MUTUAL FUNDS

BY SHITANSHU PRIYA
IIM KASHIPUR
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DEFINITION
• A mutual fund is a professionally-managed investment scheme, usually run
by an asset management company that brings together a group of people
and invests their money in stocks, bonds and other securities.
• As an investor, one can buy mutual fund 'units', which basically represent
their share of holdings in a particular scheme. These units can be
purchased or redeemed as needed at the fund's current net asset value
(NAV). These NAVs keep fluctuating, according to the fund's holdings. So,
each investor participates proportionally in the gain or loss of the fund.
• All the mutual funds are registered with SEBI. They function within the
provisions of strict regulation created to protect the interests of the investor.
Mutual Fund Operation
Flow Chart
WHY INVEST IN A MUTUAL FUND?

Mutual Fund is the most suitable investment for

the common man as it offers an opportunity to
invest in a diversified, professionally managed
basket of securities such as equities, bonds and
other securities at a relatively low cost, which
would be quite difficult to create with a small
amount of capital.
ADVANTAGES OF MUTUAL FUNDS
• Affordable –starting from Rs. 500 (typically Rs 5000)
• Professional Management
• Diversification / Choice of schemes - hundreds of
MF options available
• Liquidity – can get money back in Transaction+2
(T+2) days
• Tax benefits – some funds offer tax benefits
• Well regulated and low cost – around 2% per annum
• Transparency – can see performance every day
• Flexibility – buy and sell when you want
DISADVANTAGES OF INVESTING THROUGH
MF
• Difficult to evaluate Mutual funds
TOP 10 MF COMPANIES IN INDIA:

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TYPES OF MUTUAL
FUNDS

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TYPES OF MUTUAL FUNDS – BY
STRUCTURE
• Open ended -theses schemes do not have a fixed maturity
period –they are available for subscription and repurchase on a
continuous basis
• Close ended –these have a stipulated maturity period of 1-7
years – they are open to subscription only during the period of
launch. They can be bought and sold in stock exchanges where
they are listed. Exit routes are also provided by the fund
through repurchase at specific points of time.

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TYPES OF MUTUAL FUNDS – BY
STRUCTURE
• Direct Mutual fund Plan – Here the Investor directly invests
with the MF company – by-passing MF distributors /platform –
it improves the ROI of the investor by appx 0.7-1.0% per
annum (as compared to regular MF). This is recommended for
knowledgeable investors who self invest.
• Regular Mutual fund Plans –Here the investor invests
through a distributor /advisor /platform and the commission
costs of the same is around 0.7-1.0% per annum ( over and
above a direct MF option) – this is right for all investors who
need help in MF investing.
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TYPES OF MUTUAL FUNDS – BY
WHERE THEY INVEST
• Equity funds
• Debt funds
• Hybrid funds
• Solution Oriented schemes
• Other schemes

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WHAT IS LARGE CAP, MID CAP AND
SMALL CAP
• SEBI classifies companies according to their
Market Capitalization by using the following
method:
– Arrange all the companies in descending order
of their Market Capitalization.
– Large cap companies are the first 1-100
companies (with the largest market
capitalisation)
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WHAT IS LARGE CAP, MID CAP AND
SMALL CAP
– Mid cap companies are those from 101 to 250th
in this list in terms of market capitalisation; and
– Small cap are the 251st onwards all companies
in terms of market capitalisation.
– This list would be updated every six months –
end of June and End of December and would
be available on the AMFI website.

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TYPES OF MUTUAL FUNDS – BY
WHERE THEY INVEST
• Equity funds
• Debt funds
• Hybrid funds
• Solution Oriented schemes
• Other schemes

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EQUITY FUNDS
• Multi Cap funds – These mutual funds
primarily invest in stocks selected from all the
listed stocks in the Indian market (NSE/BSE).
 
• Portfolio allocation has to be minimum of
25% to large cap, 25% to mid cap and 25% to
small cap.

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EQUITY FUNDS
• Large Cap fund – min. 80% of all assets in
large cap companies - large cap companies
are the top 100 companies ranked based on
market capitalization.
• The scheme possess low risk and will provide
modest returns when compared to mid and
smallcap schemes.

