“Don't let the noise of othe ins drown out your own inner voice.” _ (SUNNY MARKS ALLOCATION (ICAI PAST EXAMS) 16M 12M 8M 8M 8M 8M 8M Nov’ 20 JAN' 21 JUL 21 DEC’ 21 MAY’ 22 NOV’ 22 MAY’ 23,alae rma av STUDY MENTOR Path to Exemption » 4 ee Youn Friend, Philosopher & Guide... Cert tai Dew CN eae aus No. Bru orang @ icy) ® Co How to Achieve > FIRST ATTEMPTPASS RANK 1 | Introduction to Mutual funds 1-2 2 | Net Asset Value (NAV) 3 3 | Should we invest in Stocks or Mutual 3-4 Funds? How to establish a Mutual Fund? 4 5 | Benefits & Drawbacks of Investing 5 through Mutual Funds 6 | Classification of Mutual Funds 5-8 7 | Types of Schemes 8-12 8 | Option of Mutual Funds 13 9 | Systematic Withdrawal Plan (SWP) 14 10| Systematic Investment Plan (SIP) 14 11 | Calculation aspects of Mutual Fund 14-15 12 | Concept related to Mutual Fund 15-17 13 | Expenses of Mutual Fund 17-19 CT eealae Paattu How to Achieve > rma Pore aise aris ® ® Ly FIRST ATTEMPT PASS a Co RANK 1-10 14] Return from a Mutual Fund 19 15 | Basic Calculation of NAV (QU, Q2,Q3) | 20-21 16 | Calculation of NAV with different 21-22 instruments (Q4) 17 | Calculation of unit price (Q5) 22-23 18 | Calculation of Return from Mutual Fund 23 (Q6,Q29) 19 | Original discount & future system (Q7) 23 20] Calculation of Effective Rate of Return | 23-24 (Q8) 21 | Calculation of Funds return (Q9) 24 22 | Calculation of Monthly Return (Qi0) 25 23 | Return on Investment (Q11) 25-26 24 Calculation of Rate of Return (Q12) 26 25 | Dividend/Dividend Reinvestment Plan 26-27 (Q13) 26 | Calculation of Month end NAV (Q14) 27 27 | Calculation of revised NAV (Q15,Q16) | 28-30 28 | Calculation of Effective Yield 30-33 (Q17, Q18,Q19) 29 Calculation of NAV of Multiple years 33-34 (Q20, Q21) 30| Determination of preferable option (Q22) | 34-35 31 | Calculation of annual rate of return (Q23) | 35-36 32 | Calculation of annual rate of return for | 37-39 multiple investors (Q24) CT eealae Paattu How to Achieve > rma Pore aise aris ® ® Ly FIRST ATTEMPT PASS a Co RANK schemes (Q41) - Dec ‘21 1-10 33 Calculation of Effective Yield (Q25) 39-40 34 Calculation of NAV (Advance problem) | 41-42 (Q26) 35| Computation of Income available, Issue | 42-43 price, Repurchase price & NAV at the end (Q27) 36 | Calculation of Fee Payable (Q28) 43-44 37 | Determination of Value of Portfolio (Q29) | 44-45 38 Calculation of rate of return to investor | 46 and fund manager (Q30) 39 | Calculation of NAV with Load (Q31) 46 40 | Calculation of Front end and Back end load| 46-47 (Q32) 41 | Reverse calculation of returns (Q33,Q34) | 47 42 | Calculation of Net financial benefit (Q35) | 48 43 | Determination of Amount of Interest to | 49 be earned annually (Q36) 44] Calculation of NAV, Valuation of 50-51 securities, & Expense Ratio (Q37) 45 | Calculation of Effective Yield under 52-53 Dividend & Bonus plan with STT & Capital Gains (Q38) 46 | Master sum - Combination of various 54-55 concepts (Q39) - May '22 47 | Determination of NAV when dividend paid | 55-56 & its annualised return (Q40) - May '22 48 | Calculation of expected NAV of multiple | 56-58 CT eealae Paattu How to Achieve > rma Pein eiann Bru) ® @ cco GTHEN (Q47) - Old PM Question FIRST ATTEMPT ASS RANK 49| Calculation of Effective yeild per annum | 58-59 and comment thereon (Q42) - July ‘21 50] Advance problem including Repurchase | 59-60. price & NAV at end (Q43) - Jan ‘21 51 | Calculation of issue price of Scheme 61-62 (Q44) - Nov '20 52 | Side Pocketing & its Process (Q45)-Nov | 62 "20 53 | Indicators to exit a mutual fund scheme | 62 (Q46) - Old PM Question 54] Short note on Money Market Mutual Fund | 63 CT eealae rma PREVIEW TJ INTRODUCTION TO MUTUAL FUNDS? INTRODUCTION To IAM SUD ee 2] HOW TO ESTABLISH MUTUAL FUND? - tx~ SPONSOR ld es En) Oe ee saealae rma 3] TYPES OF SCHEMES. FIXED MATURITY |ALANCED, i = PLANS, FUNDS a} OT cuss eres tinis (nett eeautmy ero er est drvaNrol EXCHANGE TRADED FUNDS (ETFS) Bieaee cused EQUITY DIVE! EUNDS laoermer in ice CASH FUND mea o=) a ver cetan 0] SECTOR FUNDS Treated peice a) Pea 5] CLASSIFICATION OF MUTUAL FUNDS Gira || oe Pena Baad || Sameer! Seam! rae ae we Cools funds funds . . a eeNerTTS - (reaenrry|_weuaeevaTe> ) PROFESSIONAL MANAGEMENT || DIVERSIFICATION | LIQUIDITY TRANSPARENCY | LOW COST ) HIGHER RETURNS ECONOMIES OF SCALE ) ee [No GuaRANTEE OF RETURN | SELECTION OF PROPER FUND)| COST FACTOR [UNETHICAL PRACTICE) (Transfer DIFFICULTIES J( Lock In PERIOD | TAXES ) Oe ee saealae rma 8] PLANS RELATED TO I MUTUAL FUNDS, 9] NAV = EVERY MF SHOULD CALCULATE | | |10] RETURN NAV ON DAILY BASIS INAV NAViguag) * Dividend « “CPi (ws NeGeumeousasone — Where, PENSE RATIO Net Asset Value of the Scheme = Market value of investments + Receivables + Other accrued income EXEENSE INCURRED PERUNZT + Other assets - Accrued Expenses - Other payables ‘AVERAGE NAV = Other Liabilities 1S] TRACKING ERROR reay ferential retirn verge differential cru n= No, of servation 12] REQUIRED RETURN R,-—__|____ T= Initial expenses (%) R, + Recurring Expenses (%) 14] ENTRY LOAD 11 EXTTLoAD TATTIME OF [AT TIME OF SALE] PURCHASE] SP ou NAV(L- EXIT LOAD) NAV(1+LOAD%) CT eealae rma Gold is the best imesiment toga beat inflation. Real Estate Market is going very high but it is impossible to purchase a property in ‘Mumbai due to its high pricing. CA Rakesh Shunjhunwala earns crores of Rupees by investing in Share Market (Equity Shares), 9 T have so less money, but I want to invest in above Assets (Shares, Gold, Real Estate). How Can I do this?? The Solution to above problem is Mutual Funds. Pn a YEAR PRICE YEAR PRICE YEAR PRICE YEAR PRICE 1995 | Rs.4,680 2002 | Rs.4,990 2009 | Rs.14,500 2016 | Rs.28,623 1996 Rs.5.160 2003 | Rs.5,600 2010 | Rs.18,500 2017_‘| Rs.29,667 1997 | Rs4,725 2004 | Rs.5,850 zon | Rs.26,400 2018 | Rs.31,438 yess | Rs.4,045 2005 | Rs7,000 2012 ‘| ‘Rs.31,050 2019 | Rs.35,220 1999 | Rs.4,234 2006 | Rs.10,800 2013 | _Rs.29,600 2020 | Rs.48,651 2000 | Rs.4,400 2007 | Rs.12,500 2014 | Rs.28,006 2021 | Rs.48,720 2001 s.4,300 2008 | Rs.14,500 2015 | Rs.26,343 2022 ‘| Rs.52,670 Naa tone] YEAR PRICE PRICE YEAR PRICE YEAR PRICE 1995, Rs.909 2002 | Rs.1,094 2008 | Rs.5,201 2016 Rs.8,186 1996 Rs.899 2003 | Rs.1,880 2010 Rs.6,351 2017 | -Rs.10,531 1997 Rs1,079 2004 | Rs.2,081 20n Rs. 4,624 201s | Rs.10,863 1998 Rs.884 2005 | Rs.2,837 2012 | Rs5,905 201s | Rs.12,168 1999 5.1480 2006 | Rs.3,966 2013 5.6304 2020 | Rs.13,981 2000 | Rsi,264 2007 | Rs.6,319 2014 | -Rs.8,283 202 | Rs.17,203 2001 s.1,059 2008 | Rs.2,959 2015 | Rs. 7,964 2022 | Rs.18.159 CT eealae rma ‘The money pooled in by large number of investors is what makes up a Mutual Fund. ‘A mutual fund is a pool managed by a professional Fund Manager. Ttisatrust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor ‘owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme's "Net Asset Value" or "NAV". In other words, a Mutual Fund is one of the most viable investment option for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at arelatively low cost. Here's a simple way to understand the concept of Mutual Fund Unit. Let's say there is a box of 12 chocolates costing Rs. 40. Four friends decide to buy the same, but they have only Rs.10 each and the shopkeeper only sells one of the box. So the friends decide to pool in Rs.10 each and buy the box of 12 chocolates. Now based on their contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds. And how do you calculate the cost of one unit? Simply divide the total number of chocolates: Rs.40/12 Chocolates = Rs.3.33 Per Chocolate. So if youwere to multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of Rs.10, This results in each friend being a unit holder in the box of chocolates that is collectively owned by all of ‘them, with each person being a et owner of the box. Passed back to cr indoors — Posing M UTU AL neu Fund enager FU N DS Generate t v J Sahi Hai_ Return Securities 7 (Diagram 7.1) Invest in Securities 1.1Who caninvestin MutualFunds? > ‘Anybody with an investible surplus of as little as a few thousand rupees can invest in mutual funds by buying units of aparticular mutual fund scheme that has a defined investment objective and strategy. 1.2How Mutual Fundsworkforyou? © The money collected from the investors is invested by a fund manager in dif ferent types of securities. These could range from shares and debentures to money market instruments depending upon the scheme's stated objectives. ‘The income earned through these investments and capital appreciation realized by the scheme is shared by its unit holders in proportion to the units owned by them. (please refer the diagram 7.1 above) CT eealae rma 2.NetAssetValue(NAV) © The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV). In simple. words, NAV is the market value of the securities held by the scheme. mpLe: 2" stock market, share price is market value of Shares and: EXAMPLE: 1 jutual Funds, NAV is market value of units of Mutual Fund. How NAVis calculated? Tris value of net assets of the funds. The investor's subscription is treated as the unit capital in the balance. sheet of the fund and the investments on their behalf are treated as assets. The fund's net assets are definedas the assets less liabilities. Where, Net asset value of the scheme Net Asset Value of the Scheme = Market value of investments| ‘Number of units outstanding + Receivables + Other accrued income + Other assets -| Accrued Expenses - Other payables - Other Liabilities 3. Should we invest in Stocks or Mutual Funds? © ‘As soon as, you have set your goals and decided to invest in equity the question arises should you invest in stocks or mutual funds? Well, youneed to decide what kind of aninvestor youare. First, consider if you have the kind of disposable income