Mutual Funds

CONTENTS

CONCEPT OF MUTUAL FUND

TYPES OF MUTUAL FUNDS
CLOSE ENDED / OPENENDED
GROWTH / INCOME / BALANCED / MMMF
DOMESTIC FUNDS
OFFSHORE FUNDS
SECTORAL FUNDS
EQUITY LINKED SAVING SCHEMES
LOAD FUNDS
GILT FUNDS
EXCHANGE TRADED FUNDS (ETF)
NET ASSET VALUE (NAV)

Growth of Mutual Funds in India

100% growth in the last 6 years (as on 2009).

Our saving rate is over 23%, highest in the world.
Only channelizing these savings in mutual funds
sector is required.
In India there are 29 mutual funds : much less than
compared to US . There is a big scope for expansion.
'B' and 'C' class cities are growing rapidly. Today
most of the mutual funds are concentrating on the 'A'
class cities. Soon they will find scope in the growing
cities.

MUTUAL FUND

Mutual fund is a trust that pools money from a

group of investors and invest the money in
markets.
Mutual Fund is managed by a fund manager .
Capital appreciation and other incomes earned
from these investments are passed on to the
investors in proportion of the number of units
they own.

Concept of Mutual funds

Organisation of a Mutual Fund

Advantages
Professional
Management
Diversification
Convenient
Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Choice of schemes

Advantages

Professional Management
The investor avails of the services of experienced
and skilled professionals who are backed by a
dedicated investment research team which analyses
the performance and prospects of companies and
selects suitable investments to achieve the
objectives of the scheme.
Diversification
Mutual Funds invest in a number of companies
across a broad cross-section of industries and
sectors.
Diversification of investments reduces the risk
Ordinary investor achieve this diversification with far
less money

Convenient Administration

reduces paperwork and helps you avoid many

problems such as bad deliveries, delayed
payments and unnecessary follow up with
brokers and companies.

It saves your time and make investing easy and

convenient.
Return Potential
Over a medium to long-term, Mutual Funds have
the potential to provide a higher return as they
invest in a diversified basket of selected
securities.
Low Costs
Mutual Funds are a relatively less expensive way
to invest compared to directly investing in the
capital markets because the benefits of scale in
brokerage, custodial and other fees translate into
lower costs for investors.

Liquidity
In open-ended schemes, you can get your money
back promptly at net asset value related prices
from the Mutual Fund itself. With close-ended
schemes, you can sell your units on a stock
exchange at the prevailing market price or avail of
the facility of direct repurchase at NAV related
prices which some close-ended and interval
schemes offer you periodically.
Transparency
You get regular information on the value of your
investment in addition to disclosure on the specific
investments made by your scheme, the proportion
invested in each class of assets and the fund
manager's investment strategy and outlook.

Flexibility
Through features such as regular investment
plans, regular withdrawal plans and dividend
reinvestment plans, you can systematically
invest or withdraw funds according to your
needs and convenience.
Choice of Schemes : Mutual Funds offer a
family of schemes to suit your varying needs
over a lifetime.
Well Regulated: All Mutual Funds are
registered with SEBI and they function within
the provisions of strict regulations designed to
protect the interests of investors. The
operations of Mutual Funds are regularly
monitored by SEBI.

Disadvantages Of Mutual Funds

Cost Control Not in the Hands of an

Investor

No Customized Portfolios

Difficulty in Selecting a Suitable Fund

Scheme

Types of Mutual Fund Schemes

By
Structure
Open Ended
Schemes

By
Investment
Objectives
Growth Schemes

Close Ended
Schemes

Income Schemes

Interval
Schemes

Balanced
Schemes
Money Market
Schemes

Other
Scheme
s
Tax Saving
Schemes

Special
Scheme
s
Index
Schemes
Sector
Specific
Schemes

Types Of Mutual Funds

By Structure
Open - Ended Schemes
Funds that can sell and purchase units at any point in
time are classified as Open-end Funds.
The fund size is variable because of continuous
selling and repurchases by the fund.
Close - Ended Schemes
Funds that can sell a fixed number of units only
during the New Fund Offer period are known as
Closed-end Funds.
The fund size remains unchanged at all times.
are listed on the stock exchanges where investors can
buy/sell units from/to each other.