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EQUITY FUNDS
• Large and Mid cap fund – min. 35% of all
assets in large and min 35% of all assets in
mid cap equities.
• These schemes are slightly riskier than large
cap schemes but can provide higher returns as
well.

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EQUITY FUNDS
• Mid Cap funds – min. 65% of total assets in
mid cap companies
• Since the schemes will bet on mid-sized
companies, it posses a little higher risks.
These schemes have the capability to provide
higher returns.

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EQUITY FUNDS
• Small Cap fund – min. 65% of all assets in
small cap companies
• These schemes will invest in small-sized
companies which may on may-not become
big companies. They are extremely risky but
can provide phenomenal returns.

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EQUITY FUNDS
• Dividend yield fund – min. 65% of all assets
in equities – scheme should predominantly
invest in dividend yielding stocks.

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EQUITY FUNDS
• Sectoral fund – min. 80% of total assets in
equities – should predominantly follow a
sectoral / thematic investing strategy.
• There are quite a few sectoral MF eg pharma
sector, IT sector, Infra sector, Banking sector,
MNC sector etc.
• One can also look at themes such as Rural India,
Consumption theme, US markets investing etc

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EQUITY FUNDS
• Focused fund – min. 65% of all assets in
equities – with max 30 stocks in the portfolio.

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EQUITY FUNDS
• Value fund – min. 65% of total assets in
equities – should predominantly follow a
value investing strategy where the fund
manager will pick stocks which he/she
believes are undervalued.

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EQUITY FUNDS
• Flexi Cap funds – These mutual funds primarily invest
in stocks selected from all the listed stocks in the Indian
market (NSE/BSE).  
• These are open-ended, dynamic equity schemes
investing across large-cap, mid-cap, and small-cap
stocks- the fund manager has no restrictions for
allocating the capital between large /mid and small caps.

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EQUITY FUNDS
• ELSS fund (equity linked savings scheme) –
These tax-saving schemes will invest 80 per
cent in equities in accordance with the Finance
Ministry notification in 2005 on Equity Linked
Savings Schemes. These schemes have a lock-
in period of three years and provide tax benefit
under Section 80C of the Income Tax Act.

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TYPES OF MUTUAL FUNDS – BY
WHERE THEY INVEST
• Equity funds
• Debt funds
• Hybrid funds
• Solution Oriented schemes
• Other schemes

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DEBT FUNDS
• Lower risk compared to equity oriented schemes
• Very low uncertainty over the medium term
• Stable returns
• Positioned as medium to long term investment
• Tailor made products to suit every cash flow and risk
requirement (Short Term Plan, Monthly Income Plan
and Floating Rate Plans)

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DEBT FUNDS
• Overnight fund – fund investing in over night securities having a
maturity of 1 day
• Liquid fund - fund investing in Debt and money market securities
having a maturity of up to 91 days
• Ultra Short duration fund - fund investing in Debt and money
market securities having a maturity of 3- 6 months.
• Low duration fund - fund investing in Debt and money market
securities having a maturity of up to 6-12 months
• Money market fund - fund investing in Debt and money market
securities having a maturity of up to 1 year
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DEBT FUNDS
• Short duration fund – fund investing in Debt and money
market securities having a maturity between 1 and 3 years
• Medium duration fund – fund investing in Debt and money
market securities having a maturity between 3 and 4 years
• Medium to Long duration fund – fund investing in Debt and
money market securities having a maturity between 4 and
7years
• Long duration fund - fund investing in Debt and money
market securities having a maturity more than 7 years

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DEBT FUNDS
• Dynamic bond– fund investing in Debt and money market
securities having a maturity across duration
• Corporate bond fund – fund investing min 80% in corporate
bonds having (only in highest rated instruments)
• Credit risk funds– fund investing min 65% in corporate bonds
having (below highest rated instruments)
• Banking and PSU Fund - fund investing min 80% in debt
instruments of Banks and PSU’s

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FIXED MATURITY PLANS (FMP)
• FMPs are the mutual fund industry’s version of fixed deposits (FDs).
• These are closed-end MF’s investing in debt investments which are held till a
synchronized maturity timeline. So a 91 day FMP will invest in debt
instruments that mature before 91 days.
• FDs offer assured returns - returns on FMPs are indicative in nature.
• FDs score over FMPs in liquidity - FDs can generally be withdrawn with 1%
penalty, unlike FMPs.