to invest in 15 - 20 stocks. That is how many stocks you will have to invest in if youwant to create a well-diversified portfolio. Remember the familiar saying: Do not put all your eggs in one basket? If Rs, 5,000 were all you have to spare, it would be impractical to invest it ‘across many stocks. Many beginners tend to focus on stocks that have a market price less than Rs. 100 or Rs.50 ; that should never be a criterion for choosing a stock. Also, brokerage could eat into your returns if you purchase small quantities of astock. On the other hand, you would be able to gain access to wide basket of stocks for Rs.5,000 if you buy into a fund, Investing in funds would also be an easy way to build your equity portfolio over time. Let's say you can afford to put away Rs, 1,000 a month in the market. You can simply invest in fund every month through a Systematic Investment Plan (SIP) as a matter of financial discipline. You can save yourself the trouble of scouting for astock every month, That brings us to the next point. Do you have the time to pick stocks? You need to invest a considerable amount of time reading newspaper, magazines, annual reports, quarterly updates, industry reports and talking to people who are familiar with industry practices. Else, you certainly won't catch a trend or pick a stock ahead of the market. How many great investors have you heard of who have not made investing their full-time job? Plus, you may have the time, but not the inclination. You have to be an active investor, which means continuously monitor the stocks you pick and make changes - buy more, cut exposures- depending upon the turn of events. These actions have costs as well. As you churn your portfolio, you bear expenses such as capital gains tax, Funds do not pay capital gains tax when they sell a stock, All this assumes you know what you are doing and have the skill to pick the right stocks. You are likely to be better at investing ina industry you understand. Only, too bad if that industry appears to be out of favour in ‘the market. NAV: CT eealae rma If you love the thrill of the ups and downs in the stock market: if you find yourself turning to business channels and business newspapers hoping that you can pick the next Infosys; if you have an instinct for spotting stocks and, importantly, the discipline to act on it; if you have the emotional maturity to cut your losses when youare ahead, then you can trust yourself to invest in stocks. Otherwise, hand over your money to the professional. Mutual funds could be the best avenue for the risk- averse Investors. 4. How to Establish a Mutual Fund? Tn India, a mutual fund is required to be registered with SEBI which regulates securities market before it can collect funds from public. MF is Regulated by SEBI and it comprises of 4 main pillars as below Pe AMC rev TTC {Assets Management Ci Establishes the MF & | Job of the MF Trustees Responsible for Responsible for securing & gets it registered with|+ To ensure that schemes | managing the assets of | managing the securities held ‘SEBI. floated and managed by ‘a mutual fund, by within a mutual fund, the AMC are in deciding the accordance with SEBI & investment trust deed. + Ensures that funds are opportunities. deployed in interest of unit holders + Sponsor shouldbe | Sponsors is the capital | AMCservices all the | Funds portfolio manager in Profitable provider while trustee is administrative, pees ee eee aise franc serices | thenteral reputr of | manger an operating | Securities owned by the usiness for more e fund. Functions of mutual fun than 5 years. Eg: HDFC Trustee Co.Ltd. | Eg: HDFC AMC Le evn a ae custodian and not directly Peete with the fund itself. This is worth of the AMC. done to reduce the risk of Eg: For Birla Sun Life fraud. Mutual Fund, Aditya Eg: HDFC Bank Limited Birla Financial Services are sponsors, ‘AUM of Indian Mutual fund industry as on October 31,2022 is Rs. 39.5 Trillion. Which is a5 times increase fromRs. 7.68 Trillion on October 31, 2012, within a span of 10 years. CT eealae rma 5. Benefits & Drawbacks of Investing through Mutualfunds > I. Benefits ee oe eT Well Transparency iver rere) Skilled & | Thvestment in |+Open Ended «Systematically invest | Registered | Regular Experienced | cross section | (Purchase & (SIP) or withdraw (SWP) | with SEBI 4| investment managers with| of industries | Redemption funds from wide range of | provide | disclosure on Research | and sector by | Sete from) | schemes. | excellent | monty eam, «Close Ende “Trvestors can aso invest | investor | quartery/ hal balancit lancing THe Geuying & Sling | indifferent types of | protection. | yearly basis, ‘on Stock instruments with even (NAV published Exchange) small savings daily) TEN) tox around 25% Ta Very good return Ea Allows access to high PE | of amount received| Pige | over medium to BE) entry tevel markets: by AMC. long term duration like real estate, Il Drawbacks of a Mutual Fund: RO ci ae en ay aa acca Pieuerd Risk of losing investment on Past | Management | Sale of Fund —|Liquidating a Can deny account of Poor performance | Performance | fees reduce | holdings to | managers do |MF portfolio| investors of fund manager, maynot | theretumn | its sister | not consider |may increase| with short guarantee | to investors. |concerns for| personal tax| risk, fees | term May provide less returns future : substantive | situations and | benefits ‘than Benchmark, returns. | Payment of | notional commissions entry &exit | gains. | Egt Capital Focus on short term and load. gain tax and other taxes. neglect the long term, 6.Classification of MutualFunds © [lrunctional classification portfolio classification E] ownership Classification - Open Ended - Equity Funds Public Sector MF - Closed Ended (Growth Aggressive, Income) - Private Sector MF - Interval Funds ~ Debt Fund - Foreign MF (Bond, Gilt etc.) - Special Funds Bh birect pian Oe ee saealae rma 6.1, Functional Classification (Also called as Structural Clas: a| OpenEndedFunds ,, Close Ended Scheme eur [Available for subscription (Sale [Envestor can buy during IPO or|Open for purchase of redemption during pre-| IRepurchase) throughout the year |from stockmarket after listing, |specified intervals (monthly, quarterly, annually) Convenience to Buy & Sell Units | Exit by selling in the stock | Not required to be listed on stock exchange. @ NAV, directly from the market. mutual fund company. Key feature = Liquidity (Direct | Fixed Maturity period (3-15 | Fresh issue possible during specified interval from MF Company) years), period @ prevailing NAV. Maturity period not} defined, 6.2. Portfolio Classification (Also Called as Investment Objective Classification) (i) Equity Oriented Mutual Fund | (Majority of money collected is invested in Equity Shares.) Main Aim + Capital appreciation by increase in share value. + Regular inflow of dividend. + Ideal for investors having a long term outlook seeking growth over a period. Pe Re ee ee ene Long term capital appreciation [Expecting Super normal returns by| Maximise regular income of investors by investing in (Start-ups, IPO'S,| investing in companies providing regular \Speculative Stocks best for risky| dividend and in high yield money market investment) instruments. (i) Debt Funds Prec iare roar Invest in fixed Income Securities - €g: Govt. Bonds, | Invest majority money in Government Securities and Corporate Debenture, Money Market etc. Treasury Bills (Less) Volatile than Shares & provide regular income. (interest) Risks with Bond Funds + Interest raterisk (Change ininterest rate leading to fall in market value of Bonds.) + Credit Risk (Risk of default in repayment of loans.) + Prepayment Risk (Related to early refund of money by issue of bonds before date of maturity.) Oe ee saealae rma (iii) Special Funds ec nces Peery enemas to offshore funds) cnr ‘Measures upward & | Invest Globally and the return will | Entire fund is Debt oriented schemes downward sentiment of be accordingly invested ina with main objective: stock market. particular industry. |- Preservation of capital Eg: Utility Fund for |+ Easy liquidity Invest in stock, Index utility industry like |+ Moderate Income (like NIFTY, BANK- power, gas, public |+ Used to park surplus NIFTY) works, ete. funds for short period. ‘So the mutual fund will The return will be as| Investment: Commercial receive whatever the per that particular | paper, Certificate of market delivers. industry. Deposits, Treasury Bills, 6-Secs, Ete. gq Fund of Funds [Schemes which invest in other mutual fund schemes, based on its overall objective. Capital Protection 01 ted Funds ‘These are closed ended funds that are hybrid in nature. They allocate money to debt and equity securities. The allocation to debt securities is done in such away that at the end of the term of the product, the value of debt investment is equal to the original investment in the fund, The equity portion aims to add to the returns of the product maturity. These funds are oriented towards protection of capital and do not offer guaranteed returns. Example: AAA bonds are quoting at interest rate of 10%p.a. for a5-year term. a. This means that at the end of 5 years, the investment of Rs.100 in such bonds would be worth Rs.161.05, assuming reinvestment of the interest. b. On the other hand, if one invests Rs.62.09 in such bonds, the value of bonds at the end of 5 years would be Rs.100. Insuch a case, the allocation between equity and debt would be 37.91 : 62.09 respectively. So, if the equity value reduces to zero, the investor gets back the original amount invested. ‘The asset allocation is a function of prevailing interest rates on high quality (AAA rated) bonds, It is mandatory for the fund to be