Mutual Funds

Mayank Vohra
Vishwesh Singbal
Goa Institute of Manangement
Mutual Fund
A mutual fund is a professionally
managed type of collective
investment scheme that pools
money from many investors and
invests it in stocks, bonds, short-
term money market instruments,
and/or other securities
Mutual Fund flow cycle

Source: AMFI
Mutual Fund Basic Terminology

An Asset Management Company is the fund

house or the company that manages the
money.
The Mutual fund is a trust registered under the
Indian Trust Act. It is initiated by a sponsor. A
sponsor is a person who acts alone or with a
corporate to establish a mutual fund. The
sponsor then appoints an AMC to manage the
investment, marketing, accounting and other
functions pertaining to the fund.
 Functional Entities in MF Operations

Trust or Trustee They form mutual funds under existing Trust or Companies Acts
●

Trust managed by the Trustees and Trustee Companies are managed by the
●

Company Board of Directors

Asset Management ●
Undertakes the administration & investment
Company (AMC) activities of the fund

He/She is an independent entity who is responsible

Custodian
●

for safekeeping the fund’s assets

Registrars/Transfer They handle sales and redemption related activities of the fund
●

They also maintain records of the shareholders and send the payment
●

Agents cheques to the investors

They are the funds distributors/underwriters to handle the sales of units

●

Distributors The underwriters act as an wholesale selling units to the brokers who in turn sell
●

to the retail investors

Mutual Fund Basic Terminology
• NAV - The Net Asset Value is the price of a unit of a
fund. When a fund comes out with an NFO, it is
priced Rs 10. Later, depending on the value of the
investments, this price could rise or fall

– Mutual funds only calculate their NAVs once per trading

day, at the close of the trading session.
• Portfolio -This is the term given to all the
investments made by the fund as well as the
amount held in cash.
• Load - This is a fee that is charged when you buy or
sell the units of a fund.
– The load is a percentage of the NAV.
– According to the new SEBI regulations, the entry/exit load
would be removed.
Mutual Fund Basic Terminology
• Corpus - The total amount of money invested
in the fund is called the corpus
• AUM - Assets Under Management is the total
value of all the investments currently being
managed by the fund.
Let's say the corpus is Rs 12,000 but, due to a rise
in the price of the shares it has invested in, the
value of the units has increased. So the Rs
12,000 invested is now worth Rs 15,000. This
figure is referred to as AUM.
• NFO - A New Fund Offering is the term given to
a new mutual fund scheme.
Mutual Fund Basic Terminology
• Public Offering Price (POP) - The public offering
price (POP) is the price at which shares are sold to
the public. For funds that don't charge a sales
commission (or "load"), the POP is simply equal to
the Net Asset Value (NAV). For a load fund, the POP
is equal to the NAV plus the sales charge. As with
the NAV, the POP will typically change on a day to
day basis.
Mutual Fund Family - A mutual fund family is a
group of mutual funds that is managed by the same
company. It is usually easy to switch money
between mutual funds that are part of the same
family.
 How to invest in a mutual fund
A one-time
outright
payment
●
If you invest directly in the fund, you just
hand over the cheque and you get your
fund units depending on the value of the
units on that particular day.
●
Let's say you want to invest Rs 10,000. All
you have to do is approach the fund and
buy units worth Rs 10,000. There will be
two factors determining how many units
you get.
●
The Net Asset Value is the price of a unit
of a fund. Let's say that the NAV on the
day you invest is Rs 30. So you will get
333.33 units (Rs 10000 / 30).
Periodic
investments(
SIP)
●
Here, every month, you commit to investing,
say, Rs 1,000 in your fund. At the end of a year,
you would have invested Rs 12,000 in your fund.
●
Let's say the NAV on the day you invest in the
first month is Rs 20; you will get 50 units.
●
The next month, the NAV is Rs 25. You will get 40
units.
●
The following month, the NAV is Rs 18. You will
get 55.56 units.
●
So, after three months, you would have 145.56
units. On an average, you would have paid
around Rs 21 per unit. This is because, when the
NAV is high, you get fewer units per Rs 1,000.
When the NAV falls, you get more units per Rs
1,000.
Advantages of Mutual Funds

• Professional Management
• Diversification
• Convenient Administration
• Lower Transaction costs
• Transparency
• Liquidity
• Mobilizes savings into the market
 Basis for Classification

