Basics of Mutual Fund

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I am an investor and where to invest my

money???

Currencies

Bonds and Fixed Deposits

Real Estate

EquityCommodities (Gold/Silver

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Mutual Funds

Gold

Equity

Debt

One stop shop for investment products.

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What is Mutual Fund?It is a pool of money, invested by number of investors, who share a common financial goal.

There are few key pointers:

Pool of money, invested by number of investors:

It means, this is a product, wherein various investor invest their money in one basket and then the manager of

the fund invest in different investment products.

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What is Mutual Fund? To share a common financial goal:

The main agenda of investment for any one is to earn profit/returns. As a renowned statement once

said, “higher the risk higher the profit…”

Equity: High risk, high return

Bonds: Lower risk, lower return

Saving Bank A/C: Lowest risk, lowest return.

So, there are various investors and has various definition of profits.

Mutual Fund has all kind of products to cater every kind of investors’ needs.

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Advantages of Mutual Fund Diversification: (DON’T PUT ALL EGGS IN ONE BASKET)

Mutual Fund, is a pool of investment, wherein many investor invest their money, and this money is

invested in various number of shares, bonds etc. which reduces the risk of capital for an investor.

This is a beauty of a mutual fund, with a small amount of

an investor get invested various sectors.

Mutual Fund

Equity

AutoMaruti

Tata

FMCGITC

HULIT Sector

BondsBonds

NCDs

Continued:If one investor invested Rs. 10,000 in Kingfisher in 2012, his current market value is in negative.

On another side, if an investor invests Rs. 5,000 in Kingfisher and another one is in ITC, his current market

value is in profit. This will make his entire investment amount is in profit.

Liquidity: (INVEST ANY TIME, REDEEM ANY TIME)

In mutual fund, you can withdraw (redeem) your investment at any period of time. Unlike, Real

estate wherein selling as asset is very time consuming.

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Advantages: Tax Benefits: (TAX IS AN IMPORTANT CONCERN IN INVESTMENT)

1. In equity fund, returns are tax free after one year.

2. Invested in equity linked saving scheme (ELSS) upto Rs. 1 lacs u/s 80C

3. Invested in Rajiv Gandhi Saving Scheme (RGSS) upto Rs. 25,000 u/s 80CCG.

Professional Management: (MANAGED BY FUND MANAGER)

Mutual Fund is like a doctor of investors’ fund, it manage it with complete professionally. The team of

research & investment has a sound knowledge and experience in their respective field. And, every

fund has a designated Fund Manager.

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Systematic Transaction Facility:In Mutual Fund, investor has an option to do the transaction on a regular basis i.e. Monthly/weekly/quarterly etc.

Systematic Investment Plan (SIP): In this an investor can invest regularly in systematic manner. This is best for a young

investor and who like to save some money regularly.

Systematic Withdrawal Plan (SWP): In this investor can withdraw (redeem) his investment in instalment. This is best

for the investor who wants regular income.

Systematic Transfer Plan (STP): In this investor can transfer his fun from scheme A to scheme B regularly. It is a good

strategy, if someone wants to book profit, and the same time want to invest in a safe fund where he can earn some

risk free returns.

For example STP from a equity scheme to debt scheme

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Structure of Mutual FundSponsor:

It is a group of people who initiate to launch a Mutual Fund

Board of TrusteesIn India Mutual Fund is a trust, so there is a board of trustees to safeguard the investors’ right.

Asset Management Company (AMC)It associates with Mutual Fund house, to manage the funds of investors.Fund Manager is a key role in AMC, because he is a person who invests investor’s fund in securities.

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Example:Sponsor:

Reliance Capital Ltd.

Board of TrusteesReliance Trustee Company Ltd..

AMCReliance Capital Asset Management

Co. Ltd.

Sponsor:Motilal Oswal Securities Ltd.

Board of TrusteesMotilal Oswal Trustee Co. Ltd.

AMCMotilal Oswal Asset Management Co.

ltd.

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What is the role of an AMC?This is an important part of a mutual fund structure, so we are discussing it in detail:

Role of an AMC:

To manage investors’ fund on day-to-day basis.

Working for smooth process of managing investors’ fund and appointing proper departments to handle the

process effectively.

