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MUTUAL FUND

Concept of Mutual Fund (MF’s)

S  Defined:- A fund that is created when a large number of investors put in their money, and is managed by professionally qualified persons.

S  It is a vehicle for collective investment, a way of becoming part-owner of the investment held under the scheme.

S  Till 1986, UTI was only mutual fund in India, which has outnumbered to 33 major emerged Mf’s.

Entities in MF’s operation

S  Sponsor:- It is like promoter of a company, maybe a bank, FI’s or a financial service company. For E.g. sponsor for Templeton Mutual Fund is Templeton international INC. Sponsor is responsible for setting up and establishing the mutual fund.

S  Trustee:- a corporate body appointed by sponsor. It appoints Asset Management Company(AMC), secure necessary approvals, periodically monitor AMC functions.

Entities in MF’s continues…

S  Asset Management Company(AMC):- also referred to as the investment manager, is separate company appointed the trustees to run the mutual fund. For E.G.: Templeton Asset Management Pvt. Is AMC of Templeton MF.

S  Custodian:- it handles investment back office operations of MF’s. It looks after receipt and delivery of securities, collection of income, distribution of dividends.

S  Registrar & Transfer Agents:- they handle investor related services such as sending fact sheet, annual reports. It may be outsourced to SEBI approved agents like KARVY & CAMS.

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MF’s FLOW PATTERN

ORGANISATION OF MF’s

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Mutual funds Classified

Open ended schemes

Close ended schemes

Interval schemes

Growth schemes

Income schemes

Balanced schemes

Money market

schemes

Tax saving schemes

Index schemes

Sector specific schemes

Classification Discussed…

S  Open ended schemes:- is the one that an investor can buy or sell as and when they intend to at a NAV based price.

S  Close-ended schemes:- it usually issue units to investors only once, when they launch an offer, called New Fund Offer (NFO). Thereafter, these units are listed in stock exchanges where they are traded on daily basis.

S  Exchange Traded Funds:- is a hybrid of close-ended & open-ended index funds. It is listed on stock exchange and like an open-ended fund it creates and redeems units in line with rise and fall of demand.

Open-ended Vs. Close-ended

Open-ended index fund

S  Subscription on continuous basis.

S  Permits investor to withdraw funds on continuing basis.

S  No fixed maturity period.

S  Not listed in secondary market.

Close-ended index fund

S  subscription for limited period(usually 3months).

S  Does not allow withdrawal as and when they like.

S  Has a fixed maturity period(5 to 15 yrs).

S  Listed on secondary market.

Structuring in ETF

Creation in-kind Redemption in-kind

ETF units Cash Buy/sell

Arbitrage

cash ETF units

Mutual Fund Terminology

S  NAV- It is actual value of a share on any business day. Its equal to

market value of the funds investment +receivable +accrued income –liabilities-accrued expenses

Number of shares outstanding

Continues…

S  Rate of return –It is the of money gained or lost on an investment relative to amount of money invested. It is also called as ROI

S  Repurchase price –It is the price at which the buyer of the securities is obilized to sell back the asset to the seller in relation to repurchase agreement

S  Standard deviation- equal to the square root of mean of the squares of the deviations from the arithmetic mean of the distribution.

Continues…

S  BETA - beta of a fund measures its past price volatility relative to a particular stock market index

S  ALFHA- Alpha measures the extra return earned on a scheme on a risk –adjusted basis

S  Large cap- Larger companies worth $5 billion or more, like General Electric (NYSE: GE).

S  Mid cap- Medium-size companies worth $1 billion to $5 billion, like Barnes & Noble (NYSE: BKS).

S  Small cap - Smaller companies worth $250 million to $1 billion, like Hot Topic (Nasdaq: HOTT).

Advantages of Mutual Funds

v Increased Diversification

v Daily Liquidity

v Professional Investment Management

v Ability to participate in investments that may be available only to larger investors

v Service & Convenience

v Government oversight

v Ease to comparison

Disadvantages of Mutual Funds

v Fees

v Less control over timing of recognition of gains

v Less predictable income

v No opportunity to customize

References of study

S  http://finance.indiamart.com/india_business_information/mutual_fund_companies.html

S  www.wikipedia.com/finance

S  http://sunseven.hubpages.com/hub/The-Top-10-Mutual-Funds-in-India

S  Security Analysis & Portfolio Management – Prassana & Chandra

S  Security Analysis & Portfolio Management- P. Pandian

S  http://www.e-investing.in/mutual-funds/106-reliance-mutual-fund-now-indias-largest-mf.html

AMIT KUMAR ROY VIVEK SINGH NITIN VERMA PARITOSH JAIN