Mutual Fund Kash

KASH Management Services Pvt Ltd

Retail Investors

Investment Objective

Risk Management

NAV

Factsheets

ReturnAUMs

Portfolio

Portfolio

Professional Management

Asset Allocation

Tax Saving

Growth

Fund Manager

Redemption

Open Ended

Investment

Dividend

Close Ended

Exit Load

Entry Load

Sale Price

Repurchase Price

Mutual Fund

Snapshot….

Why did Mutual Funds come into existence?

An old Axiom :

“It is not wise to put all eggs into one basket”

……… was probably in the minds of those who formed the first mutual fund.

Why did Mutual Funds come into existence?

Flow Cycle of a Mutual Fund

Organizational Structure of a Mutual Fund

Balance sheet of a Bank and Mutual Fund

Diff. b/w MF and Direct Investment

Regulatory Aspects

Classification of Mutual

Fund Schemes

Risk-return structure of

schemesHistory of

Mutual Funds

Portfolio Management

ProcessMutual Fund Comparison

Investments Checklists

Risk Management

AUM movements in

IndiaExpensesTracking

Mutual FundsWarning Signals

Penetration of Mutual Funds

What Mutual Funds are not?








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Mutual Funds defined….a flow cycle


• A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

• The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.

• The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.

• Thus a 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 at a relatively low cost.

Flow Cycle explained…

• The ownership is in the hands of the investors who have pooled in their funds.

• It is managed by a team of investment professionals and other service providers.

• The pool of funds is invested in a portfolio of marketable investments.

• The investors share is denominated by ‘units’ whose value is called as Net Asset Value (NAV) which changes everyday.

• The investment portfolio is created according to the stated investment objectives of the fund.

Important Characteristics of Mutual Funds

• Portfolio diversification

• Professional Management

• Reduction in Risk

• Reduction in Transaction costs

• Liquidity

• Convenience and Flexibility

• Safety – Well regulated by SEBI

Advantages of Mutual Funds to Investors

• No control over the costs. Regulators limit the expenses of Mutual Funds. Fees are paid as percentage of the value of investment.

• No tailor made portfolios.

• Managing a portfolio of funds. ( Investor has to hold a portfolio for funds for different objectives ).

Disadvantages of Mutual Funds to Investors

A mutual fund is not1.A portfolio of stocks, bonds and other securities2.A company that manages investment portfolios 3.A pool of funds used to purchase securities on behalf of investors4.A collective investment vehicle

The Mutual fund is constituted asA trust A private limited companyAn asset management company

A trustee company

Mutual fund can benefit from economics of scale because of Portfolio diversificationRisk reductionLarge volume of tradesNone of the above

A portfolio of stocks, bonds and other securities

A company that manages investment portfolios

A collective investment vehicle

A pool of funds used to purchase securities on behalf of investors

A mutual fund is not

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Diff. b/w MF and Direct Investment…

• Diversification is the key to success in equity investments. A diversified portfolio serves to minimize risks. An individual investor may not have the capital to build a diversified portfolio.

• Professional Management by mutual funds ensure that the best avenues are tapped with the aid of comprehensive information and detailed research.

• Liquidity of mutual funds is high as you have daily repurchase options for open-end funds.

• Transaction costs are lower in mutual funds as compared to direct investment due to economies of scale.

• Convenience is high for mutual funds as they sell through service networks, banks and other distributors. Many funds allow investors the flexibility to switch between schemes within a family of funds.

• Blue Chip portfolio available to investors for as low as Rs. 500/-.

• High Service Standards maintained by mutual funds for unit administration.

• Transparency – High degree of transparency is maintained by the funds.

Diff. b/w MF and Direct Investment…








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Difference between Bank and Mutual Fund

Mutual Fund Balance Sheet

Liabilities Assets

Bank Balance Sheet

Liabilities Assets


Difference between Bank and Mutual Fund

Mutual Fund Balance Sheet

Liabilities Assets

Unit Capital Investment in Financial Securities

Bank Balance Sheet

Liabilities AssetsShare Capital Deposits

Loans and Advances









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Organizational Structure of Mutual Fund

• In India Mutual fund is the form of a Public Trust created under the Indian trust Act. 1882.

