It is not wise to put all eggs in one

basket

Mutual Funds Overview

A mutual fund is a common pool of money into whichinvestors place their contributions that are to beinvested in different types of securities in accordancewith the stated objective.

An equity fund would buy equity assets – ordinaryshares, preference shares, warrants etc.

A bond fund would buy debt instruments such asdebenture bonds, or government securities/moneymarket securities.

A balanced fund will have a mix of equity assets anddebt instruments.

Mutual Fund shareholder or a unit holder is a partowner of the fund’s asset.

History of Mutual Funds

Phase I – 1964 – 87: In 1963, UTI was set up by Parliament under UTI act and given a monopoly. The first equity fund was launched in 1986.

Phase II – 1987 – 93: Non-UTI, Public Sector mutual funds.

Like-SBI Mutual Fund,

Canara bank Mutual Fund,

LIC Mutual Fund,

Indian Bank Mutual Fund,

GIC Mutual Fund and

PNB Mutual Fund.

Phase III – 1993 – 96: Introducing private

sector funds. As well as open-end funds.

Phase IV – 1996: Investor friendly regulatory

measures Action taken by SEBI to protect the

investor, and enhance investor’s returns

through tax benefits.

Myths

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.

Facts

Equity Instruments like shares are not only

a part of the securities held by mutual

funds. It also also invest in debt securities

which are relatively much safer.

Mutual Funds are there in India since 1964.

Mutual Funds market has evolved in U.S.A

and is there for the last 60 years.

Mutual Funds are the best solution for

people who want to manage risks and get

good returns.

Types of Mutual Funds

1. Schemes according to Maturity Period:A mutual fund scheme can be classified into open-ended scheme or

close-ended scheme depending on its maturity period.

Open-ended Fund/ Scheme

Open-ended schemes are those schemes where investors can redeem and buy new units all throughout the year as per their convenience at NAV related prices.

Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed.

2. Schemes according to

Investment Objectives

Growth / Equity Oriented Scheme

Income / Debt Oriented Scheme

Balanced Fund

Gilt Fund

Sector specific funds/schemes

3. Load or no-load Fund

Mutual funds incur certain expenses such as brokerage,marketing expenses, and communication expenses. Theseexpenses are known as ‘load’.

A Load Fund is one that charges a percentage of NAV for entry or exit.That is, each time one buys or sells units in the fund, a charge will bepayable. This charge is used by the mutual fund for marketing anddistribution expenses. Suppose the NAV per unit is Rs.10. If the entry aswell as exit load charged is 1%, then the investors who buy would berequired to pay Rs.10.10 The investors should take the loads intoconsideration while making investment as these affect their yields/returns.A no-load fund is one that does not charge for entry or exit. It means theinvestors can enter the fund/scheme at NAV and no additional charges arepayable on purchase or sale of units.

Calculation of NAV

NAV = Total market value of assets under management - liabilities

Number of mutual fund units outstanding

Suppose there are 10 investors investing 1,00,000Rs each

Total Investment- 10 L

Unit value of Scheme 10/unit

No of units allotted to each investor – 10,000

Investment of each Investor- 10,000*10=1,00,000

Total Units- 10,00,000/10 = 1,00,000

Now lets say that after 1 year the invested values grows to 14,00,000

from10,00,000

NAV = 14,00,000/1,00,000 = 14

NAV has become 14 now from 10

Any new Investor wanting to invest in this scheme will get each unit

at 14 not at 10

Advantages of MF

Affordability

A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc.depending upon the investment objective of the scheme. An investor canbuy in to a portfolio of equities, which would otherwise be extremelyexpensive. Each unit holder thus gets an exposure to such portfolios withan investment as modest as Rs.5000/-.

Diversification

We must spread our investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.).

Variety

Mutual funds offer a tremendous variety of schemes.

Professional Management

Qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money.

Transparency

Being under a regulatory framework, mutual funds have to disclosetheir holdings, investment pattern and all the information that canbe considered as material, before all investors. SEBI acts as awatchdog and safeguards investors’ interests

Liquidity

A distinct advantage of a mutual fund over other investments isthat there is always a market for its unit/ shares. It's easy to getone’s money out of a mutual fund. Redemptions can be made byfilling a form attached with the account statement of an investor.

Risks associated

Costs – The biggest source of AMC income is generally from the entry & exit load which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.

Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return.

Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale.

Organisation Structure of Mutual

Funds

Fund Sponser

Any person or corporate body that establishes

the Fund and registers it with SEBI.

Form a Trust and appoint a Board of Trustees.

Appoints Custodian and Asset Management

Company either directly or through Trustee ,

in accordance with SEBI regulations.

Trustees

Created through a document called the Trust

Deed that is executed by the Fund Sponsor

and registered with SEBI.

The Trust- may be managed by a Board of

Trustees- a body of individuals or a Trust

Company- a corporate body.

Protector of unit holders interests.

2/3 of the trustees shall be independent

persons and shall not be associated with

the sponsors.

Rights of Trustees:

• Approve each of the schemes floated by the AMC.

• The right to request any necessary informationfrom the AMC.

• May take corrective action if they believe that the conduct of the fund's business is not in accordance with SEBI Regulations.

• Have the right to dismiss the AMC,

• Ensure that, any shortfall in net worth of the AMC is made up.

Obligations of the Trustees:

Enter into an investment management agreement with the AMC.

Ensure that the fund's transactions are in accordance with the Trust Deed.

Furnish to SEBI on a half-yearly basis, a report on the fund's activities

Review the investor complaints received and the redressal of the same by the AMC.

Asset Management Company

• Acts as an investment manager of the Trust under the Board Supervision and direction of the Trustees.

• Has to be approved and registered with SEBI.

• Will float and manage the different investment schemes in the name of Trust and in accordance with SEBI regulations.

• Acts in interest of the unit-holders and reports to the trustees.

• At least 50% of directors on the board are independent of the sponsor or the trustees.

Custodian

• Has the responsibility of physical handling and safe keeping of the securities.

• Should be independent of the sponsors and registered with SEBI.

Depositories

• Indian capital markets are moving away from physical certificates for securities to ‘dematerialized’ form with a Depository.

• Will hold the dematerialized security holdings of the Mutual Fund.