Mutual Funds An Overview

Rajesh Subudhi
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Topics Advantages of Mutual Fund Types of Mutual Funds Classes of shares Fund Companies and Supporting Agents Portfolio Management (Events in a regular day of Mutual Fund) Net Asset Value (NAV) ?

Advantages
The advantages of a Mutual Fund 1. 2. 3. 4. 5. 6. 7. 8. 9. Diversification Professional Management Liquidity Choice Flexibility Regulation Accessibility Growth Tax Benefit

Definition An mutual fund, generally, is an entity that pools shareholders' funds to provide the shareholders with professional investment management.
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Types of Funds
Funds may be categorized along many dimensions: Open end versus closed end Underlying investment vehicle type Risk/reward profile Issuer Pool Duration Underlying investment vehicle location

Open End Versus Closed End Funds Open End Funds Create shares as needed Are priced based on Net Asset Value (NAV) Issue and redeem shares daily Are the most common form today Closed End Funds Gather a pool of capital and issue a fixed number of shares Trade issued shares on a secondary market Behave like common stocks Less common form today

Investment Vehicle Type

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Risk/Reward Profile

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I n

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F e n o C o

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v e r n Re Y w i s k i e l d t h

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I nL co o w m H G i g r o h

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Issuer Pool

q u it y L a r g e M S S m id C

F u n d x se d F i C a p a p

In c o m

F u

a pF e d e r a l T F e d e r a l A M C

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u n ic ip a lit ie s o r p o r a t e

Duration
F M o n e y i x e d M a I n c o rV k a e r t i a S h o m b e l e r t T F N u n d A V s

T-bills Issues near maturity Commercial paper Repos

e Maturities < 3 year r m i a Maturities 3-10r years t e T e m e Maturities > 10 years r m

I n t e r m L o n g

e d T

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Location

e s t i c D D E

r e i g p p

n e d i n g M M M a a

e v e l o e v e l o m e r g

i n g

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Classes of Shares

Total Investment Pool Value

Class A Asset Value

Class B Asset Value

Class C Asset Value

Class A Expense

Class B Expense

Class C Expense

Class A NAV Class B NAV

Class C NAV

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Fund Companies and Supporting Agents

The Mutual Fund Complex: Agents that Support the Fund
nt tme s Inve viser Ad ers Oth / iter rwr r e Und ibuto r Dist

d Fun ting oun Acc

fer rans t T n Age

ian tod Cus ker Bro

lic Pub tant un cco A

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The Fund Itself...

 Is a corporation/trust with directors/trustees, officers, and shareholders  Holds a pool of assets (cash and securities)  Contracts with agents for services  Pursues a particular investment objective  Is defined by a prospectus

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The Fund Directors

y y y y

Are elected by the shareholders Have fiduciary responsibility to the shareholders Must meet the "prudent man" standard Approve the fund's contractual arrangements directors delegate the day-to-day management to the fund's officers

y The

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The Fund's Supporting Agents

r Investment Advisor r Underwriter/ Distribution Agent r Fund Accounting r Custodian r Transfer Agent r Legal counsel and Independent Auditors

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Investment Advisor
Responsible for implementing the fund's investment
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DJIA

O LIB R

Makes the asset allocation decisions Expert in particular investment vehicles/strategies May be internal or external Fees paid may be:

1) annual fee (based on specified % of average net assets (ANA) 2) performance fee (basic fee % + bonus/ penalty based on fund performance
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L R IBO

policy (as defined in the prospectus)

DJI A $

Underwriter/ Distributor

Underwriter/distributor must be a broker/dealer An affiliate of investment advisor Distributor acts as an agent or principal; sells

fund's shares for commission (sales charge)

Sales charge are regulated

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Fund Accounting

Maintains the "books of record (funds general ledger)

11 10 9 8 7 6 5 12 1 2 3 4

Performs securities accounting Responsible for calculating the NAV Calculates the distribution rate/amount Prepares fund financial statements Often outsourced
ay' NAV s

Tod
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The Custodian

Holds the fund's securities Holds and processes cash Collects interest and dividends Typically a bank Required by statute

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The Transfer Agent

Performs shareholder record keeping:

Account setup and maintenance Shareholder trade execution Distribution allocation Internal and external reporting Customer service

Reports daily activity to fund accounting May be performed internally or outsourced or a hybrid Regulated
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Legal counsel and independent auditors

Assists in organization & compliance with

regulatory requirements and other legal matters (registration statement filing etc)
Annual audits (Here we Come) Approval of both board of directors and

shareholders required for selection of independent auditors

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Portfolio Management (Events in a regular day of Mutual Fund)

Portfolio Management
(A few selected events)

1. Fund accounting and the custodian give the advisor the cash status 2. The advisor orders a security purchase 3. The broker executes the trade(s) 4. The custodian and fund accounting are notified of the trade(s) 5. On Trade date, the trade is reflected on the fund books 6. At the end of day Trade date, the pricing vendor supplies a price for the holding 7. The transfer agent is given the NAV 8. At some point, fund management checks for compliance 9. On day T+2, the trade settles 10. The issuer declares a dividend 11. On ex-date, fund accounting recognizes a dividend payable 12. The custodian receives the payment 13. The advisor orders a security sale (reverse of Step 2.)
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Net Asset Value (NAV)

Net Asset Value (NAV) = Fair Value of Assets/ outstanding shares Where, Fair Value of assets is based on : Value of underlying securities Accruals for income/ expense Declaration of dividend to shareholders Why NAV? Open-end investment companies NAV computed on a daily basis Sell/redeem shares at NAV using forward pricing Closed-end investment companies Outstanding shares traded in the market like bonds/stocks Market value used for trading based on NAV

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Any Questions Thank You

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