rated by at least one rating agency in order to be called a capital protection oriented fund, Debt securities held in the portfolio must be of highest rating. EI Gold - Funds This fund offers investors an opportunity to participate in the bullion market without having to take physical delivery of Gold The units represent value of gold and related instruments. (Sometimes in the form of ETF.) Example: Kotak Gold is an open ended fund of fund which generate returns by investing in units of Kotak Gold Exchange Traded Fund. CT eealae rma Ho Funds (Automated investment) Data driven approach for stock selection and investment decisions based on a pre-determined rules or parameters using statistics or mathematics- based models. While an active fund manager selects the volume and timing of investments (entry or exit) based on his/her analysis and judgement in this type of fund complete reliance is placed on an automated programme that decides making decision for quantum of investment as well as its timings and action and concerned manager has to act accordingly. However, it is to be noted it does not mean that in this type of Fund there is no human intervention at all, because the Fund Manager usually focuses on the robustness of the Models in use and also monitors their performance on continuous basis and if required some modification is done in the same. The prime advantage of Quant Fund is that it eliminates the human biasness and subjectivity and using model-based approach also ensures consistency in strategy across the market conditions, In addition to that since the Quant Fund normally follows passive strategy their exposure ratio tends to be lower. On the con side Quant Fund are tested based on historical data and past trends though cannot altogether be ignored but also cannot be used blindly as good indicators. ‘Thus, overall, it canbe said that whether it is human or amachine it is not easy to beat the market 6.3. Ownership Classification v Be ee ena) | Sponsored by Public Sector. | Sponsored by Private Sector. Sponsored for raising funds in India | L eperate from India, and invest in India,! 6.4 Direct Plans of Mutual Funds Direct plans of mutual fund schemes were launched in January 2013. The basic idea behind the concept was ‘to allow well informed investors to buy direct plans of a scheme directly from the mutual fund - via online or through authorized branches. The logic is that a well-informed investor, who has facilities to directly deal with the mutual fund, Need not pay ‘unnecessary’ commission to the intermediary - and save on commissions. ‘The commissions, saved and invested, would help them to make extrareturns on their investment over along period, Sure, many informed investors made the switch and doing a good job for managing their investments, NAV of direct plans are therefore lower to the extent of commission that is not paid to advisors/ distributors, In their quest to save commissions paid to mutual fund advisors, many mutual fund investors, especially novices to mutual funds, have been investing in direct plans without proper consultation in a big way. Tt is obvious that investors stand to lose money in the long term. However, as one starts understanding the importance of advisory services, this is likely to reverse. CT eealae rma ‘Types of Schemes Eee roan Eris ktnns (Funds containing wide range of stocks) Strategic allocation to EM) Comers a Peis) both Debt and Equities [a Invests in Tt is an Equity mutual fund in Seeks to track the Equity = Growth | combination of which fund manager invests mostly | performance of a benchmark ters ap sues of aan eo t]he Ides he BSE Ps cops "mall | Performing we | Sensex or S & P CNX Nifty. The fund maintains the (Provides Moderate gains] Invests in Cos, | The idea is that buying Equity at a| portfolio of all securities in with a combination of | with pre- _|lower price today will be profitable | the same proportion as stated Risk & Reward.) determined |in the long term when the business | in, benchmark Index and earns market | problem is resolved and the stock the same return as earned by capitalization will witness a strong rally. the market. SEW) Market Capitalisation Value of company traded on stock market. (No. of Shares x Stock Market Price per share.) Large Cap Cap ‘small Cap [Companies having a market capital] Market Capital between Rs.5000 | Market Capital below Rs 5000 ‘of R&.20,000 Crores or more. | Crores toRs.20,000 Crores. | Crores. Eg:Ashoka Build Con Eg: Tes. Eg: Polycab India EllbividenaViela Fund (Envestsin shares of companies having high dividend yields.) Eg: In 2022, Vedanta Ltd. gave dividends 3 times ina year. (9th March, 6th May & 26th July) - Mutual Fund NAVs are less volatile for Dividend Yield Funds, - Medium Risky innature. Dividend yield = DPS Dividend pe MP: are) (Market price per share) Funds invests in high dividend giving companies. ES Bile ke Pio ek ed ‘Meaning Dividend paid to Unit holders Dividend accrued on units is reinvested back into| the scheme © ex-dividend NAV. Impact _ | NAV of the unit falls to the extent of dividend | _ Investors receive additional units on their paid, investments in lieu of dividends. Oe ee saealae rma EB Eauity Linked Savings Scheme (ELSS) ELSS is one of the options for investors to save taxes under Section 80 C of the Income Tax Act. They also offer the perfect way to participate in the growth of the capital market, having a lock-in- period of three years. Besides, ELSS has the potential to give better returns than any traditional tax savings instrument. Moreover, by investing in an ELSS through a Systematic Investment Plan (SIP), one can not only avoid the problem of investing alump sum towards the end of the year but also take advantage of “averaging”. Example: Mirae Asset Tax Saver Fund. [ifsectorFunas ‘These funds are highly Focused on a particular industry. The basic objective is to enable investors to take advantage of industry cycles. Since sector funds ride on market cycles, they have the potential to of fer good returns if the timing is perfect. However, they are bereft of downside risk protection as available in diversified funds. Sector funds should constitute only a limited portion of one’s portfolio, as they are much riskier than a iversified fund, Besides, only those whe have an existing portfolio should consider investing in these funds. Example: Real Estate Mutual Funds invest in real estate properties and earn income in the form of rentals, capital appreciation from developed properties, Also some part of the fund corpus is invested in equity shares or debentures of companies engaged in real estate assets or developing real estate development projects. REMFs are required to be close-ended innature and listed ona stock exchange. Ellthematic Funds + Equity Mutual Funds that invest in stock tied to a theme, + These are broader based then sectoral fund: as they pick companies and sectors united by an idea. + Example: An infra theme fund will invest in cement, power, steel among other sectors. [What are arbitrage Funds? ‘Arbitrage is the process of buying stocks or shares in one market and selling it in another to exploit the price. difference. An Arbitrage Fund is a type of hybrid fund which aims to capitalize on portfolio arbitrage opportunities (price differential in a stock) between cash and derivatives segments of the equity market. ‘Thus opportunity lies in generating a good return between these differences, Example: JM Equity & Derivatives / ICICI Equity & Derivatives. Features of Arbitrage Funds om BSE NSE + Endeavor to generate positive returns during market volatility. + Tax-efficient,as tax treatment is similar to equity funds. Reliance 61.01 61.85 + Offer relatively risk-free returns among equity investments. (For above; Buy BSE and sell + Aims to generate returns through fully hedged exposure toequities. in NSE.) + Used by investors to save taxes v/s SOC of the Income Tax Act. Resulting in Risk Free Profit + LockinPeriod= 3 Years. + Potential to give better returns than any traditional tax saving instrument. CT eealae rma [il Hedge Fund ‘A Hedge Fund is a lightly regulated investment fund that escapes most regulations by being a sort of a private investment vehicle being of fered to selected clients. The big difference between a hedge fund and a mutual fund is that the former does not reveal anything about its operations publicly and charges a performance fee. Typically, if it outperforms a benchmark, it takes a cut off the profits. Of course, this is a one way street; any losses are borne by the investors themselves. Hedge funds are aggressively managed portfolio of investments which use advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Tr is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize returnon investment. HilcashFuna Cash Fund is an open ended liquid scheme that aims to generate returns with lower volatility and higher liquidity through aportfolio of debt and money market instrument. The fund will have retail institutional and super institutional plans. Each plan will of fer growth and dividend options. La wna Exchange Traded Fund (ETF)? An ETF is amarketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. In the simple terms, ETF's are funds that track indexes such as CNX Nifty or BSE Sensex, etc. When you buy shares/ units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its native index. The main difference between ETF's and other types of index funds is that ETF's don't try to outperform their corresponding index, but simply replicate the performance of the Index. They don't try to beat the market, they try to be the market, Unlike regular mutual funds, an ETF trades like a common stock