Assignment

on
Mutual Funds
“It’s all about money, honey…”
 Investment
Investment is the employment of funds on assets with an
aim of earning income or capital appreciation.
It has two attributes:
 Time ; and
 Risk.

The Expected Rate of Return (EROR) =

Rate of Inflation (to compensate Time value of money)
+ Risk Premium
 Investment Objectives

One needs to invest to:

 Earn return on your idle resources
 Generate a specified sum of money for a
specific goal in life
 Make a provision for an uncertain future
 Risk
Risk is the possibility of incurring a loss.
It is caused by Uncertainty
Risks may be classified as:
 Systematic Risk
- Market Risk
- Interest Rate Risk
- Purchasing Power Risk
 Unsystematic Risk
- Business Risk
- Financial Risk
 Mutual Funds
These are funds operated by an investment
company which raises money from the public
and invests in a portfolio (group) of assets
(shares, debentures etc.), in accordance with a
stated set of (shared) objectives.
Mutual Fund is a substitute for those who are
unable to invest directly in equities or debt because
of resource, time or knowledge constraints.

Mutual Funds are usually long term investment

vehicle though there some categories of mutual
funds, such as money market mutual funds which
are short term instruments.
A Mutual Fund is a body corporate registered
with SEBI (Securities Exchange Board of India)
that pools money from individuals/corporate
investors and invests the same in a variety of
different financial instruments or securities such
as equity shares, Government securities, Bonds,
debentures etc.

Corpus: The amount raised by Mutual Fund

organisations
Mutual Fund – The modus operandi

Mutual funds issue units to the investors. The

appreciation of the portfolio or securities in
which the mutual fund has invested the
money leads to an appreciation in the value of
the units held by investors.
 Net Assets Value

Net Assets Value (NAV) =

Market Value of Securities in the Portfolio
Number of Units in the Fund
Mutual Fund: The Advantages
 Funds for all reasons and seasons
 Professional Investment Management
 Risk reduction through diversification
 Convenience
 Liquidity of investment
 Lower transaction costs
 Regulatory Protection
 Relatively higher returns
Mutual Funds: The Schemes
Based on Investment timing and freedom

 Open Ended

 Closed Ended

 Interval Funds

 Systematic Investment Plans (S.I.P.s)

 Systematic Withdrawal Plans (S.W.P.s)

Mutual Funds: The Schemes
Based on Investment Objectives:

 Growth Fund

 Income Fund

 Balanced Fund
Mutual Fund: The Schemes

Based on Loading:
 Loaded Funds
- Entry Load
- Exit Load
 Non-loaded Funds
 Mutual Funds: The Schemes
Based on Portfolio:  Contra Fund
 Sector Funds  Index Funds
- FMCG Funds Junk Bond Funds
- Pharmaceutical Funds, etc  Guilt / Liquid Funds
 Area Funds  Real Estate Funds
 Offshore Funds  Bullion / Gold Fund
 Fund of Funds  MMMFs
 Event Fund / Activity Fund
 Mutual Funds: The Schemes
Other Misc. schemes:
 Exchange Traded Funds (ETF s)
It’s a hybrid of individual stock trading and
Open- Ended mutual funds.
The demand and supply of the units determine
the price at which the funds can be traded just like
shares listed in a stock exchange.
NIFTY Benchmark Exchange Scheme is the first ETF in
India
 Mutual Fund: The Organisation

o The Sponsor

o The Trust

o The Asset Management Company

o The Custodian of Assets Under Management (AUM)

Mutual Funds: The Limitations

 Not a Risk Free investment avenue

 Inappropriate Fund Management

Conventional Portfolio policies

Absence of Equity Research

Mismanagement / Embezzlement of funds

Unscrupulous investment decisions e.g. UTI, CanMF

 Absence of Equity Research

Mutual Funds: The Limitations
 Lack of transparency of operations
Governance
Composition of portfolio
NAV
Rate of Return
Comparative study of competitors
Profit, declaration of dividend, etc.
 Mutual Funds: The Limitations
 Small investors are not the real beneficiaries
Single investor base (more than 50 such schemes
were launched)
Financial institutions, Corporate clients, etc are
the major investors
Diversion of income available to small investors
into or for the benefit of large investors
 Difficulty in selecting a good fund manager
 Lack of stringent regulatory framework
Late trading practices to favour large investors
Mutual Funds: The Limitations
 Lack of awareness from the part of investors

 Improper guidance

 Dividend Stripping

Buying MF before dividend declaration and disposing

after receipt of dividend, thereby creating a Short
Term Capital Loss, and setting off the same with
other Short Term Capital Gains; and hence evading
the liability of tax.