Improve the sales of mutual fund’s schemes. Via

Appointing its own sales team

Empanelling (connecting) with maximum number of distributors.

Engage marketing activities for investors.

To adhere all the rules of regulations of industry.

On behalf of all these activities AMC charges fees.

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Regulators:Securities Exchange Board of India (SEBI):

SEBI is a regulator of Indian Mutual Fund, so all the fund houses in India has to adhere the rules & regulations

of SEBI. These regulations has been mentioned in

“ S E B I M u t u a l F u n d R e g u l a ti o n A c t , 1 9 9 6 ”

Apart from this, as Mutual Fund is a trust, so it have to adhere the rules of

I n d i a n C o m p a n i e s A c t , 1 9 5 6 & I n d i a n T r u s t A c t , 1 8 8 2 .

Association of Mutual Fund In India:

It is an association created to enhance the mutual fund industry, to adhere the best sales practice and educate

investors about mutual fund.

One key member of every AMC is a part of AMFI.

U.K. Sinha is Chairman of SEBI

Milind Barve is chairman of AMFI

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What is New Fund Offer (NFO)Whenever an AMC launches a new scheme, it is known as NEW FUND OFFER (NFO)

This is for the period of 15 days (except ELSS)

NFO of ELSS fund has a period of 20 days.

In NFO, the units are allotted at Rs. 10 which is as same as a cost price of a new scheme, which is also known as

Face Value.

This face value is also use at the time of declaration of dividend as same as it function in equities.

For Example: Motilal Oswal AMC, has launched its new scheme called MOSt Focus Mid Cap 30, which has NFO

period of 15 days dated 3rd Feb, 2013 to 17th Feb 2013. At this time units were allotted at Rs. 10.

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What is NAV… & Why it is important?Net Asset Value:

In laymen terms, it is a price of a scheme, like any other product which has its own price.

If anyone wants to invest in a particular scheme, it invests as per its current NAV & anyone wants to redeem his

investment, redeem at current NAV.

How it calculated?

N E T A S S E T VA LU E ( N AV ) =A S S E T S - L I A B I L I T I E S

N O. O F U N I T S I S S U E D

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Net Asset Value (NAV)If an AMC invested Rs. 10,000 in equity market & current value is Rs. 12,000. The expenses incurred in

handling funds is Rs. 500. No. of units allotted to its all investors is 1,000. So NAV if scheme is;

Assets: Rs. 12,000

Liabilities: Rs. 500.

No. of units: 1,000.

NAV= (12,000-500)/1,000 ; 11,500/1,000

NAV= Rs. 11.5

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Why NAV is important?It is important for a various reason;

It is a price of a scheme.

Current NAV of any scheme, describes the performance of the fund.

For example:

If a scheme launched in Feb, 2012 & allotted units @ Rs. 10. after 6 months, NAV of a fund is Rs. 12,

(scheme has given 20% returns), after an year if NAV is Rs. 8, scheme is in negative 20% from the

date of NFO.

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Why NAV fluctuates??There are four reason of which NAV fluctuates:

1. Performance of investment: Fund manager invests the money into various securities, the

performance of these securities impact NAV. (if price of invested securities increases, NAV

increases & vice versa).

2. Investment & redemption: If investor invest in Mutual Fund, he becomes the member of fund

house, his entry and exit impact on the NAV. Like; if an investor invested in a particular scheme, it

will increase the asset of a fund, so NAV will increase, and if someone redeems, it take out the

money from fund, so asset side reduces, so NAV reduces.

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3. Expenses of scheme: If a scheme has huge expenses due to portfolio restructuring, marketing

expense, distribution expenses etc. It impacts inversely with NAV. Higher the expenses, lower the

NAV. So, always check the expense ratio of a fund, before investing. Note: SEBI, tracks the

expense incurred by an AMC in a particular scheme, if any excess amount that has be borne by

AMC.)

4. Declaration of Dividend: If a scheme declares dividend, and after the payment of dividend, NAV

of a fund. Reduces, because bank balance has been reduces because of payment has made by an

AMC.