exchange. The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange. The trading value of an ETF is based on the net asset value of the underlying stocks that an ETF represents. ETF's typically have higher daily liquidity and lower fees than mutual funds schemes, making them an attractive alternative for individual investors. Passive Management An investor in an ETF do not want fund managers to manage their money i.e, decide which stocks to buy/sell/hold), but simply want the returns to mimic those from the benchmark index. Since buying all scripts that are a part of say, the NIFTY (which has scrips) is not possible, one could invest in an ETF that tracks Nifty. ETFsare cost-efficient Because an ETF tracks an index without trying to outperform it, it incurs lower administrative costs than actually managed port folios. Typical ETF administrative costs are lower than actively managed fund, coming in less than 0.20% per annum, as opposed to the over 1% yearly cost of some actively managed mutual fund schemes. Because they have lower expense ratio, there are fewer recurring costs to diminish ETF returns. CT eealae rma Following types of ETF products are available in the market: + Index ETF's - Most ETF's are index funds that hold securities and attempt to replicate the performance of astockmarket index. (BSE Sensex, Nifty) + Commodity ETF's - Commodity ETFs invest in commodities, such as precious metals and futures, + Bond ETF's - Exchange- traded funds that invest in bonds are known as bond ETF's. They thrive during economic recessions because investors pull their money out of the stock market and into bonds (for example, government treasury bonds or those issues by companies regarded as financially stable.) Because of this cause and effect relationship, the performance of bond ETFs may be indicative of broader economic conditions. + Currency ETFs - The funds are total return products where the investor gets access to the FX spot change, local institutional interest rates anda collateral yield, Open Ended Funds vs. Close Ended Funds vs. ETFs Er Ma ee) Emi cure 1. Fund Flexible Fixed Flexible 2, NAV Daily Daily Real Time 3. Liquidity Provider Fund itself ‘Stack Market ‘Stock Market/Fund itself 4, Sole Price ‘At NAV plus load, if | Significant Premium/ Discount | Very close to actual New Scheme ny toNAV 5. Availability Fund itself __ |Through Exchange where listed| Through Exchange with Fund itself| 6. Portfolio Disclosure| ‘Monthly Monthly Daily/Real-time 7. Uses Equitising cash o [Equitising Cash, hedging, Arbitrage &, Intra-Day Trading| Not possible Expensive Possible at low cost [Fixed Maturity Plans Fixed Maturity Plans (FMPs) are closely ended funds in which an investor can invest during aNew Fund Offer (NFO). FMPs usually invest in Certificates of Deposits (CDs), Commercial Papers (CPs), Money Market Instruments and Non-Convertible Debentures over fixed investment period, Sometimes, they also invest in Bank Fixed Deposits (FD). InNFO, during the course of which FMPs are issued, are later traded on the stock exchange where they are listed, But, the trading in FMPs is very less. So, basically FMPs are not liquid instruments. ‘The main advantage of FMPs is that they are free from any interest rate risk because FMPS invest in debt instruments that have the same maturity as that of the fund, However, they carry credit risk, as there is a possibility of default by the debt issuing company. So, if the credit rating of an instrument is downgraded, the returns of FMP can come down. Presently, most of the FMPs are launched with tenure of three years to take the benefit of indexation. But, because of the longer maturity period they find it difficult to provide good returns in the form of interest to the investors in highest rated instruments. They, therefore assign some portions of the invested funds in ‘AA (Credit Rating) and below rated debt instruments to earn higher interest. The reason is that lower rated instruments carry higher coupon rates than higher rated instruments. CT eealae rma Funds Indian mutual funds of fer three broad options withina scheme to Indian investors. They are: Growth option | (a pay-out Dividend Re-investment option option Growth Optic ‘The Growth option reinvests the profits back into the scheme and it is the ideal option for investors who are. looking to create a corpus for long-goals. Dividend pay-out opti Under the Dividend pay-out option, the scheme distributes realized profits to investors as dividends. This option is useful to investors looking for periodic income from their mutual fund investments. Dividend re-investment option: Dividend reinvestment option does not distribute the dividends to investors, the dividend is declared, but not physically paid out. Instead, itis reinvested back into the scheme & the additional units are issued. These additional units are treated like a fresh purchase, ‘Same fund manager manages the different options, The investment portfolio that will be handled by the fund manager is same, irrespective of which option one chooses. So, the choice of option will not modify the performance of Mutual Funds. The choices are accounting entries that the fund makes to suit the needs of investors who may require dividend pay-outs, The following table shows difference between Growth, Dividend Reinvestment, and Dividend Pay-out options. Perec Dividend Received ‘No No ‘Additional units issued No Yes No NAV Change Ne Declines to the extent of | Declines to the extent of dividend dividend Value of holding before and after No No Change Decreases dividend ‘Summary: The selection of option depends on investor's requirement and mostly his tax aspect. 1.Tf one is looking at regular tax-free income, one should prefer a dividend option (as long as equity dividends cre tax exempt in the hands of investors). 2. Tf one is looking to create wealth over the long run then growth option should be selected, Growth options follow the classical theory of compounding, 3, If one does not desire income and tax benefits are more by converting the dividends back to units, then ‘one should prefer Dividend Reinvestment option. CT eealae rma ‘9, Systematic Withdrawal Plan (SWP) g ‘A SWP allows investors to receive a regular income while still maintaining their investments growth potential. Investors can use a SWP to supplement the income they are receiving from any other source. A ‘SWP includes convenient pay-out options and has several tax advantages. Aninvestor can choose to withdraw from the capital appreciation in the NAV without af fecting the principal amount a fixed amount every month or quarter and any amount thereafter. 10. Systematic Investment Plan (SIP) SIP isa feature specifically designed for those who are interested in building wealth over a long-term and plan out a better future for themselves and their family. The SIP allows investors to save a fixed amount of rupees every month or quarter for the purchase of additional units. Anyone can enroll for this facility by starting an account with (minimum investment amount) and giving post-dated cheques or providing debit instructions through Electronic Clearing Service (ECS) of periodic investment every month for a specified period based on one’s convenience. This disciplined approach to investing gives advantages like, benefit of compounding, rupee cost averaging, convenience, and help build wealth over the long-term and avoiding the risk of timing the market. Tl. Calculation Aspects of Mutual Fund © (111) Computation of NAV: Net Asset Value (NAV) is value of net assets of the funds. The investor's subscriptionis treated as the unit capital in the balance sheet of the fund and the investments on their behalf are treated as assets. The funds net assets are defined as the assets less liabilities. Net assets value of the scheme Where, Number of units outstanding Net Asset Value of the Scheme = Market value of investments I+ Receivables + Other accrued income + Other assets - [Accrued Expenses - Other payables - Other Liabilities NAV=. (1.2) Computations of Returns: Investors derive three types of income from owning mutual fund units 1 Cash Dividend 2. Capital Gains Disbursements 3. Changes in the fund's NAV per unit (Unrealised Capital Gains) For an investor who holds amutual fund for one year, the one-year holding period returnis given by Return = Dividend + Realised Capital Gains + Unrealised Capital Gains/Base Net Asset Value D,+C6,+ (NAV,-NAV,)/NAV,.*100 Where, D, + Dividend, Cg,» Realised Capital Gains, NAV, - NAV, Unrealised Capital Gains, NAV, ~ Base Net Asset Value. CT eealae rma (11.3) Holding Period Return (HPR): A simple but effective measure of performance is to describe mutual fund return in terms of the following three major sources: (@) Dividend Earned () Capital Gain Distribution/ Earned (a) Change inprice or NAV. In case investment is held for a period less than one year, then pay of fs can be easily converted into returns by using Holding Period Return (HPR) formula, which is as follows: (NAV, - NAV, ) + Capital Gain Distribution / Famed + Di ip Soe eee NAY, (1.4) Asset Values: Valuation Rule Pati Liquid Assets e.g. cash held ‘As per books: All listed and traded securities Closing Market Price (other than these held as not for sale) Debentures and Bonds ‘Closing traded price or yield liquid shares or debentures Last available price or book value whichever is lower. Estimated Market Price approach to be adopted if suitable benchmark is available. Fixed Income Securities Current Vield (11.5) Netting the Asset Values: The asset values obtained from above have to be adjusted as follows: roe Eee Dividends and Interest accrued Expenses accrued Other receivables considered good Liabilities towards unpaid assets ‘Other assets (owned assets) ‘Other short term or long term liabilities ‘12, CONCEPTS RELATED TO MUTUALFUND, 3 12.1. Trailing Commissior A trailing commission is a fee that you pay a financial advisor each year that you own an investment. The purpose of a trailing commission is to give an advisor an incentive to review a client's holdings and provide advice. It is essentially areward for keeping you witha particular fund. + Fees paid to financial advisors every year that an investment is owned. + Paid in order for a financial advisor to have an incentive to review a client's investment holdings and provide advice. CT eealae rma + Trailing commissions vary but canrange between 0.25% to 1% of the total investment per year. + Avoiding trailing commissions is possible, by investing in low-cost mutual funds, exchange traded funds (ETFs), which typically have lower costs, or using robo-advisors. 