2014 to Rs. 5.25 lakh crores in December 2014,
an increase of 31.68%.
 Individual investors contributed 44.19% of the
assets in March 2014. This increased to 46.28% by
December 2014.
 Institutional assets grew from Rs.5.04 lakh crores
to Rs. 6.09 lakh crores.
 The growth in investments by individual investors
was also higher than the 26% overall growth in
assets for the mutual fund industry.
 TOP PERFORMING FUNDS
MF SCHEME 1-MONTH 3- MONTH’s 6 MONTH’s 1-YEAR

ICICI PRU EQUITY SAVING 6.40% 11.50% 22.20% 85.90%

SR 1 DP (G)

ICICI PRU EQUITY SAVING 6.30% 11.20% 21.40% 83.60%

SR 1 DP (G)

TATA GROWING ECO INFRA 6.10% 8.60% 19.50% 66.60%

B DIRECT (G)
TATA GROWING ECO INFRA 6.10% 8.50% 19.10% 65.50%
B (G)
ICICI PRU INDO ASIA 5.0% 8.50% 17.70% 63.40%
EQUITY DIRECT (G)
ICICI PRU INDO ASIA 4.90% 8.40% 17.40% 62.50%
EQUITY IP (G)
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