If a scheme declares dividend of Re.1, then NAV of next day (ex-dividend NAV) reduces by Re.1

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What is Units?It is like share in equity, wherein mutual fund allots units in against of investment made by an

investor.

Allotment of units is based on face value in the time of NFO , and post-NFO is based on NAV.

For example: If an investor invested Rs. 1 lacs in a Scheme A in NFO, he will get;

Rs. 1 lacs/ Rs. 10 = 10,000 units.

If invested post-NFO, and NAV of scheme is Rs, 20, at the time of investment, he will get,

Rs. 1 lacs / Rs. 20 = 5,000 units allotted

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What are the expenses in Mutual Fund?There are only two direct expenses in mutual fund for an investor:

1. Entry Load: When an investor invests in a mutual fun, it gets a charge of small amount let’s

say 0.5% 0f NAV, which is known as entry load. Hence now entry load is NIL.

2. Exit Load: When an investor wants to redeem (withdraw) his investment, AMC charges a

small amount let’s say 1% of NAV, which is known as exit load.

3. Expense Ratio: It is not directly charged to investors, however this expenses is adjusted in

NAV and it is charged on the total funds collected in a scheme. This has a beauty that this

charge is get distributed among all the investor.

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What is Sales price & Repurchase Price? Sales Price: This is a price when an investor invest. It is calculated by;

Sales price = NAV + Entry Load

If one investor invested Rs. 10,000 in a fund & NAV is Rs. 20, entry load is 1%, the sales price will

be;

Rs. 20 + (Rs. 20 X 1%

Rs. 20 + Rs. 0.2

Rs. 20.2

Note: Now entry load is NIL, so sales price is as same as NAV

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Repurchase Price: This is a price when an investor redeems his investment.

It is calculated by;

Repurchase price = NAV – Exit Load

If one investor wants to redeem 1,000 units, in a fund & NAV is Rs. 20, ext load is 1%, the repurchase

price will be;

Rs. 20 - (Rs. 20 X 1%)

Rs. 20 - Rs. 0.2

Rs. 19.8

Note: If an investor hold his investment for a long period of time (let’s say for more than a year) exit

load become NIL.

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Asset Classes: There are majorly three types of classes of an asset.

1. Equity

2. Debt

3. Gold

Asset Allocations: A major part of assets of a scheme is its investment, and it has to allocate it

carefully among the desired asset classes.

Portfolio: It is a list of companies wherein a fund manager will invests the collected fund.

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Asset Under Management (AUM): This is a fund collected by an AMC including all the

schemes it has launched till date.

HDFC Mutual Fund has maximum amount of AUM (Rs. 104,000 Cr.)

Corpus: It is a total amount collected under one particular scheme.

Corpus of scheme A

Corpus of scheme B

Corpus of Scheme C

Corpus of Scheme D

AUM of

a Mutual

Fund

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What is an Offer Document??It is a prospectus of a mutual fund, like in our college we use to get prospectus of a college at the

time of joining that college, which includes all the information of this college, likewise, in

OFFER DOCUMENT all the important information of a mutual fund and related parties like

AMC, sponsor, trustees etc. is informed. It is divided into two parts:

1. Scheme Information Document (SID): In this the detailed information of a scheme is

mentioned, like NFO open date, close date etc. fund manager’s name and his experience,

objective of the fund, asset allocation etc.

2. Statement of Additional Information (SAI): This includes all the information of a mutual fund,

like detailed information of sponsor, trustee, AMC, RTA & their rights & obligation, investors’

right and obligations. Legal information about the fund house.

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What is KIM?Key information Memorandum (KIM)

It is a abridged (short) version of offer document. This includes key pointers of a particular

scheme, and it is mandatory for an AMC to distribute to the investor with the application

form of a scheme.

It includes:

NFO details (NFO Open date, close date etc.)

Fund Manager’s information

Investment details and criteria

Application forms

Asset allocations, etc.

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PARIKSHA 31. Who can invest in Mutual Fund?

1. Individual

2. Insurance, Banks etc.

3. NRI

4. All of the above

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2. Which of the following is not an advantages of Mutual Fund?

1. Diversification

2. Liquidity

3. Tailormade portfolio

4. None of the above

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3. What is the benefit of diversifications?