12.2. Expense Ratio: Tris the percentage of the assets that were spent to run a mutual fund, It includes things like management and advisory fees, travel costs and consultancy fees. The expense ratio does not include brokerage costs for trading the portfolio, It is also referred to as the Management Expense Ratio (MER) Paying close attention to the expense ratio is necessary. The reason is it can sometimes be as high as 2-3% which can seriously undermine the performance of amutual fund. 12.3. Side-pocketing in Debt Mutual Funds: Side-pocketing or segregation is an accounting method that allows fund to separate the risky or bad assets in their portfolio from the liquid or good ones, For instance, let us assume that rating agencies downgrade a particular band held by a debt fund scheme inits portfolio. ‘So, the fund house now has the option to push this risky or illiquid bond to their side pocket. All the investors of the scheme receive allocation of this side pocket as per their investment on a pro-rata basis. The side pocket then has a separate NAV, and the liquid and good assets held by the scheme have adifferent NAV. Example Let us consider an example to better understand what is side-pocketing in mutual funds. Let us assume that youhave invested Rs, 1 lakh ina debt fund scheme at NAV of Rs.100 in 2019, You'd have received 1,000 units of the fund. In the last 2 years, the NAV of the scheme increased to Rs.200. The total value of your investment now is Rs.2 lakh Now, due to default downgrade, the fund house decides to side pocket the scheme. The segregation was in the ratio of 95% to 5%, This means that 95% of the portfolio is made up of good assets, and 5% is risky or illiquid assets. ‘The good and bad portions of the portfolio will have two different NAVs. As per the segregation ratio, the updated NAV of the good asset will be Rs.190 and NAV of bad assets will be Rs. 10. If youwere toredeem this investment, you'd be free to sell the units that belong to agood portion of the portfolio. Side Pocketing is quite common internationally. However, Side Pocketing has also been resorted to bereft ‘the investors of genuine returns In India recent fiasco in the Infrastructure Leasing and Financial Services (IL& FS) has led to many discussions on the concept of side pocketing as IL4FS and its subsidiaries have failed to fulfill its repayments obligations due to severe liquidity crisis. ‘The Mutual Funds have given negative returns because they have completely written off their exposure to IL&FS instruments. CT eealae rma 12.4. Tracking Error: ‘Tracking Error can be defined as the divergence or deviation of a fund's return from the benchmarks return itis following. The passive fund managers closely follow or track the benchmark index. Although they design their investment strategy on the same index but often it may not exactly replicate the index return. In such situation, there is possibility of deviation between the returns, The tracking error can be calculated on the basis of corresponding benchmark return vis a vis quarterly or monthly average NAVs. Higher the tracking error higher is the risk profile of the fund. Whether the funds outperform or underperform their benchmark indices; it clearly indicates that our fund managers are not following the benchmark indices properly. In addition to the same, other reasons for tracking error are as follows: + Transaction Cost + Fees charged by AMCs + Fund Expenses + Cashholdings + Sampling biasness Thus, from above it can be said that to replicate the return to any benchmark index the tracking error should be near to zero, The Tracking Error is calculatedas follows: S@-ay d= Differential return n= No, of observation TE Vn d d= Average differential return ‘13. EXPENSES OF MUTUAL FUND ‘An AMC incurs various expenses and as expenses increase the return on amutual fund reduces, The following are two major expense heads: 13.1) Initial expenses: This is attributable to establishment of a scheme under a mutual fund - this is similar to preliminary expenses of a corporate. Earlier, these initial expenses were booked in the respective scheme accounts asa ‘load’. Load is an amount that is paid by the investor to subscribe to the units or to redeem the units from the scheme, This amount is used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Load amounts are variable and subject to change from time to time. In terms of SEBI circular dated June 30, 2009,no entry load will be charged by the Scheme to the investor ef fective August 01, 2009. The upfront commission, if any, on investment made by the investor shall be paid by the investor directly to the Distributor, based on his assessment of various factors including the service rendered by the Distributor, Now, initial issue expenses are borne by the Investment Manager/ AMC and not by the scheme of mutual fund. CT eealae rma 13.2) Entry and Exit loadin Mutual Funds: (Charges paid to MF AMC while Buying & Selling the Fund Respectively.) Ereaer Emre Charged when an Investor purchases the units of a scheme. |Fee or amount charged from an investor for exiting ‘or leaving a scheme or the company as an investor. IEg: TF someone makes an investment of Rs.100 ina 2% load fund:| Tf there is a sale of MF of value Rs.100 & exit load Ithey would be investing Rs.99.8 effectively as remaining Rs.0.2| is 2.5%: then investor will get net. (100-2.5) = 97.5 |would be deducted as commission, by mutual fund provider. S.P = NAV(I+LOAD%) RVs NAV(1- EXIT LOAD’) ‘Suppose a scheme charges 1 % exit load for redemptions within 365 days from the date of purchase. Suppose. you redeem 500 units of a scheme 4 months after your date of purchase. Let us assume that the NAV is Rs.100. The exit load will be = 1% x 500 (number of units) x 100 (NAV) = Rs.500. This amount will be deducted proceeds which gets credited to your bank account. So for this, the redemption amount received inyour bank account will be Rs.49,500 (Units 500 x NAV Rs.100 - Rs.500 exit load = Rs.49,500. 13.3) Recurring expenses: This is day to day expenses which are spent in running a mutual fund scheme. The total annual recurring expenses of the Scheme, excluding deferred revenue expenditure written off, issue or redemption expenses, but including the investment management and advisory fee are classified as recurring expenses that can be charged to the scheme shall be within the limits specified in Regulation 52 of SEB (Mutual Funds) Regulations. The recurring expenses chargeable to the scheme are listed below: a) —_Thvestment Management and Advisory Fees b) Cost towards investor education & awareness c) Trustee fee 4) Audit fees e) Custodian fees f) RTA fees (Register and Transfer Agent) 9) Marketing & Selling expense including agent commission h) Cost related to investor communications i) Cost of fund transfer fromlocation to location J) Cost of providing account statements and dividend redemption cheques and warrants k) Cost of Statutory Advertisements 1) Brokerage & transaction cost over and above m) Service taxon expenses other than investment and advisory fees n) Service tax on brokerage and transaction cost 0) Other expenses Investors generally look for the total quantum of expenses through a measure called expense ratio which is given by: Ratic ab VeraceN Ei ANTE GUASECR CT eealae rma ‘Maximum total expense ratio (TER) permissible under Regulation 52 (4) and (6) (c) is up to 2.50% of average daily net assets of the scheme. It is to be noted that expenses exclude brokerage incurred while doing sales and purchases of securities, as sales and purchases are recorded on net basis, 14,Return fromaMutualFund © Return as simply defined is return on one's investment. As far as mutual fund is concerned we have returns in the form of capital gain and income (dividend). Thus return in the case of mutual fund will be calculated depending on the data given tous. This is of ten called as ‘Holding Period Return’. Formula 1 Tf NAV details in the beginning and end periods along with dividend are given then return will be on unit basis as (NAV, NAV gee) + Divide 2 100 NAV ening s Tf however, we are given total value invested and received then return will be calculated on gross basis: (Amount ~Amountyynng) + Total Income 12 199 AMOUME, ap n Both the formulas should provide us the same answer. Secondly, we mostly calculate annualized return, Therefore we have the factor 12/n, One important point to note is that if the period is less than or equal to one year then only the above formulae should be used for return calculations. This is because if we have the investment period after one year and if we are to calculate annualized returns i.e. return per annum then we should be finding the return based on the concept of compound interest, popularly called