Sectoral funds are most risky

Risk
●

●
Money market funds are least risky

Tenor Equity funds require a long investment horizon

●

●
Liquid funds are for short term liquidity needs

●
Equity funds suit growth objective
Investment Objective ●
Debt funds suit income objective
Different type of Funds
• Closed-end funds: A closed-end mutual fund
has a set number of shares issued to the public
through an initial public offering.
• Open-end funds: Open end funds are operated
by a mutual fund house which raises money
from shareholders and invests in a group of
assets
• Large cap funds: Large cap funds are those
mutual funds, which seek capital appreciation
by investing primarily in stocks of large blue
chip companies
Different type of Funds
• Mid-cap funds: Mid cap funds are those mutual
funds, which invest in small / medium sized
companies
• Equity funds: Equity mutual funds are also
known as stock mutual funds. Equity mutual
funds invest pooled amounts of money in the
stocks of public companies. Eg- SBI Magnum,
Fraklin India Prima
• Bond Funds: A mutual fund that invests in
several different types of medium and long-term
government securities in addition to top quality
corporate debt. Eg – UTI Liquid Cash Plan, HDFC
Cash Managemnt Fund, Birla Cash Plus
Different type of Funds
• Growth funds: Growth funds are those mutual
funds that aim to achieve capital appreciation by
investing in growth stocks. Eg – Reliance Growth
Funds
• Balanced funds or Hybrid Funds: It is a type of
mutual fund that buys a combination of
common stock, preferred stock, bonds, and
short-term bonds – SBI Magnum balanced Fund,
Tata Balanced Fund
• Value funds: Value funds are those mutual funds
that tend to focus on safety rather than growth,
and often choose investments providing
dividends as well as capital appreciation.
Different type of Funds
• Gilt Funds: A mutual fund that invests in several
different types of medium and long-term
government securities in addition to top quality
corporate debt. Gilts originated in Britain. Eg. ICICI
Prudential gilt.
• Aggressive Growth funds: These funds invest in
the securities with high risk and high return.
• Enhanced index: This is an index fund which has
been modified by either adding value or reducing
volatility through selective stock-picking.
• Exchange Traded Funds(ETFs): These represent a
basket of securities that is traded on an exchange,
similar to a stock.
Different type of Funds
• Money market funds: A money market fund is
a mutual fund that invests solely in money
market instruments. Money market
instruments are forms of debt that mature in
less than one year and are very liquid.
• International mutual funds: International
mutual funds are those funds that invest in
non-domestic securities markets throughout
the world.
• Regional mutual funds: Regional mutual fund
is a mutual fund that confines itself to
investments in securities from a specified
geographical area, usually, the fund's local
region.
Different type of Funds
• Sector funds: Sector mutual funds are those
mutual funds that restrict their investments to a
particular segment or sector of the economy.
• Index funds: An index fund is a mutual fund or
exchange-traded fund that aims to replicate the
movements of an index of a specific financial
market.
• Fund of funds: A fund of funds (FoF) is an
investment fund that holds a portfolio of other
investment funds rather than investing directly in
shares, bonds or other securities.
Different type of Funds
• Real estate Stocks: These are from firms
involved in real estate such as builder, supplier,
architects and engineers, financial lenders, etc.

• Venture Capital Funds: Venture Capital Mutual

Funds invest in the start-up and new
companies.
Investment Strategies
Bottom- Takes into consideration the fundamental
●

factors involved driving the stock

performance before considering the
up economic prospects which affect the
industry and within which the company
Investing operates.

Top- This first takes view on the

●

Economy and then looks at the

Down industry scenario to assess the
potential performance of the
Investing company.
Strength Weakness Opportunities Threats
SEBI/AMFI have Limited channels of Mutual fund Large number of
taken an active role distribution i.e. investment as a % substitutes
in protecting banks and agent of Household available to Indian
investors interest account for more savings invested in investor- Deposit,
through regulations than 70% of financial assets is equities and real
certifications and distribution of less than 1% estate.
code of conduct mutual funds

Open product Lack of effort of Because of the In India low risk

architecture i.e. wealth managers in economic growth, investment
distributors offer aeducating the investors are products like PPF
range of Mutual market about the actively diversifying offer high returns.
fund products to mutual products their income into
choose from has been the cause various funds.
of low penetration
Has often added as Absence of global Mutual funds in As more foreign
a counterbalance to policies on global India permitted to players enter India
equity market mutual funds invest up to 10 % of through the JV
volatility and the net assets route, investors in
market liquidity abroad in foreign India will need to
securities educate themselves
about abroad risks
The effect of slowdown
• The Mutual Fund Industry was hardhit by
economic slowdown.
• Positive impact
– Investors who used to directly invest in the
market have started investing through Mutual
Funds.
– MF Companies were able to pick some good
stocks at a very low price from the market
– The MF’s have started looking more into the
fundamentals and are now playing safe.
Tax Benefits
• Section 10(33) of the Income Tax Act, 1961 :
The dividend received by the investors from
the scheme will be exempt from income tax
for all categories of investors under Section
10(33) of the Income Tax Act, 1961
• Wealth Tax Benefits: Mutual Fund units are
exempt from Wealth Tax.
Tax Benefits
• Capital Gains benefit under Section 112 of the Income
Tax Act, 1961
– Long-term capital gains in respect of Units held for a
period of more than 12 months will be chargeable under
Section 112 of the Income Tax Act, 1961, at a
concessional rate of tax @ 20% (excluding surcharge)
– From the full value of consideration, the following
amounts would be deductible to arrive at the amount of
capital gains:
• Cost of acquisition as adjusted by Cost Inflation Index
notified by the Central Government
• Expenditure incurred wholly and exclusively in
connection with such transfer
– Investors can also opt to pay tax @10% (excluding
surcharge) on such Long Term Capital Gains, but without
the cost inflation indexation benefit.
Regulatory Framework
• SEBI Mutual Fund Regulations(1996)

• Indian Trusts Act

• Registrar of Companies takes care of the Compliances

• Company Law Board is responsible for levying

penalties.
Source: AMFI
Ratings of Mutual funds in India
The Road Ahead
• The Mutual fund industry is expected to increase
its share from present 6.5% of GDP to 21% in
next 10 years. The size of the industry is expected
to grow to 1,65,000 crore
• The Steps taken by the RBI for Financial inclusion
and the Financial Literacy of the Rural Sector is
likely to mobilize the savings of the Households
into the Financial Markets.
– The Mutual Funds is the most likely route provided the
risk averse nature of the Indian Investors.
• The growing GDP of the country is likely to
increase and the key driver to utilize this growth
would be the product innovation to cater to the
needs of investors with different risk appetite.
The Road Ahead
• Service Innovations would play a key role to tap
the potential.
• Distribution Front – The distribution has to be
improved in order to serve the rural market
and tier 2 and tier 3 cities.
• Technology Innovations like call-centres to
handle investor queries, transaction facility
through phones and providing information
through the use of SMS’s.
References

• www.wikipedia.org
• www.moneycontrol.com
• www.amfiindia.com
THANK YOU