1. Gets exposure of more no. Of products/shares

2. Investor gets the right to pick his favourite stocks

3. It reduces the risk of loss from one products.

4. Both 1 and 2

5. All 1, 2 & 3

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4. Why returns in mutual fund is guaranteed?

1. Because it has the exposure in equity.

2. Because all the asset classes are traded in the market & it moves according to the

sentiments of the market

3. Because fund manager doesn’t have the knowledge of the market.

4. 1 & 2

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5. What is a golden rule of investment?

1. Don’t put all eggs in one basket

2. Men are from mars and women are from venus

3. Double your money by investing in equity

4. Real estate creates maximum wealth

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6. AMFI stands for?

1. Association of Most Focused Investors

2. Association of Mutual fund in India

3. Association of Main fund of India

4. Association of Major funds in India

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7. AMFI is involve in:

1. Setting guidelines for mutual funds to follow best selling practices.

2. Conducting awareness programme for investors.

3. Regulating distributors of Mutual Funds

4. All of the above

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8. AMFI is regulator of Mutual Fund:

1. True

2. False

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9. SEBI is the regulator of Mutual Fund under:

1. SEBI Mutual Fund Regulation Act, 1956

2. SEBI Mutual Fund Regulation Act, 1992

3. SEBI Mutual Fund Regulation Act, 1996

4. SEBI Mutual Fund Regulation Act, 1881

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10. SEBI stands for:

1. Share exchange board of India

2. Stock exchange board of India

3. Securities & exchange Board of India

4. None of the above

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11. Role of an AMC is:

1. To regulate the industry

2. To launch a new scheme

3. To protect the investor from the losses

4. To manage the funds of investors’ investment

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12. Registrar & transfer Agent (RTA) is appointed by AMC for:

1. To give best service to the client

2. To issue units & dividend, redemption cheques.

3. To solve the query of investors.

4. All of the above

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13. Sponsor, who initiates to launch a mutual fund:

1. False

2. True

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14. NFO is a period when a new scheme launched by an AMC:

1. False

2. True

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15. If an investor wants to redeem his investment in NFO, at what price he can redeem?

1. Rs. 10

2. Current NAV

3. He cannot redeem

4. NAV – exit load

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16. In NFO units are allotted at:

1. Rs. 10

2. Current NAV

3. NAV – entry load

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17. NAV is:

1. Total Assets – Total Liabilities

2. Total Assets/No. Of units issues

3. (Total Assets- Total Liabilities)/No. Of units issued

4. Total Liabilities/ No. Of units issued

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18. A fund has invested Rs. 20,000 in market and its current market value is Rs. 25,000 and fund

expenses is Rs. 1,000 and no. Of units allotted to investor is 2,000. NAV will be?

1. Rs. 12

2. Rs. 9.5

3. Rs. 13

4. Rs. 10

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19. If current NAV is Rs. 15, and an investor wants to invest Rs. 60,000, how many units will be

allotted?

1. 4,000

2. 6,000

3. 8,000

4. 12,000

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20. NAV of the fund is Rs. 20 and exit load is 1%, what will be the sales price?

1. Rs. 20

2. Rs. 20.20

3. Rs 19.80

4. Rs. 22

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21. What is repurchase price?

1. NAV- Entry Load

2. NAV + Exit Load

3. NAV – Exit Load

4. NAV + Entry Load

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22. Offer Document is:

1. Combination of SID & SAI

2. In SID, all scheme information about the scheme is mentioned

3. In SAI, all detailed information of fund house is mentioned.

4. All of the above

DISCLOSUREMotilal Oswal Securities Ltd. (MOSL) Member of NSE, BSE & MSEI - CIN no.: U65990MH1994PLC079418Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Registration Nos.: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE (F&O): INF011041257; BSE (CD); MSEI (Cash): INB261041231; MSEI (F&O): INF261041231; MSEI (CD): INE261041231; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS & Mutual Funds are offered through MOAMC which is group company of MOSL. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML which is a group company of MOSL. Motilal Oswal Securities Ltd is a distributor of Mutual Fund & IPOs. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. Investment in Securities is subject to market risk and there is no assurance or guarantee of the returns. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com , Contact No.:022-30801085