CAGR (Compounded Annual Growth Rate) or Annualized Return or IRR CT eealae rar) PRACTICAL QUESTIONS QUESTION 1 (Basic Calculation of NAV) The following portfolio details of a fund are available: Stock ‘Shares Price A 2,00,000 35 8 3,00,000 40 c 4,00,000) 20 D 6,00,000) 25 ‘The following portfolio details of a fund are available: ‘The fund has accrued management fees with the portfolio manager totaling Rs.30,000. There are 40 lakh units outstanding. What is the NAV of the fund? If the fund is sold without a load what is the sale price? Stock Shares (1) Price (2) Price (1x 2) A 2,00,000 35 70,00,000 B 3,00,000 40 1,20,00,000 c 4,00,000 20 80,00,000 D 6,00,000 Ey 1,50,00,000 Total 4,20,00,000 NAV of the fund =(Rs. 4,20,00,000 - Rs. 30,000) / 40,00,000 units = Rs. 10.4925 Sale Price = NAV (when load=0%) = Rs, 10.4925 QUESTION 2 (Basic Calculation of NAV) Calculate the today's NAV of Flexi Fund if the following details are given: Yesterday's NAV=Rs. 12.8700, Total number of outstanding units: 1.25 Crores, Face Value =Rs. 10. Expenses = Rs. 1 lakh [Assume sales NAV & Repurchase NAV to be Rs.12.87) ‘Appreciation of Portfolio today Rs. 12 Lakhs Units - Redemption 0.75 lakhs! Units - Fresh subscription 2 Lakhs Dividends received 1 lakhs: Net Asset Value (NAV) = Yesterday's NAV x Outstanding units +Appreciation of Portfolio + Net receipts - Expenses +Dividend Outstanding Number of Units = (12.87 x 125 lakhs) + (12 lakhs) + ((2-0.75) lakhs x 12,87) - (1 lakh) + (1 lakh) 126.25 lakh units Note: New units outstanding = 1,25 Crores + Net subscri CT ee 125 lakhs +1.25 | (new) (2-0. = Rs.12,9650 lakhs =126.25 lakhs units 75) (redemption)alae rar) QUESTION 3 (Basic Calculation of NAV) Cindrella mutual Fund has the following assets in Scheme Rudolf at the close of business on 31st March 2014 Company No. of Shares ‘Market Price Per Share RS Nairobi Ltd 25000 20 DAKAR LTD 35000 300 ‘Senegal Ltd 29000 380 Cairo Ltd 40000 500 The total number of units of Scheme Rudolf are 10 lacs. The scheme Rudolf has accrued expenses of Rs.2,50,000 and other liabilities of Rs, 2,00,000, Calculate the NAV per unit of Scheme Rudolf, Share No. of Shares | Price Amount (Rs) Nairobi Ltd 25000 20 500,000 DAKAR LTD 35000 300 1,05,00,000 ‘Senegal Ltd 29000 380 1,10,20,000 Cairo Ltd 40000 500 2,00,00,000 Total 4,20,20,000 Less: Accrued Expenses 2,50,000_ Other Liabilities 2,00,000 Total Value 4,15,70,000 No, of Units 10,00,000 NAY per Unit (4,15,70,000/10,00,000) Rs. 4157 QUESTION 4 (Calculation of NAV with different instruments) (May ‘10, May ‘14, May °16) Based on the following information, determine the NAV of aregular income scheme on per unit basis Crores [Listed shares at cost (ex-dividend) 20 Cash in hand 123 Bonds and debentures at cost 43 Of these , bonds are not listed and quoted 1 Other fixed interest securities at cost 45 Dividend accrued 08 ‘Amount payable on shares 632 Expenditure accrued 075 Number of units (Rs.10 face value) 20 Lacs Current realizable value of fixed income securities of Face value of Rs. 100 106.5 CT eealae rar) The listed share were purchased when index was 1000) Present index is 2300 Value of listed bonds and debentures at NAV date 8 There has been a diminution of 20% in unlisted bonds and debentures Particulars ‘Adjustment value Rs. crores Listed shares ( 20 x 2300/1000) 46.00 [cash 123 [Listed bonds / debentures 8.00 lUnlisted bonds - after diminution 0.80 ced interest securities (4.5 x 106.5/100) 47925 [Dividend accrued 0.80 [Sub total assets 61.6225 Particulars ‘Adjustment value Rs. crores Less: The amount payable on shares 6:32 Expenditure accrued 075 ‘Sub total liabilities 7.07 Net asset value (Rs. Crores) 54.5525 ‘Outstanding number of units 20,00,000 units NAV per unit (RS.) 272.7625 QUESTION 5 (Calculation of Ut Consider the following data of a Mutual funds (Rs. Millions) Value of investments 3474.20 Receivables 260.60 ‘Accrued income 173.60 Other current assets 521,00 Liabilties 390.86 ‘Accrued expenses 86.80 Number of outstanding units is 200 millions . Exit load applicable to this scheme is 2.5% . If the investor sells his units , what will be the per unit price he will get? CT eealae rar) NAV = (Value of Investments + Receivables + Accrued income + Other current assets - liabilities - ‘Accrued expenses)/ Number of units outstanding = (3474.2 + 260.6 + 173.6 + 521 - 390,86 - 86.8) / 200 = Rs.19.7587 Now the selling price of the investor will be 19.7587 X (1 - 0.025) = Rs.19.2647 Mr. QUESTION 6 (Calcul. of Return from Mutual Fund) ivek purchased a 3 year closed - end fund of Tata when the fund was launched, at an opening offer price of Rs, 10 per unit. Since then the units got listed on the stock exchange. After a year the NAV of the fund was Rs, 12.50, However, the units of the fund were trading at a discount of 25%, During the year a dividend of BYowas given. If Mr. Vivek sells the units in the exchange, wouldhe have earned any return at all? The premium or discount for closed-end funds is calculated as (Market price - NAV)/NAV. In this case, since the market price is less than the NAV, the fund is selling at a discount which is 25% of Rs.12.50.e. Rs. 9.375. The fund declares a dividend of 0.50p during the year. Therefore return for vivek= (Sale Price - P ise Price) + Dividend _ (9.375 - 10) +0. Purchase Price 10 25% ‘Therefore Mr. Vivek would not earn any return because of the steep discount the units erased even the income earned by way of dividend QUESTION 7 (Original Discount & Future System) Mr. V purchased a closed-end fund with a NAV of Rs. 25 per unit for only Rs. 20, At the end of the year, the fund's NAV was Rs 27 was selling at a 5% premium. It did not pay out any dividends or capital gains during the year. How much was the original discount and what was Mr. V'sreturn? ‘The premium or discount for closed-end funds is calculated as (Market Price - NAV)/NAV. In this case, since ‘the market p less than the NAV, the fund is selling at a discount which is (Rs,20-Rs.25)/Rs,25=-20%, One year later, itis selling at a5% premium. If the new NAV is Rs. 27, the market price is Rs. 27* 1.05 or Rs. 28.35, Thus, Mr. V's returnis (Rs. 28,35-Rs.20)/Rs.20:41.75% Note: NAVis Theoretical Value as per formula, However market value can be different based on its trading price on stock market based on demand and supply. | QUESTION 8 (Calculation of Effective Rate of Return) (ICWA Exam Sum) _) ‘Mr. S.K. Sinha had purchased 500 units of a scheme of Temple MF at the rate of Rs. 60 per unit. He held the units for 2 years and got a dividend of 15% and 20% in the first year, and second year respectively on the face value of Rs. 10 per unit. At the end of the second year, the units are sold at the rate of Rs. 75 per unit. Determine the effectiverate of return per year which Mr. Sinha has earned on this MF scheme. CT eealae rar) Total investment made by Mr. Sinha Dividend received- First Year Dividendreceived-SecondYear = Rs.2x500 = Rs. 1000 Proceeds of SaleforMr.Sinha =500x75 = Rs. 37,500 Total Absolute Return = 27500 30000) + 1000 + 750 30000 30.833% Effectiverate of returnis the Compounded Annual Rate, which is'r‘in the following equation: 39250 30000 (1 +r) FvVzevaen* ¥30000 QUESTION 9 (Calculation of Funds Return) ) ‘Amutual has a NAV of Rs. 8.50 at the beginning of the year. At the end of the year NAV increase toRs. 9.10. Meanwhile fund distributes Rs. 0,90 as dividend and Rs. 0.75 as capital gains. a. What is the fund's return during the year? b. Assuming that the investor had 200 units and also assuming that the distributions been re-invested at an average NAV of Rs. 8.75, what is the return? r= Effective Rate 1 = 14.38% per annum FV = 39250 | 0,000 | n= 2 years Return for the year (all changes onaperunit basis): | Fer on investor whe poles a mutual fund for one Change in price (Rs.9.10-Rs.8.50) = —Rs.0.60 vee b ve one-year holding period return i Dividend received Rsogo [Sterner Capital gains distributions RS.0.75 | Retum = Dividend + Realised Capital Gains + Total return Rs.2.25 | Unrealised Capital Gains/Base Net Asset Value Holding periodretumn=Rs.2.25 = 26.47% |= D, + C6, + (NAV, ~ NAV,) NAV,» 100, Rs, 8.50, Where D, —» Dividend, C6, > Realised Capital Gains, NAV, - NAV; —> Unrealised Capital Gains, b. Whenall dividends and capital gains distributions are NAV. Base Net Asset Value. reinvested into additional units of the fund (at Rs.8.75/unit): Dividend and capital gains per unit: Rs. 0,90 + Rs.0.75 =Rs. 165 Total received from 200 units: Rs. 1.65 x 200 = Rs. 330.00 ‘Additional units acquired: Rs, 330/Rs. 8.75 37-7 units Value of 237.7 units held at end of year: 237.7 units xRs.9.10 =Rs.2,163 Price paid for 200 units (200 units x Rs. 8.50) = Rs, 1,700at beginning of year Thus, the holding period returnwouldbe :(2163-1700)/1700 =27.24% CT eealae rar) QUESTION 10 (Calculation of Monthly Return) (Module Question) A mutual fund that had a net asset value of Rs.20 at the beginning of month - made income and capital gain distribution of Rs.0.0375 and Rs.0.03 per unit respectively during the month, and then ended the month with anet asset value of Rs.20.06, Calculate monthly return, [= NAV.) +1, +6, Where, NAV, r =Returnon the mutual fund (Rs. 20.06 - Rs. 20.00) + (Rs. 0.0375 +Rs.0.03)] NAV: =Netassetsvalue at time period + = [Serie 2000 Bs. 90875 85 009) (End of the year) NAY,, =Net assets value at time period t=1 = 2:06 +0.0675 _ 0.1275 _ 9 gagans (Beginning of the year) 20 20 L = Income at time period t 6, = Capital gain distribution at time period t Or, =0.6375%pm. Or, 65 % p.a (0.6375 x 12 Months) QUESTION 11 (Return on Investment) (Module Question) ‘An investor purchased 300 units of a Mutual Fund at Rs.12.25 per unit on 31st December, 2009. As on 31st December, 2010 