Types of Mutual funds

Interval schemes
Interval Schemes are those that combine the
features of open-ended and close-ended schemes.
The units may be traded on the stock exchange or
may be open for sale or redemption during predetermined intervals
By Investment Objective
Growth Schemes
Income Schemes
Balanced Schemes
Money Market Schemes

Growth Scheme
Aim is to provide capital appreciation over the
medium to long term
Major part of their corpus is invested in equity
High risk
Different Options : Dividend, Capital
Appreciation
Investor has choice to select the option and also
change the option at later date
Good for investors having long term outlook
seeking appreciation over a period of time

Income Scheme

Aim is to provide regular and steady income to

the investors
Underlying portfolio is Fixed income securities
such as bonds, corporate debentures, Govt.
Securities and Money Market Instruments
Less risky as compared to growth funds
Opportunity of capital appreciation is limited.
These funds are not affected due to volatility of
equity markets but affected because of change in
interest rate in the country.

Balanced Funds

Aim is to provide both growth and regular income

Schemes invest in both equities and fixed income
securities in proportion indicated in offer
document
Appropriate for investors looking for moderate
growth
Generally invest 40 60% in equity and debt
instruments
Affected by fluctuations in stock markets, however
NAV is less volatile as compared to growth funds

Money Market Funds or Liquid Funds

Income Funds and aim is to provide easy liquidity,

preservation of capital and moderate income
Invest in short term instruments viz. TB, CDs,
CPs, Interbank Call Money, Govt. Securities
Returns fluctuates much less compared to other
funds
Appropriate for Corporate and Individual
Investors as a means to park their surplus funds for
short periods

Other Schemes

Tax Saving Schemes

Special Schemes

Index Schemes

Sector Specfic Schemes

SECTORAL FUNDS

These provide the opportunity for focused

investments and also the facility to construct your
own portfolio in terms of sectoral preferences .
These funds restrict investors to only investing in
one sector .
These are the funds/schemes which invest in the
securities of only those sectors or industries as
specified in the offer documents.

NET ASSET VALUE (NAV)

NAV = (Market value of the assets of the

scheme - its liabilities ) / No. of funds unit

USAGE
Investors might want to know if a company is
cheap or expensive to invest in .

Load Funds

Mutual Funds incur various expenses on

marketing, distribution, advertising, portfolio
churning, fund manager's salary etc. Many funds
recover these expenses from the investors in the
form of load. These funds are known as Load
Funds .
Entry Load .
Exit load
Deferred Load .
Contingent Deferred Sales Charge (CDSS)

Load Fund
Calculation
Let's assume that Mr. Gupta has purchased Mutual Fund
units worth Rs. 10,000 at an NAV of Rs. 10 per unit on
February 1. The Entry Load on the Mutual Fund was 2%.
On September 15, he sold all the units at an NAV of Rs 20.
The exit load was 0.5%.
His growth/ returns is calculated as under:
1. Calculation of Applicable NAV and No. of
units purchased
(a) Amount of Investment = Rs. 10,000
(b) Market NAV = Rs. 10
(c) Entry Load =2% = Rs. 0.20
(d) Applicable NAV (Purchase Price) = (b) + (c)
= Rs. 10.20
(e) Actual Units Purchased = (a) / (d) = 980.392 units

2. Calculation of NAV at the time of

Sale
(a) NAV at the time of Sale = Rs 20
(b) Exit Load = 0.5% or Rs.0.10
(c) Applicable NAV = (a) (b) = Rs. 19.90
3. Returns/Growth on Mutual Funds
(a) Applicable NAV at the time of Redemption = Rs.
19.90
(b) Applicable NAV at the time of Purchase = Rs.
10.20
(c) Growth/ Returns on Investment = {(a) (b)/(b) *
100} = 95.30 %

1. The NAV of ABC on January 2 , 2010 was

Rs. 23.45. If the fund charged 2% as entry load
and 0.25% as exit load , what are the sale and
repurchase prices to the investor?