• In India, Mutual funds are organized as trusts. The trust is either managed by a Board of Trustees, or by a trustee company.

• The trustees hold the unit holders money in a fiduciary capacity.(Money belongs to unit holders)

• In legal sense, the investors are the beneficial owners of investments.

• There must be at least 4 members in the Board of Trustees

• At least 2/3 of the members of the board of trustees must be independent.

• Trustee of one mutual fund can not be a trustee of another mutual fund.

How are Mutual Fund Structrured


SEBI

AMC

Unit holders

Savings

Units

Trust Investments

Returns

Trust

AMC Custodian

Registrar

Mutual Fund

Sponsor

AMCTrustInvestment Advisors

Broker - Dealers

Transfer Agent

Custodian

Exchange

Mutual Fund’s Bank

Investor’s Bank

Fund Administrator

Distributor

DTCC

Investor

Constituents of Mutual Fund

Sponsor• Akin to the Promoter of the company,• Contribution of minimum 40% of net worth of AMC,• Posses sound financial record over five years period,• Establishes the Fund,• Gets it registered with the SEBI,• Forms a trust, & appoints Board of trustee.

Trustees• Holds assets on behalf of unit holders in trust,• Trustees are caretaker of unit holders money,• Two third of the trustees shall be independent persons (not associated with the

sponsor),• Trustees ensure that the system, processes & personnel are in place,• Resolves unit holders GRIEVANCES,• Appoint AMC & Custodian, & ensure that all activities are accordance with the

SEBI regulation.


Custodian • Holds the fund’s securities in safekeeping,• Settles securities transaction for the fund,• Collects interest & dividends paid on securities,• Records information on corporate actions.

Asset Management Company• Floats schemes & manages according to SEBI,• Can not undertake any other business activity, other than portfolio mgmt services,• 75% of unit holders can jointly terminate appointment of AMC,• At least 50% of independent directors,• Chairman of AMC can not be a trustee of any MF.

Distributor / Agents• Sell units on the behalf of the fund,• It can be bank, NBFCs, individuals.


Banker• Facilitates financial transactions,• Provides remittance facilities.

Registrar & Transfer Agent• Maintains records of unit holders’ accounts & transactions• Disburses & receives funds from unit holder transactions,• Prepares & distributes a/c settlements,• Tax information, handles unit holder communication,• Provides unit holder transaction services.

Broker• Broker/Dealer is an individual or institution that acts as a principal in securities transaction. • Take the orders to the exchanges / ECNs for execution and trade for their own account and

risk. • When buying from a broker acting as a dealer, a customer receives securities from that firm's

inventory. Since most brokerage firms operate both as a broker and as a Principal (dealer), the term broker/dealer is commonly used.


• Who is the primary guardian of unit holders’ funds/assets– The AMC– The Trustees– The Registrars– The custodians

• Transfer Agents of a mutual fund are not responsible for– Issuing and redeeming units of the mutual fund– Updating investor records– Preparing transfer documents– Investing the funds in securities markets

• The Custodian of a mutual fund:– Is appointed for safekeeping of securities– Need not be an entity independent of the sponsors– Not required to be receive deliveries with SEBI

• Does not give or receive deliveries of physical securities• The Mutual fund is constituted as

– A trust – A private limited company– An asset management company– A trustee company

• Which of the following cannot be distributors of a mutual fund– Sponsor– Associate of sponsor– Associate of AMC– Employees of AMC








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Classification of Mutual Fund Schemes

Each category is classified into more sub-categories.

AMFI Classification of MF SchemesFund schemes

Portfolio objectives Growth & Income High Risk & High Return

Balanced Moderate Risk & Return Liquid & Money Market Fixed Return

Gilt Zero Risk ELSS Tax Saving

Fund of funds Additional diversification ETFs Market Driven


• By Structure– Open-Ended – anytime enter/exit

– Close-Ended Schemes – listed on exchange, redemption after period of scheme is over.

• By Investment Objective– Equity (Growth) – only in Stocks – Long Term (3 years or more)

– Debt (Income) – only in Fixed Income Securities, Gilt Funds – primarily in G-Sec

– Liquid/Money Market – Short-term Money Market (CPs, CDs, Treasury Bills)

– Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)

• Other Schemes– Tax Saving Schemes such as ELSS

– Special Schemes (ETFs, foreign funds)

• Risk– Sectoral funds are most risky; money market funds are least risky

• Tenor– Equity funds require a long investment horizon; liquid funds are for the short term liquidity needs

Classification of MF schemes


Open-ended plans

• Open-ended plans do not have a fixed maturity period.

• Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day.

• These schemes have unlimited capitalization, there is no cap on the amount one can buy from the fund and the unit capital can keep growing.

• These funds are not generally listed on any exchange.

• Open-ended plans are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme.

• Any time entry option: An open-ended fund allows one to enter the fund at any time and even to invest at regular


By Structure

Close-ended plans

• Close-ended plans have fixed maturity periods.

• Investors can buy into these funds during the period when these funds are open in the initial issue.

• Such schemes cannot issue new units except in case of bonus or rights issue.

• After the initial issue, investor can buy or sell units of the scheme on the stock exchanges where they are listed.

• The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors’ expectations and other market factors intervals.


By Structure…. contd

• Equity Funds are those that invest in shares or equity of companies.

• Bond Funds invest in fixed income instruments issued by government or corporate entities

• Hybrid Funds that invest in a combination of both stocks and bonds

• Money Market/Liquid Funds that invest in money market instruments

• Commodity Funds that invest in various commodities

• Real Estate Funds that invest in properties, land and building etc.


By Nature of Investment

Types of Funds - By Investment Objective

Equity Debt Money Market

Equity FundsIndex FundsSector Funds

Fixed IncomeFundsGILT Funds

Money Market Mutual Funds

Balanced Funds Liquid Funds


• 3 year lock in period

• Minimum investment of 90% in equity markets at all times

• So ELSS investment automatically leads to investment in equity shares.

• Open or closed ended.

• Eligible under Section 80 C upto Rs.1 lakh allowed

• Dividends are tax free.

• Benefit of Long term Capital gain taxation.

Other Schemes


• Of the following fund types, the highest risk is associated with – Balanced Funds– Gilt Funds– Equity Growth Funds– Debt Funds

• A close ended mutual fund has a fixed– NAV – Fund Size– Rate of Return– Number of Distributors

• Equity Linked Savings Scheme does not have which of the following features?– It entitles the unit holder to tax rebate– The investment is locked in for 3 years– A minimum stated level of investments is made in equity and equity related instruments– None of the above

• Gilt funds invest in– IT sector– AAA securities– Money market securities– Government bonds

• When comparing a fund’s performance with that of its peer group, the following cannot be compared– Two debt funds with 5 year maturities– A broad-based equity fund with an IT Sector Fund– A bond fund with bond index– A government securities fund with a government security








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Risk-return structure of schemes

Performance Measurement of Mutual Funds

For investors, the performance of their investment depends on what happens to the fund’s per unit value, or net asset value (NAV)

NAV = Market Value of Assets – Liabilities Number of Shares Outstanding

Computing Mutual Fund’s Net Asset Value

Calculating a Mutual Fund’s Net Asset Value

Net Asset Value (NAV)

• Definition: Total value of the mutual fund’s stocks, bonds, cash, and other assets minus any liabilities such as accrued fees, divided by the number of shares outstanding

Example:Stocks $35,000,000Bonds $15,000,000Cash $3,000,000Total value of assets $53,000,000Liabilities ($800,000)Net worth $52,200,000Outstanding shares 15 millionNAV = $52,200,000/15,000,000 = $3.48

Example• An open ended fund was purchased when its

NAV was Rs. 22. One year later, its NAV was Rs. 24. The annualised percent NAV change is ______

• Answer• % change in NAV = ( 24 -22) *100 = 9.09%

» 22


• Purchase price Rs. 22 per Unit• NAV at year end Rs. 23 per Unit• Interim Div. Rs. 3• Ex.-Div. NAV Rs. 21• Total Return=?