he has received Rs.1.25 as dividend and Re.1.00 as capital gains distribution per unit. Required: i) The return on the investment if the NAV as on 31st December, 2010 is Rs.13.00. ji) Thereturn on the investment as on 31st December, 2010 if all dividends and capital gains distributions are reinvested into additional units of the fund at Rs.12.50 per unit.. Particulars Rs. 7 Unit ‘Change in price (Rs. 13.00 - Rs. 12.25) 0.75 Dividend received 1.25 Capital gain distribution 1,00 Total Return 3.00 Return on investment = oo x 100 = 24.49% Alternatively, it can also be computed as follows: (NAV,-NAV,) =D, +CG, ROI= x 100 NAV, (3-12.25) +1.25+1.00 4994 4994 12.25 CT eealae rar) Gi) Tf all dividends & capital gains are reinvested into additional units @ Rs.12.50 p.u, the position would be. Total amount reinvested = Rs.2.25 x 300=Rs.675 Rs. 675 Additional units added = 54 Units Value of 354 units as on 31-12-2010 =Rs.4,602 Price paid for 300 units on 31-12-2009 (300 xRs.12.25) =Rs.3,675 Return=Rs.4,602 - Rs.3,675 = Rs.927 = 25.22% Rs.3,675 Rs.3,675 QUESTION 12 (Returns Calculation) ‘The NAV of per unit of XYZ Mutual Fund (a Close Ended Funds) on 1.1.2014 was Rs.28, The value on 31.12.2014 comes to Rs.28,80. On the same date unit was trading in market at a premium of 3% though on 1.1.2014 same. was trading at a discount at 5%. On 31.12.2014, XYZ distributed a sum of Rs.2.80 as incomes and capital gains. You are required to compute rate of return to the investor during the year, Priceof eachuniton1.1.2014 = Rs.28x0.95 = Rs. 26.60 Price of each unit on 31.12.2014 = Rs, 28,80x 1,03 Rs. 29.66 ‘The price of fund increasesby = 29.66-26.60 = Rs. 3.06 Rate of Return = 243.96... 199 = 22.03% QUESTION 13 (Dividend / Dividend Reinvestment Plan) ‘A mutual fund having 300 units has shown its NAV of Rs.8.75 and Rs.9.45 at the beginning and at the end of ‘the year respectively. The Mutual fund has given two options to the investors: (i) Pay dividend of Rs.0.75 per unit and capital gain of Rs.0.60 per unit, or These distributions are to be reinvested at an average NAV of Rs.8.65 per unit. What difference would it make in terms of returns available and which option is preferable by the investors? (i) Returns for the year (All changes onaPer -Unit Basis) Change inPrice: Rs. 9.45-Rs.8.75=Rs.0.70 Dividends received: Rs.0.75 Capital gains distribution Rs. 0.60 Total reward Rs. 2.05 Holding periodreward: Rs.2.05 x100 = 23.43% Rs.8.75 CT eealae rar) (ii) When all dividends and capital gains distributions are re-invested into additional units of the fund © Rs.8.65/unit Dividend + Capital Gains per unit =Rs.0.75+Rs.0.60=Rs.1.35 Total received from300units = Rs, 1.35 x 300= Rs, 405/-. Additional Units Acquired =Rs.405/Rs.8.65 = 46.82 Units. TotalNo. of Units = 300units + 46,82 units = 346,82 units. Value of 346.82 units held at the end of the year = 346.82 units xRs. 9.45=Rs. 3277.45 Price Paid for 300 Units at the beginning of the year = 300 units x Rs, 8.75 = Rs, 2,625.00 Holding Period Reward Rs.(3277.45- 2625.00) = Rs. 652.45 Holding Period Reward = Rs.652,45. x 100= 24.85% Rs, 2625.00 Conclusion: Since the holding period reward is more in terms of percentage in option-two i.e., reinvestment of distributions at an average NAV of Rs. 8.65 per unit, this option is preferable QUESTION 14 (Calculation of NAV) (Module Question) The following information is extracted from Steady Mutual Fund's Scheme: - Asset Value at the beginning of the month. -RS.65,78 - Annualised return - 15% - Distributions made in the nature of Income. ~Rs,0.50 and Rs.0.32 & Capital gain (per unit respectively). You are required to: {) Calculate the month end net asset value of the mutual fund scheme (limit your answers to two decimals). ii) Provide abrief comment on the month end NAV. (i) Calculation of NAV at the end of month: GivenAmountReturn 215% [Since the Return is to be calculated @ HencemonthlyReturn = 1.25% (+) Imonthly level; the Annual return will first be converted to monthly return _ | QNAV-NAV, HG, NAV; 0.0125 = [(NAV,-Rs.65,78)+ Rs.0.50+Rs, 0.32]/Rs.65.78 0.82 =NAV,-Rs.64.96 NAV, =Rs.65,78 (ii) There is no change in NAV. CT eealae rar) QUESTION 15 (Original & New NAV) (Module Question) _) ‘A Mutual Fund Co. has the following assets under it on the close of business as on: Company | No. of Shares | ist February 2012Market | 2nd February 2012Market price per share (Rs.) price per share (Rs.) Lud 20,000 20,00 20.50 MLtd 30,000 312.40 360.00 NLtd 20,000 361.20 383.10 PLtd 60,000 505.10 503.90 Total No. of Units 6,00,000 {) Calculate Net Assets Value (NAV) of the Fund ii) Following information is given: Assuming one Mr. A, submits a cheque of Rs.30,00,000 to the Mutual Fund and the Fund manager of this company purchases 8,000 shares of M Ltd: and the balance amount is held in Bank. In such a case, what would be the position of the Fund? iil) Find new NAV of the Fund as on 2nd February 2012. (NAV of the Fund Rs. 4,00,000 + Rs, 93,72,000 + Rs.72,24,000 + Rs.3,03,06,000 6,00,000 units Rs.78,8366 rounded to Rs.78.84 (ii) The revised position of fund shall be as follows: ‘Shares No. of shares Price ‘Amount (Rs.) Ltd. 20,000 20.00 4,00,000 MLtd, 38,000 312.40 1,18,71,200 NLtd. 20,000 361,20 72,24,000 P Ltd. 60,000 505.10 3,03,06,000 Cash 500,800 5,03,02,000 No. of units of fund = 600,000 + = 638,053 units CT eealae rar) On 2nd February 2012, the NAV of fund will be as follows: ‘Shares No. of shares ‘Amount (Rs.) Ltd. 20,000 20.50 4,10,000 MLtd, 38,000 360.00 1,36 80,000 N Ltd. 20,000 383.10 76 62,000 P Ltd 60,000 503.90 3,02,34,000 Cash 500,800 5,24,86,800 Rs.5,24,86,800 NAV as on 2nd Feb, 2012 = = Rs.82.26 per unit 6,38,053 units QUESTION 16 (Calculation of Revised NAV) (Module Question) ‘On ist April 2009 Fair Return Mutual Fund has the following assets and prices at 4.00 p.m. ‘Company No. of Shares ‘Market Price Per Share ALtd. 10,000 19.70 BLtd. 50,000 482.60 CLtd. 10,000 264.40 DLtd. 1,00,000 674.90 ELtd. 30,000 25.90 No. of units of funds 8,00,000 Please calculate: a) NAV of the Fund on 1st April 2009. b) Assuming that on 1st April 2009, Mr. X, a HNI, send a cheque of Rs.50,00,000 to the Fund and Fund Manager immediately purchases 18000 shares of C Ltd, and balance is held in bank, Then what will be position of fund. ©)Now suppose on 2 April 2009 at 4.00 p.m, the market price of shares isas follows: Shares Rs. ALtd. 20,30 BLtd. 513.70 Cltd, 290.80 DLtd. 671.90 Eltd, 44.20 Then what will be new NAV. (a) NAV of the Fund _ Rs.1,97,000 + Rs, 2,41,30,000 + Rs.26,44,000 + Rs.6,74,90,000 + Rs.7,77,000 _ 9,52,38,000 8,00,000 8,00,000, = 119.05 CT eealae rar) (b) The revised position of the fund shall be as follows: ‘Shares No. of shares Price Amount (Rs.) ALtd, 10,000 19.70 1,97,000 BLtd. 50,000 482.60 2,41,30,000 Cid 28,000 264.40 74,03,200 DLtd 1,00,000 674.90 6,74,90,000 ELtd. 30,000 25,90 777,000 Cash 240,800 10,02, 38,000 No. of units of fund = 800,000 + BS30.00.000 349 999 units 119.0475 units ((¢) On 2nd April 2009, the NAV of fund will be as follows: ‘Shares No. of shares Price ‘Amount (Rs.) ALtd. 10,000 20.30 2,03,000 BLtd. 50,000 513.70 2,56,85,000 CLitd. 28,000 290.80 81,42,400 Ditd 1,00,000 671.70 6,71,90,000 Eltd. 30,000 44.20 13,26,000 Cash 2,40,800 10,27,87,200 NAVas on 2nd April 2009 = Rs.10,27,87,200 / 842,000 units = Rs.122.075 per unit ___ QUESTION 17 (Module Question) (Calculation of Effective Vield) _) ‘A has invested in three Mutual Fund Schemes as per details below: Particulars MFA MF B MFC Date of investment 01.12.2009 01.01.2010 01.03.2010 Amount of investment Rs.50,000 Rs.1,00,000 Rs.50,000 Net Asset Value (NAV) at entry date Rs. 10,50 Rs. 10, Rs.10 Dividend received upto 31.03.2010 Rs. 950 Rs. 1,500 Nil NAV as at 31.03.2010 Rs. 10.40 Rs. 10,10 Rs.9.80 Required: What is the ef fective yield on per annum basis in respect of each of the three schemes to Mr. A upto 31.03.2010? CT eealae rar) Scheme Investment (Rs.) | Unit Nos. (investment/| ‘Unit NAV Total NAV NAV at entry date) 31.3.2010 (Rs.) 31.3.2010 MF A 50,000 4761.905 10.40 49,523.812 MFB 1,00,000 10,000 10.10 1,01,000 MFC 50,000 5,000 9.80 49,000 ‘Scheme [NAV (+)/(-) (NAV] Dividend | Total Yield | Number of ]Effective Yield (% p.a.)(Total jas on 31.3.2010-| Received ‘Change in days Yield/ Investment) x [Investment) NAV+Dividend (365/No. of days) x 100 MF A (-) 476.188 950} 473.812 121 2.858% MFB (+) 1,000 1,500 2500 90 10.139% MFC (© 1,000 Nil =1000 31 (-) 24% QUESTION 18 (Effective - yield of different schemes) (Module Question) > ‘Mr. Sinha has invested in three Mutual fund schemes as per details below: Particulars Scheme X Scheme ¥ Scheme Z Date of Investment 01.12.2008, 01.01.2009 01.03.2009 Amount of Investment Rs.5,00,000 Rs.1,00,000 Rs.50,000 Net Asset Value at entry date Rs.10,50 Rs.10,00 Rs.10.00 Dividend received upto 31.03.2009 Rs.9,500 Rs.1,500 Nil NAV as at 313.2009 Rs. 10.40 Rs.10.10 Rs.9.80 You are required to calculate the ef fective yield on per annum basis inrespect of each of the three schemes ‘to Mr. Sinha upto 31.03.2009, Calculation of ef fective yield on per annum basis in respect of three mutual fund schemes to Mr.Sinha up to 31.03.2009: Particulars ‘Scheme X ‘Scheme ¥ ‘Scheme Z (@) Investments Rs.5,00,000 Rs.1,00,000 Rs.50,000 () Opening NAV Rs.10.50 Rs.10.00 Rs.10.00 (€)No. of units (a/b) 47,619.05 10,000 5,000 (@) Unit NAV on 31,3.2009 Rs.10.40 Rs.10.10 Rs.9.80 {(e) Total NAV on 31.3.2009 (c x d) Rs4,95,238.12 Rs.1,01,000 Rs.49,000 (f) Increase/ Decrease of NAV (e-a) (Rs. 4,761.88) Rs. 1,000 {(Rs.1,000) (g) Dividend Received Rs, 9,500 Rs.1,500 Nil (h) Total yield (F + 9) Rs. 4,738.12 Rs.2,500 (Rs.1,000) (i) Number of days 121 90 at (i) Effective yield p.a. (h/a x 365/i x 100) 2.859% 10.139% 23.55% CT eealae rar) QUESTION 