Mutual Funds in India

Ashish Batra

Components of Financial System

• Financial Market

• Financial Institution

• Financial Services

• Financial Instruments

On the basis mutual funds rated

• Weight of Risk

• Return & Assets under management

• Net assets value

• Book value

• Price earning ratio

Definition of Mutual Funds

• An investment programme funded by shareholders that trades in diversified holdings and is professionally managed.

• The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.

Understanding Mutual Fund

Cont.

• When an investor subscribes to mutual fund,he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the fund.mutual fund investor also known as mutual fund unit holder,because mutual fund is issued units to investor as per his contribution in fund.

Cont..

• Any change in the value of investments made in the capital market instruments like shares,bonds etc,is reflected in the Net Asset Value (NAV) of the scheme.

• NAV is defined as the market value of mutual fund schemes assets net of its liabilities. NAV of scheme is calculated by dividing the market value of schems assets by total number of units issued to the investors.

Example

• Scheme offer nav starts with Rs 10 per unit• Assume that number of units issued to the investors is

10000• then the scheme fund value 10000*10 = Rs 100,000 • if an investor Mr A owns 5 units of the scheme ,then his

total contribution of the scheme is Rs 50 (unit price* number of units)

• benefit of scheme = upside unit price or downside unit price ,multiple with number of units of Mr A

Types of Mutual Funds

(On the basis of objective)

1 Equity/Growth Funds

2 Tax Saving Funds

3 Debt Funds

4 Balanced Funds:

Types of Mutual Funds

(On the basis of flexibility )

1 Open - ended funds

2 Close ended funds

Equity/Growth Funds

• Funds that invest equity shares are called equity funds are growth funds.They carry the principle objective of capital appreciation of the investment over medium to long term.there are different types of funds such as Diversified equity funds,sector specific funds and indexed funds.

Funds under Equity/ Growth

• Diversified Funds: These funds invest in companies spread across sectors.These fund are generally meant for investors , who want a diversified portfolio across sectors.

• Sector Funds: These funds are invested primarily in

equity shares of companies in a particular sector or industry. Ex: infrastructure,it,real estate

• Index Funds: These funds invest in the name pattern as popular market indices like Nifty,BSE 100.The money collected from the investors is invested only in the stocks ,which represents the index. Ex: Nifty index fund will invest only in the nifty 50 stocks.

Tax Saving Funds

• These funds offer tax benefits to investors under the income tax act.

3)Debt Funds: These funds invest in high rated fixed income bearing instruments like bonds,debentures,Govt Securities ,commercial paper and other money market instruments.They are the best suited for the medium to long term investors who are averse to risk and seek capital preservation.They provide regular income to the investor

Under Debt Funds• Liquid Funds/Money market Funds: These funds invest in highly

liquid money market instruments .The period of investment could be as short as a day and maximum one year..They provide easy liquidity. These funds are ideal for corporate,institutional investors and business houses that invest their funds for very short period. ex: Treasury bills,certificate of deposit issued by banks..etc

• Gilt Funds: These funds are known as government securities in India.Gilt Funds invest in government papers having medium to long term maturity period,issued by Govt.These investments have little credit risk and provide safety of principal to the investors.gilt funds are exposed to interest rate risk,interest rates and prices of debt securities are inversely related.

Balanced Funds

• 4)Balanced Funds: These funds invest both in equity shares and Debt instruments .They provide a steady return and reduce the volatility of the fund.These funds are ideal for medium to long term investors who are willing to take moderate risk.

On the basis of flexibility • 1)open - ended funds : These funds do not have a fixed date of

redemption. Generally they are open for subscription and redemption throughout the year.The fund prices are linked to the daily net asset value(NAV). From the investors perspective ,these funds are having much liquidity than closed -ended funds.

• 2)Close ended funds: These funds are open initially for entry during the initial public offering(IPO) and thereafter closed for entry as well as exit.These funds have a fixed date of redemption .One of the Characteristics of close ended schemes is that they are generally traded at a discount to NAV ,but the discount narrows as maturity nears.These funds are open for subscription only once and can be redeemed only on the fixed date of redemption.

Advantages of Mutual Fund:

• Professional management

• liquidity

• Transparency

• Flexibility

• Portfolio Diversification

• Low cost

• Tax Benefit