• Assume investment of Rs. 10000• Step 1: Initial Units alloted =10000/22=454.55• Step 2:Total Div.=454.55*3=1363.65• Step 3: Additional Units=1363.65/21=64.94• Step 4:Total Units=454.55+64.94=519.49• Step 5:Withdral Amt. =519.49*23=11947.17• Gain =11947.17-10000=1947.17• Gain of 1947.17 on the investment of Rs. 10000• So that on the investment of Rs. 100 gain is 19.47• Ans:19.47%


Its new (Old wine in a new bottle, participate in India’sgrowth potential)

Its at Rs 10 i.e its cheaper than a existing fund whose NAV is Rs.110

My neighbour is buying it My distributor / agent has strongly recommended it. I can make good profit in the short term

Actually there is no difference/benefit an individual has by investing in an existing Mutual fund or New Fund Offering

Investing in NFO

Investing in NFO.. exapmle

Systematic Investment Plan (SIP) Invest a fixed sum every month. (6 months to 10 yearsthrough post-dated cheques or Direct Debit facilities) Fewer units when the share prices are high, and more units when the share prices are low. Average cost price tends to fall below the average NAV.

Systematic Transfer Plan (STP)•Invest in debt oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.

Systematic Withdrawal Plan (SWP)

Mutual Fund Investment Modes

Mutual Fund Investment Modes

SIP Calculation

Risk –Return of different schemes

Risk-return structure

Risk –Return on Types of Funds

Risk-return structure

• The amount required to buy 100 units of a scheme having an entry load of 1.5% and NAV of Rs. 20 is:– Rs. 2000– Rs. 2015– Rs. 1985– Rs. 2030

• A fund’s investments at market value total Rs. 700 crores, Total liabilities stand at Rs. 50 lacs and the number of units outstanding is 28 Crores. What is the NAV?

– Rs. 30.19– Rs. 24.98– Rs. 32.15– Rs. 40.49

• An Investor buys one unit of a fund at an NAV of Rs. 20. He receives a dividend of Rs. 3 when the NAV is Rs. 21. The unit is redeemed at an NAV of Rs. 22. Total Return is

• a. 25.71%– Rs. 27.51%

• 21.27%• Rs. 21.75%• A funds NAV is affected by

– Purchase and sale of investment securities– Valuation of all investment securities held– Units sold or redeemed– All of the above– If the NAV of an open-ended fund was Rs. 16 at the beginning of the year and Rs.22 after 13 months, the annualized change in NAV is – 6.0%– 34.6%– 40.6%– 37.5%








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History of Mutual Funds

Global• First started in 1924

• Nearly 8,300 mutual funds available today

• More mutual funds in existence today than stocks listed on NYSE and AMEX combined

• Nearly half of all U.S. households own mutual funds

INDIA


1963 – 1987UTI sole player in the industry, created by an Act of Parliament ,1963

UTI launches first product Unit Scheme 1964

1987 - 1993In 1987 Public Sector Banks and FI's got permission to set up MF.

SBI mutual fund was the first non -UTI mutual fund

1993 - 1996

In 1993, Mutual Fund Industry was open to private players.

SEBI's first set of regulations for the industry formulated in 1993

Significant innovations, mostly initiated by private players

1996 - 1999

Implementation of new SEBI regulations led to rapid growth

Bank mutual funds were recast as per SEBI guidelines

UTI came under voluntary SEBI supervision.Dividends made tax free in 1999.

1999 - 2000

Rapid growth, significant increase in corpus of private players

Tax break offered created arbitrage opportunities

Bond funds and liquid funds registered highest growth

1964

1987

1993

2009 ?

Phases of Mutual Fund Industry in India



Fig 1.1: Total Net Assets Fig 1.2: Global MF Assets by Fund Type

• IN USA, a MF is constituted as an investment company and an investor buys the share of the fund.

• In USA, all mutual funds are open ended.

• In USA, funds are also classified as Tax Exempt and Non Tax Exempt Funds

• In India, classified as Open – Closed ended, Load and No Load Funds.

• Mutual Fund is NOT a company, it can be called as a portfolio of stocks, bonds and other securities or it can be called as pool of funds used to purchase securities on behalf of investors or a collective investment vehicle.