A. Rs. 23.45 and 23.39

B. Rs. 23.92 and 23.39

C. Rs. 23.75 and 23.24

D. Rs. 23.52 and 23.24

Calculations:
Sale Price

= NAV ( 1 + Entry Load)

= 23.45 (1 + 2/100)
= Rs. 23.92
Repurchase Price
= NAV ( 1 - Exit Load )
= 23.45 (1-0.25/100)
= Rs. 23.39

An investor holds 1100 units in a gilt fund. The current NAV

is Rs. 12.95. He would like to switch his holdings to an
equity fund , whose NAV is Rs. 15.95. If the exit load is
0.75% for the gilt fund and the entry load for the equity
fund is 0.50% , what is the value of his holding in the
equity fund , after the switch?
A. Rs. 14072.8507
B. Rs. 14067.8903
C. Rs. 14067.8507
D. Rs.14072.8903

Calculations:
The investor will sell the gilt fund holdings , and use the
proceeds to buy the equity fund units.
Repurchase of gilt fund units:
Repurchase price
= NAV ( 1 - exit load )
= 12.95 (1 - 0.75/100 )
= 12.95(1 - .0075)
= 12.95( 0.9925)
= Rs. 12.8529
Number of units redeemed
= 1100
Therefore redemption value
= Rs. 14138.19
Purchase of equity fund units:
Sale Price
= NAV ( 1 + entry load )

Purchase of equity fund units:

Sale Price
= NAV ( 1 + entry load )
= 15.95 ( 1 +
0.5/100)
= Rs. 16.02975
Number of units purchased = 14138.19 / 16.02975
= 881.9969 units
Value of holding is
= 881.9969 * 15.95
= Rs. 14067.8507

Gilt Funds

Gilt fund is also known as Government Securities

in India, Gilt Funds invest in government papers
(named dated securities) having medium to long
term maturity period. Issued by the Government
of India, these investments have little credit risk
(risk of default) and provide safety of principal to
the investors
Gilt funds differ from bond funds because bond
funds invest in corporate bonds, government
securities, and money market instruments. Gilt
funds stick to high quality-low risk debt, mainly
government securities.

TAX SAVINGS ELSS

Under specific provisions of the Income Tax Act,

1961, the Government offers tax incentives for
investment in specified avenues. E.g.: ELSS, Pension
schemes.

ELSS is the mirror image of diversified equity funds.

That means the fund manager will invest in shares of
various companies across various industries. Hence, it
is a normal equity diversified fund .
Why ELSS?
good returns .

Tax Saving Schemes

Equity Linked Tax Saving Schemes (ELSS)

Minimum investment in Equity & Equity related
securities will be 80%.
Investments in ELSSs fall under Section 80C. The
limit under this section is Rs 1 Lac.
Pluses

Minuses

Possibility of high returns

Lock-in period of only 3
years
Easy transfer
Low tax incidence (10 per
cent) on redemption

High risk
Difficult to choose
the right fund

SBI Mutual Fund

MAGNUM GILT FUND
An Open-ended Gilt Fund
Objective
The scheme will invest in government securities only
with the exception of investments made in the call
money markets.
The scheme offers two Plans
(i) Short-Term Plan
(ii) Long-Term Plan

 Investment Objective and Policies

Index Funds
Index Funds replicate the portfolio of a particular
index such as the BSE Sensitive index, S&P
NSE 50 index (Nifty), etc

Thank You