19 (Module Question) (Period of Holding) ‘Mr. ¥ has invested in the three mutual funds (MF) as per the following details: Particulars MF IX" MF 'Y? MF 'Z! ‘Amount of Investment (Rs.) 2,00,000 | 4,00,000 | 2,00,000 Net Assets Value (NAV) at the time of purchase (Rs.) 10.30 10.10 10 Dividend Received up to 31.03.2018 (Rs.) 6,000 ° 5,000 NAV as on 31.03.2018 (Rs.) 10.25 10 10.20 Effective Yield per annum as on 31.03.2018 (percent) 9.66 “11.66 24.15 Assume 1 Year =365 days ‘Mr. ¥ has misplaced the documents of his investment. Help him in finding the date of his original investment after ascertaining the following: i) Number of units in each scheme; ii) Total NAV: Total Yield: and iv) Number of days investment held. (i) Number of units in each scheme: ‘Scheme Working No of Units MF xX" Rs, 2,00,0007Rs.i0.30 | = 19,417.48 MF Rs.4,00,000/Rs.10.10_| = 39,603.96 MF 'Z" Rs.2,00,000/Rs.10.00 | = 20,000.00 (i) Total NAV on 31.03.2018 MF 'X! = 19,417.48 x Rs.10.25 Rs.1,99,029.17 MF TY" 9,603.96 x Rs.10.00 Rs.3,96,039.60 MF 'Z" = 20,000.00 x Rs.10.20 Rs.2,04,000.00 Total Rs. 7,99,068.77 ii) Total Yield Capital Yield Dividend yield Total MF 'X" _ | =Rs.1,99,029.17 - Rs. 2,00,000= - Rs.970.83 _| Rs.6,000 Rs.5029.17 IAF *Y" _| =Rs.3,96,039.60 ~ Rs.4,00,000 = -Rs.3,960.40_| Nil =Rs.3,960.40 MF 'Z' =Rs. 2,04,000 - Rs.2,00,000 =Rs. 4,000 Rs.5,000 Rs.9,00,000 Total Rs.10,068.77 Total Yield = RS10068-77 199 ~ 1 258606 Rs.8,00,000, CT eealae rar) (iv) No. of Days Investment Held MF MF 'Y" MF Let No. of days be x y 4 Initial Investment (Rs.) 2,00,000 4,00,000 2,00,000 Yield (Rs) 5029.17 ~3,960.40 9,000.00 Yield (%) 2.5146 -0.9901 45 Period of Holding (Days) 2.5146 x 365 -0.9901 x 365 45 x 365 9.66 “11.66 24.15 = 95 Days = 31 Days = 68 Days [Date of Original Investment 27.12.17 01.03.18 23.01.18 lAiternatively following dates can also be| considered: [Date of Original Investment 26.12.17 28.02.18 22.01.18 QUESTION 20 (NAV of Multiple Year) ) ‘Mr. X on 17.2007, during the initial of fer of some Mutual Fund invested in 10,000 units having face value of Rs.10 for each unit. On 31.3.2008, the dividend paid by the M.F. was 10% and Mr. X found that his annualized yield was 153,33%. On 31.12.2009, 20% dividend was given. On 31,3.2010, Mr. X redeemed all his balance of 11,296.11 units when his annualized yield was 73.52%, What are the NAVs as on 31.3.2008, 31.3.2009 and 31.3,20107 Yield for 9 months= (153.33 x 9/12) Market value of Investment as on 31.03.2008 Therefore, NAV as on 31.03.2008 15% {00,000 + (1,00,000 x 115%) = 15,000 10,000)/10,000 =Rs,20.50 (NAV would stand reduced to the extent of dividend payout, being (10,000 x 10 x 10%) = Rs.10,000) . 2,15,000/- Since dividend was reinvested by Mr. X, additional units acquired = = 487.80 units Rs.20.50 Therefore, units as on 31.03.2008 ,000 + 487.80 = 10,487.80 (Alternatively, units as on 31.03.2008 (2,15,000/20,50) Dividend as on 31.03.2009 =10,487.80 x 10 x0. Let X be the NAV on 31.03.2009, then number of new units reinvested will be Rs.20,975.60/X. Accordingly 11296.11 units shall consist of reinvested units and 10,487.80 (as on 31.03.2008). Thus, by way of equation it canbe shownas follows: 20975.60 x 11,296.11 = + 10,487.80 CT eealae rar) ‘Therefore, NAVas on 31.03.2009 = 20,975.60/(11,296.11- 10,487.80) =Rs.25.95 NAV as on 31.03.2010 = Rs.1,00,000 (1+0.7352 x 33/12)/11296.11 =Rs.26.75 QUESTION 21 (Module Question) (NAV of Multiple Years) Mr. X on 1.7.2012, during the initial public of fer of a Mutual Fund (MF) invested Rs.1,00,000 at Face Value of Rs.10, On 31.3.2013, the MF declared a dividend of 10% when Mr. X calculated that his holding period return was 115%, On 31.3.2014, MF again declared a dividend of 20%. On 31.3.2015, Mr. X redeemed all his investment which had accumulated to 11,296.11 units when his holding period return was 202.17%. Calculate the NAVs as on 31.03.2013, 31.03.2014 and 31.03.2015. Yield for 9 months 115% Market value of Investments as on 31.03.2013 00,000 + (1,00,000x 115%) s.2,15,000/- Therefore, NAVas on 31.03.2013, = (2,15,000 -10,000)/10,000 = Rs.20.50 (NAV would stand reduced to the extent of dividend payout, being (Rs.1,00,000 x 10%) = Rs.10,000) Since dividend was reinvested by Mr. X, additional units acquired = RS10.000 _ 487.80 units Rs.20.50 ‘Therefore, units as on 31.03.2013 =10,000+487.80 10,487. (Alternatively, units as on 31.03,2013 2,15,000/20.50) =10,487.80) Dividend as on 31.03.2014 =10,487,80x10x0.2=Rs.20,975.60 Let X be the NAV on 31.03.2014, then number of new units reinvested will be Rs.20,975.60/ X. Accordingly, 11,296.11 units shall consist of reinvested units and 10487.80 (as on 31,03.2013). Thus, by way of equation it canbe shown as follows: 11296.11 = 2975-69 4 19487.80 x Therefore, NAVas on 31.03.2014 = 20,975.60/(11,296.11- 10,487.80) =Rs.25.95 NAVas on 31.03.2015 =Rs,1,00,000(1+2.0217)/11296.11 =Rs.26.75 UESTION 22 (Module Question) ination of Pre) ‘A Mutual Fund having 300 units has shown its NAV of Rs.8.75 and Rs.9.45 at the beginning and at the end of the year respectively. The Mutual Fund has given two options: 1) Pay Rs.0.75 per unit as dividend and Rs.0.60 per unit asa capital gain, or ii) These distributions are to be reinvested at an average NAV of Rs.8.65 per unit. What difference it would make in terms of return available and which options preferable? CT eealae rar) (i) Return for the year (All changes on aPer-Unit Basis) Change inPrice: Rs.9.45-Rs.8.75 — =Rs.0.70 Dividends received: R.0.75 Capital Gains Distribution Rs.0.60 Total Reward Rs.2.05 Holding Period Reward: 882-95 199 — 23.43% Rs8.75 (i) When all the dividends and capital gains distributions are re-invested into units of the fund @ (Rs. 8.65/unit) Dividend + Capital Gains per unit =Rs,0.75+Rs.0.60 = RS.1.35 Total received from 300units = Rs.1.35x 300 Rs.405/- Additional Units Acquired = R&.A05/Rs.8.65 = 46,82 Units Total No.of Units += 300 Units + 46.82 units = 346.82 units, Value of 346.82 unitsheldat theendof theyear = 346.82 units xRs.9.45=Rs.3277.45, Price paid for 300 Units at the beginning of theyear = 300units x Rs.8.75 = 2,625.00 Holding Period Reward Rs, (3277.45 - 2625.00) =Rs.652.45 Holding Period Reward = BASSAS 109 = 24.85% S.2625.00 Conclusion: Since the holding period reward is more in terms of percentage in option-two .e.,reinvestment of distributions at an average NAV of Rs.8.65 per unit, this option is preferable. QUESTION 23 (Module Question) (Annual Rate of Return) On 1-4-2012 ABC Mutual Fund issued 20 lakh units at Rs.10 per unit. Relevant initial expenses involved were Rs.12 lakhs. Tt invested the fund so raised in capital market instruments to build a port folio of Rs.185 lakhs, During the month of April 2012, it disposed of f some of the instruments costing Rs.60 lakhs for Rs.63 lakhs and used the proceeds in purchasing securities for Rs.56 lakhs, Fund management expenses for the month of April 2012 was Rs.8 lakhs of which 10% was in arrears. In April 2012, the fund earned dividends amounting to Rs.2 lakhs and it distributed 80% of the realized earnings. On 30-4-2012, the market value of the portfolio was Rs.198 lakhs. ‘Mr. Akash, an investor, subscribed to 100 units on 1-4-2012 and disposed of f the same at closing NAV on 30- 4-2012, What was his annual rate of earning? CT eealae rar) Amount ‘Amount Amount (Rs. in lakhs) | (Rs. in lakhs) ‘Opening Bank (200 - 185 -12) 3.00 ‘Add: Proceeds from sale of securities 63.00 ‘Add: Dividend received 2,00 68.00 Deduct: Cost of securities purchased 56.00 Fund management expenses paid (90% of 8) 7.20 Capital gains distributed = 80% of (63 - 60) 2.40 Dividend distributed =80% of 2,00 160 £7.20 Closing Bank 0.80 Closing market value of portfolio 198.00 198.80 Less: Arrears of expenses 0.80 Closing Net Assets 198.00 Number of units (Lakhs) 20 Closing NAV per unit (198.00/20) 9.90 Rate of Earning (Per Unit) Particulars Amount Income received (Rs. 2.40 + Rs. 1.60)/20 Rs.0.20 Less: Loss on disposal (Rs. 200 - Rs. 198)/20 Rs. 0.10 Net earning Rs, 0.10 Initial investment Rs, 10.00 Rate of earning (monthly) 1% Rate of earning (Annual) 12% CT eealae rar) QUESTION 24 (Module Question) ‘Sun Moon Mutual Fund (Approved Mutual Fund) sponsored open-ended equity oriented scheme “Chanakya Opportunity Fund". There were three plans viz. 'A’ - Dividend Re- investment Plan, 'B" - Bonus Plan & 'C’ ~ Growth Plan. At the time of Initial Public Offer on 1.4.1999, Mr. Anand, Mr. Bacchan & Mrs. Charu, three investors invested Rs.1,00,000 each & chosen’, 'C' &'A’ Plan respectively. The History of the Fundis as follows: Date Dividend % Bonus Ratio Net Asset Value per Unit (F.V. Rs.10) Plan A Plan B Plan € 28.07.2003 20 30.70 31.40 33.42 31,03,2004 70 5:4 58.42 31.05 70.05 31.10.2007 40 42.18 25.02 56.15 15.03.2008 25 46.45 29.10 64.28 31.03.2008 1:3 42.18 20,05 60.12 24.03.2009 40 1:4 48,10 19.95 72.40 31.07.2009 53.75 22.98 82.07 On 31st July all three investors redeemed all the balance units, Calculate annual rate of return to each of the investors. Consider: 1.Long-term Capital Gainis exempt from Income tax. 2, Short-term Capital Gainis subject to 10% Income tax, 3. Security Transaction Tax 0.2 per cent only on sale/redemption of units. 4, Ignore Education Ces ‘Mrs. Charu Plan A Dividend Reinvestment Date —_| Investment | Dividend ividend Re- invested | NAV | Units | Closing Unit payout | (Closing Units X Face value Balance (%) _|of Rs. 10xDividend Payout %) = Units 01.04.1999 | 1,00,000.00 10.00 | 10,000.00 | 10,000.00 28.07.2003 20 20,000.00 30.70| 651.47 | 10,651.47 31.03.2004 70 74,560.29 58.42 | 1,276.28 | 11,927.75 30.10.2007 40 47,711.00 42.18 | 113113 | 13,058.88 15.03.2008 25 32,647.20 4645] 702.85 | 13,761.73 24.03.2009 40 55,046.92 48.10 | 1,144.43 14,906.16 CT ee