Importance points

• After UTI, the first mutual funds were started bya. Private sector banksb. Public sector banksc. Financial institutions

d. Non-banking Finance Companies• The private sector was granted permission to enter the mutual fund industry in

a. 1992b. 1993c. 1998d. 1995

• In US all Mutual Funds are classified as a) Close Endedb) Open Endedc) Both








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Regulatory Aspects

• Governed by SEBI (Mutual Fund) Regulation 1996– All MFs registered with it, constituted as trusts ( under Indian Trusts

Act, 1882)• Bank operated MFs supervised by RBI too• AMC registered as Companies registered under Companies Act, 1956• SEBI- Very detailed guidelines for disclosures in offer document, offer

period, investment guidelines etc.– NAV to be declared everyday for open-ended, every week for closed

ended– Disclose on website, AMFI, newspapers– Half-yearly results, annual reports– Select Benchmark depending on scheme and compare

Regulations - India

Regulatory AspectsRegulatory Aspects

• SEC- Securities Exchange Commission is the regulatory body of security industry including Mutual Fund.

• The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

• The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.

Regulatory Aspects

Regulations - US

Mutual funds are regulated by four primary laws:– Securities Act of 1933: specifies disclosure requirements

– Securities Exchange Act of 1934: details antifraud rules

– Investment Company Act of 1940: requires registration and minimal operating standards

– Investment Advisors Act of 1940: regulates fund advisors

Mutual funds are the only companies in the U.S.that are required by law to have independent directors, as follows (2001 SEC rules)

– Independent directors must constitute a majority of the board

– Independent directors select and nominate other independent directors

– Legal counsel to the independent directors must also be independent

Regulatory Aspects

Regulations - US

• Sebi has categorised obligations of Trust into General Due Diligence and Specific Due Diligence.

• General Due Diligence – Due care in appointing AMC Directors, observing irregularities in functioning. The purpose is to ensure that trust properties are protected by competent persons and agencies. Ensuring that appointed constituents are duly regd. With SEBI.

• Specific Due Diligence – Trustees must appoint independent auditors and obtain periodic audit reports. To obtain Compliance Test reports from the AMC once every 2 months. To prescribe a Code of Ethics for Trustees and AMC personnel.

Compliance with SEBI’s Requirements

• Only SEBI registered AMC can be appointed as investment managers of mutual funds

• AMC must have a minimum net worth of Rs. 10 Cr., at all times

• An AMC cannot be an AMC or Trustee, of another Mutual Fund

• AMC’ s cannot indulge in any other business, other than that of asset management

• At least half of the members of the Board of an AMC, have to be independent

• The 4th Schedule of SEBI regulations spells out rights and obligations of both trustees and AMC’s

Compliance with SEBI’s Requirements

• The trustees, on the advice of the sponsors usually appoint the AMC

• The AMC is usually a private limited co., in which the sponsors and their associates or JV partners ,are shareholders

• The AMC has to be a SEBI registered entity, with a minimum net worth of Rs. 10 Cr.

• The trustees sign an investment management agreement with the AMC, which spells out the functions of the AMC

Mutual Fund AMC appointment

• Though the trust is the mutual fund, the AMC is its operational face

• The AMC is the first functionary to be appointed and is involved in the appointment of all other functionaries

• The AMC structures the mutual fund products, markets them and mobilises the funds, manages the funds and services the investors

• All the functionaries are required to report to the trustees who lay down the ground rules and monitor their working

How are Indian mutual funds organized?

• AMC’ s cannot launch a scheme without the prior approval of the trustees

• AMC’ s have to provide full details of investments by employees and Board members in all cases where the investment exceeds Rs.1 Lakh

• AMC’ s cannot take up any activity that is in conflict with the activities of the mutual fund

What are the restrictions on the AMC?








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Portfolio Management Process








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Risk Management

Risk Management FunctionRisk category Risk factors

Fund management Volatility in performance, portfolio concentration,

Interest rate movement, liquidity risk & credit risk.

Operations Deal error, settlement problem, NAV & fund pricing error, inaccurate financial reporting, fraud.

Customer Error in deal processing, fraud . Marketing & distribution

New product development, selling & distribution

Other business risk Critical knowledge loss, skills shortage, third party risk •Disaster recovery & business contingency plans.

•Insurance against third party loss (R&TA), arising from error & omission.

Risk Management








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Investment Checklists

• Draw up your asset allocation– Financial goals & Time frame (Are you investing for retirement?