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TYPES OF MUTUAL FUNDS – BY
WHERE THEY INVEST
• Equity funds
• Debt funds
• Hybrid funds
• Solution Oriented schemes
• Other schemes

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HYBRID FUNDS
• Objective is to reward investors with moderate capital
appreciation with minimum risk of capital erosion.
• Invests in mix of debt securities, convertible securities, and
equity and preference shares held in a pre-decided proportion

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HYBRID FUNDS

• Conservative Hybrid fund - fund investing between 75 – 90%

in debts and rest in equity. These funds are lower on risk and
give returns closer to Fixed deposits – but will give more than
FD if the stocks markets are going up.

• Aggressive Hybrid fund - fund investing between 65-80% in

equity and rest in debts. These funds are slightly lesser in
volatility than 100% equity funds.

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HYBRID FUNDS

• Dynamic Asset allocation or Balanced advantage – Investment

in equity and debts that is managed dynamically – the
allocation in stocks and bonds depends on fund manager’s
reading of the market conditions.

• Multi Asset allocation – Invests in at least three asset classes

with a minimum allocation of at-least 10% in each asset class.
Typically it will be equity, debt and gold (ETF).

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HYBRID FUNDS

• Arbitrage fund – Fund investing on both stocks and bonds

with min equity investments of 65% following arbitrage
strategy of  exploiting the price differential between the cash
and futures markets.
• Equity savings – fund investing min 65% in equity and equity
related instruments and min 10% in debt.

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CAPITAL PROTECTION ORIENTED
FUNDS (CPO’S)
• These are close ended funds that aims to protect the capital by
investing in high quality fixed income securities along with
equities for capital appreciation. ---

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TYPES OF MUTUAL FUNDS – BY
WHERE THEY INVEST
• Equity funds
• Debt funds
• Hybrid funds
• Solution Oriented schemes
• Other schemes

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SOLUTION ORIENTED SCHEMES -

• Children’s fund – these mutual funds invest in stocks and

bonds. These funds have a lock in period of 5 years or till the
child attains age of majority(whichever is earlier)

• Retirement fund – these mutual funds invest in stocks and

bonds. These funds have a lock in period of 5 years or till the
retirement age (whichever is earlier)

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TYPES OF MUTUAL FUNDS – BY
WHERE THEY INVEST
• Equity funds
• Debt funds
• Hybrid funds
• Solution Oriented schemes
• Other schemes

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OTHER SCHEMES -
• Index funds / ETF’s - Min 95% of total investment in
securities of a particular index which the fund is tracking. So
these funds are expected give similar returns as per index.
– Index funds track BSE Sensex, Nifty 50, BSE Bankex, BSE
Finance, BSE IT, BSE PSU etc
– ETF’s in India are primarily Gold ETF’s tracking the bullion
price of gold.

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GOLD ETF’S
• NAV of a Unit will track price of approximately 1Gram of
Gold
• Ideal for Retail Investor as minimum lot size to trade is one
unit on secondary market.
• Low cost way of investing in gold
• Listed and traded on NSE just like a stock-EasyBuying /
Selling
• No Storage & Security Issues/Transparent pricing
• Taxation as that of a non equity mutual fund ----

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SOME COMMON
TERMS IN MF

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EXPENSE RATIO IN MUTUAL FUNDS
• The expense ratio measures the per unit cost of managing a fund. A
1.5% expense ratio means the AMC charges Rs 1.50 for every Rs100
in assets under management.
• It can be up to 2.5% for equity MF and 2.25% for debt MF (SEBI
mandate).
• It includes the management fees paid by AMC to fund managers,
transfer agents, custodians, legal fees and marketing and distribution
expenses.
• The daily net asset values (NAVs) of a fund scheme are reported after
deducting such expenses, though the expense ratio is disclosed only
once every six months

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NET ASSET VALUE (NAV)
• NAV is the total asset value (net of expenses) per unit of the
fund and is calculated by the AMC at the end of every business
day.
• The value of all the securities in the portfolio in calculated
daily. From this, all expenses are deducted and the resultant
value divided by the number of units in the fund is the fund’s
NAV.
• NAV = (Total assets (including current assets) –
current liabilities) / total no of MF .units

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THANK YOU

SHITANSHU PRIYA
IIM KASHIPUR
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