A child’s education? Or for current income? )– Risk Taking Capacity

• Identify funds that fall into your Buy List• Obtain and read the offer documents • Match your objectives

– In terms of equity share and bond weightings, downside risk protection, tax benefits offered, dividend payout policy, sector focus

• Check out past performance – Performance of various funds with similar objectives for at least 3-5

years (managed well and provides consistent returns)

Investment ChecklistsInvesting Checklist

• Think hard about investing in sector funds – For relatively aggressive investors– Close touch with developments in sector, review portfolio regularly

• Look for `load' costs– Management fees, annual expenses of the fund and sales loads

• Does the fund change fund managers often? • Look for size and credentials

– Asset size less than Rs. 25 Crores• Diversify, but not too much• Invest regularly, choose the S-I-P

– MF- an integral part of your savings and wealth-building plan.

Investment ChecklistsInvesting Checklist








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Mutual Fund Comparison

Mutual Fund Comparison • Absolute returns

– % difference of NAV

– Diversified Equity with Sector Funds– No

• Benchmark returns – SEBI directs

– Fund's returns compared to its benchmark

• Time period– Equal to time for which you plan to invest

– Equity- compare for 5 years, Debt- for 6 months

• Market conditions – Proved its mettle in bear market

Mutual Fund ComparisonMutual Fund Comparison








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Expenses

Expenses of Mutual FundAccounted for in FUND RETURN Not included in FUND RETURN

Management fee* Front end sales load Group fee* Back end sales load

Performance fee* Transaction fee Administrative fee* Redemption fee

Brokerage costs Account maintenance fee Interest costs Bid ask spreads

• An asterisk * indicates fee which is included in a fund’s expense ratio.• As per SEBI Rule, expense ratio should be 2.5% for equity & 2.25% for

debt fund of fund value.

ExpensesMutual Fund Comparison

84 Limited Access

• Two types of loads in Mutual Fund

Front end load – Fees that is charged at the time of investing in a mutual fund. Front-end loads reduce the amount of your investment. For example, let's say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund

Back end load – Fees charged at the time of redeeming out of a mutual fund. For example, the above $950 grows to $5000 in 2 years. There is back end load of 5%. Hence $ 250 will be deducted from the total amount and the investor will receive $4750.

There are some other fees which Mutual fund charges to the investor. Although these fees are only a few percentage points a year and seem like a minor expense, they create a serious drain on the performance over a period of years.

Mutual fund fees & expenses?

85 Limited Access

• Contingent deferred sales charge A mutual fund may charge sales charges that are reduced at certain time

intervals. For example, the fund may charge 6% of the sale price the first year after the shares are bought. Each year thereafter the fee would be reduced by 1% until no fee would be charged. This is an incentive for investors to leave their money in the fund.

• Management fees

Mutual funds may charge fees to cover expenses such as advertising, brokers'

costs and toll-free telephone lines. These are 12b-1 fees, regulated by law.

• Transfer fees

A fee is charged each time the investor transfers money within the company.

Mutual fund fees & expenses.. Contd

Expenses that are incurred in the launch of the fund are

called as initial issue expenses.

∙ The costs of registration and fund formation∙ Legal and advisory expenses∙ Costs of launching the scheme∙ Advertisement and promotion expenses∙ Distribution costs ∙ Commissions to selling agents

SEBI imposes a ceiling of 6% on these expenses.

What are Initial Issue Expenses

Can the Fund be launched without bearing any initial issue expenses ?

∙Yes

∙Such funds are called as no load funds

∙AMCs can charge an investment management fee, which is 1% higher than the statutory limit, in this case.

What are Initial Issue Expenses…contd

Latest changes on Initial Issue Expenses• IIE will be permitted for closed ended schemes only and such

scheme will not charge Entry load

• IN CES, IIE shall be amortized on a weekly basis over the period of scheme.

• IN OES, the sales, marketing and other expenses of sales should be met from the entry load and not IIE

Update on Initial Issue Expenses

Can the AMC charge all the expenses that it incurs, to the income of the fund ?

• No. There are two levels of restrictions• At the first level only certain kinds of expenses, that are identified as

having been incurred for the conduct of the business of the fund, can be charged to the fund.

• The second level of regulation refers to the limit on the total expenses, that can be charged to the fund

Following is the maxmum limit on the expenses For net assets up tp Rs. 100 Cr 2.50%For the next Rs 300 Cr. Of net assets 2.25%For the next Rs 300 Cr. Of net assets 2%

For the remaining net assets 1.75%

On debt funds the limits on expenses are lower by 0.25%

Mutual Fund Expenses

What are the fees charged by the AMC ?

The fees are regulated by SEBI as follows:• For the first Rs.100 Cr. Of net assets: 1.25%• For the net assets exceeding Rs. 100 Crore: 1.00%

• If the AMC does not charge any of the initial issue

expenses to the fund, it can charge the scheme a

management fee, that is 1% higher than the above rates

Mutual Fund Expenses

91 Limited Access

Mutual fund fees & expenses

• Two types of loads in Mutual Fund

Front end load – Fees that is charged at the time of investing in a mutual fund. Front-end loads reduce the amount of your investment. For example, let's say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund

Back end load – Fees charged at the time of redeeming out of a mutual fund. For example, the above $950 grows to $5000 in 2 years. There is back end load of 5%. Hence $ 250 will be deducted from the total amount and the investor will receive $4750.

There are some other fees which Mutual fund charges to the investor. Although these fees are only a few percentage points a year and seem like a minor expense, they create a serious drain on the performance over a period of years.

92 Limited Access

Mutual fund fees & expenses continued….

• Contingent deferred sales charge A mutual fund may charge sales charges that are reduced at certain time

intervals. For example, the fund may charge 6% of the sale price the first year after the shares are bought. Each year thereafter the fee would be reduced by 1% until no fee would be charged. This is an incentive for investors to leave their money in the fund.

• Management fees

Mutual funds may charge fees to cover expenses such as advertising, brokers'

costs and toll-free telephone lines. These are 12b-1 fees, regulated by law.

• Transfer fees A fee is charged each time the investor transfers money within the

company.








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Tracking Mutual Funds

• Filling up an application form and writing out a cheque = end of the story… No!• Periodically evaluate performance of your funds

– Fact sheets and Newsletters – Websites such as www.valueresearchonline.com,

www.mutualfundsindia.com, www.morningstar.in, www.lipperweb.com et al.

– Newspapers– Professional advisor

Keeping Track…

Tracking Mutual Funds








Risk Management

Regulatory Aspects


Fund Schemes


schemes


in India

AUM movements in





Warning Signals

• Fund's management changes;• Performance slips compared to similar funds;• Fund's expense ratios climb;• Beta, a technical measure of risk, also climbs; • Independent rating services reduce their ratings of the fund; • It merges into another fund;• Change in management style or a change in the objective of the fund.

Warning Signals

Warning Signals








Risk Management

Regulatory Aspects


Fund Schemes


schemes


in India

AUM movements in





AUM movements in India

Movement of AUMs in different categories over a period of time

Stock Funds have become a mainstream product. Liquid Plus Funds and FMPs have seen aggressive inflows due to regulatory changes. New asset classes like ETFs and FoFs have emerged.


Indian Asset Management Industry - Growth in Assets

Total Assets Under Management as on March 2009 – Rs 493286 croresTotal No. of players - 36









Risk Management

Regulatory Aspects


Fund Schemes


schemes


in India

AUM movements in






Penetration vis-à-vis Other Financial Products

Note: Penetration of Mutual Funds is still low as compared to Banks and Insurance Companies.









Risk Management

Regulatory Aspects


Fund Schemes


schemes


in India

AUM movements in






• MFs are not ‘get rich quick investments’

• MFs are not ‘risk free investment’

• MFs are not ‘assured return investment’

• MFs are not ‘a universal solution to all investment needs’

What Mutual Fund are not

•Mutual Funds invest only in shares.

• Mutual Funds are prone to very high risks/actively traded.

• Mutual Funds are very new in the financial market.

• Mutual Funds are not reliable and people rarely invest in them.

• The good thing about Mutual Funds is that you don’t have to pay attention to them.

Myths about Mutual Funds

Track record / experience of the fund house

Stability of the investment team / adherence to an investment process

Consistent performance of the fund across market cycles

Disclosure and service levels offered by the fund house

Relative performance among its peer group (across time periods)

Investment style (whether it suits your risk profile)

Look for Expense Ratio, Exit load etc

Factors to be considered before choosing a Mutual Fund

Thank You

Mutual Fund Kash

Economy & Finance

Transcript of Mutual Fund Kash