MUTUAL FUNDS

A BEGINNER’S MODULE
 WHAT IS A MUTUAL FUND?

A vehicle for investing in stocks and bonds

 CONCEPT
A Mutual Fund is a trust that pools the savings of a number
of investors who share a common financial goal.
The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities.
The income earned through these investments and the
capital appreciation realised are shared by its unit holders
in proportion to the number of units owned by them.
Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at
a relatively low cost.
MUTUAL FUND OPERATION
FLOW CHART
 EACH MUTUAL FUND HAS A SPECIFIC STATED
OBJECTIVE

 Fund’s objective is laid out in the

fund's prospectus, which is the
legal document that contains
information about the fund
Its history, its officers and its
performance.
OBJECTIVES OF A MUTUAL FUND ARE

Fund Objective What the fund will invest in

Equity (Growth) - Only in stocks
Debt (Income) - Only in fixed-income securities
Money Market - In short-term money market
instruments
(including government securities)
Balanced - Partly in stocks and partly in
fixed- income securities,
('balance' in returns and risk)
MUTUAL FUNDS STRUCTURE IN INDIA

Mutual Funds in India follow a 3-tier structure

BENEFITS OF INVESTING THROUGH
MUTUAL FUNDS
PROFESSIONAL MONEY MANAGEMENT

 Fund managers are responsible

for implementing a consistent
investment strategy .

 Fund managers monitor market

and economic trends and analyze
securities
DIVERSIFICATION

 Diversification is one of the best

ways to reduce risk.

 Mutual funds offer investors an

opportunity to diversify across
assets.
LIQUIDITY

 Investors can sell their mutual

fund units on any business day.

 Receive the current market value

on their investments within a short
time period (normally three- to
five-days).
 AFFORDABILITY

 The minimum initial investment

for a mutual fund is fairly low for
most funds (as low as Rs500 for
some schemes).
CONVENIENCE

 Convenience of periodic purchase plans,

automatic withdrawal plans and the
automatic reinvestment of interest and
dividends.

 Reports and statements .

FLEXIBILITY AND VARIETY

 Pick from conservative, blue-chip stock funds, Sectorial

funds,

 Funds that aim to provide income with modest growth

 Those that take big risks in the search for returns.

 You can even buy balanced funds, or those that combine

stocks and bonds in the same fund.
 TAX BENEFITS ON INVESTMENT IN
MUTUAL FUNDS

 100% Income Tax exemption on all Mutual Fund

dividends .

 Deduction up to 1 lakh available u/s 80(c) under

investment in ELSS funds as of FY2005-2006.
IMPORTANT DOCUMENTS

 Two key documents that

highlight the fund's strategy and
performance are 1 the prospectus
(legal document) and the
shareholder reports (normally
quarterly)
COMPLIANCE OFFICER

A compliance Officer is one of the most important

persons in the AMC.
If any fund manager, analyst intends to buy/ sell some
securities, the permission of the Compliance Officer is a
must.

OFFER DOCUMENT

OD is a legal document and investors rely upon the

information provided in the OD for investing in the
mutual fund scheme.
WHO IS A CUSTODIAN?

 A custodian’s role is safe keeping of physical securities

and also keeping a tab on the corporate actions like rights,
bonus and dividends declared by the companies in which
the fund has invested.

 Custodian is appointed by the Board of Trustees.

 The physical securities are held by the Custodian.

WHAT IS THE ROLE OF THE AMC?

 The company that puts together a mutual fund is

called an AMC .

 AMC may have several mutual fund schemes .

 AMC hires a professional money manager, who

buys and sells securities in line with the fund's
stated objective.
 Mutual fund regulations require that the fund’s
objectives are clearly spelt out in the prospectus.

 Every mutual fund has a board of directors that is

supposed to represent the shareholders' interests,
rather than the AMC’s.

ALL AMCS REGULATED BY SEBI, FUNDS

GOVERNED BY BOARD OF DIRECTORS
 WHAT IS AN NFO?
 AMC launches new schemes, under the name of the
Trust, after getting approval from the Trustees and SEBI.

 The launch of a new scheme is known as a New Fund

Offer

 ROLE OF A REGISTRAR AND TRANSFER AGENTS?

 RTA’s office where the information is

converted from physical to electronic form.
INVESTORS’ S RIGHTS & OBLIGATIONS?
 Investors are mutual, beneficial and proportional owners
of the scheme’s assets.

 In case of dividend declaration, investors have a right to

receive the dividend within 30 days of declaration.

 On redemption request by investors, the AMC must

dispatch the redemption proceeds within 10 working days
of the request.

 In case he AMC fails to do so, it has to pay an interest @

15%. This rate may
INVESTORS’ S RIGHTS & OBLIGATIONS?
 In case the investor fails to claim the redemption proceeds
immediately, then the applicable NAV depends upon when
the investor claims the redemption proceeds.

 Investors can obtain relevant information from the trustees

and inspect documents like trust deed, investment
management agreement, annual reports, offer documents, etc.
They must receive audited annual reports within 6 months
from the financial year end.

 Investors can wind up a scheme or even terminate the AMC

if unit holders representing 75% of scheme’s assets pass a
resolution to that respect.
INVESTORS’ S RIGHTS & OBLIGATIONS?

 Investors have a right to be informed about changes in the

fundamental attributes of a scheme. Fundamental attributes
include type of scheme, investment objectives and policies
and terms of issue.

 Lastly, investors can approach the investor relations officer

for grievance reprisal. In case the investor does not get
appropriate solution, he can approach the investor grievance
cell of SEBI. The investor can also sue the trustees.
TERMINOLOGIES OF MUTUAL FUNDS
TERMINOLOGIES
Sale Price/ Offer Price
Price you pay to invest in a scheme. May include a sales load.
(In this case, sale price is higher than NAV)
Re-Purchase Price/ Bid Price
Price at which close-ended scheme repurchases its units
Redemption Price
Price at which open-ended scheme
Dividend
Profits given to the investor from time to time.

Growth
Profits ploughed back into scheme. This causes the NAV to
rise.
LOAD
Entry Load/Front-End Load (0-2.25%)

 The commission charged at the time of buying the fund.

 To cover costs for selling, processing

Exit Load/Back- End Load (0.25-2.25%)

 The commission or charge paid when an investor exits from a

mutual fund. Imposed to discourage withdrawals

 May reduce to zero as holding period increases.

EXPENSE RATIO

 AMCs charge an annual fee, or expense ratio

that covers administrative expenses, salaries,
advertising expenses, brokerage fee, etc.

 Fund's expense ratio is typically to the size of

the funds under management and not to the returns
earned.
NET ASSET VALUE OR NAV

 NAV is the total asset value (net of

expenses) per unit of the fund and is
calculated by the AMC at the end of every
business day.
HOW IS NAV CALCULATED?

 The value of all the securities in the portfolio in

calculated daily. From this, all expenses are deducted and
the resultant value divided by the number of units in the
fund is the fund’s NAV.
MUTUAL FUND PRODUCTS
TYPES OF MUTUAL FUND SCHEMES
 By Structure
 Open-Ended – anytime enter/exit
 Close-Ended Schemes – listed on exchange, redemption after
period of scheme is over.

 By Investment Objective
 Equity (Growth) – only in Stocks – Long Term (3 years or
more)
 Debt (Income) – only in Fixed Income Securities (3-10
months)
 Liquid/Money Market (including gilt) – Short-term Money
Market (Govt.)
 Balanced/Hybrid – Stocks + Fixed Income Securities (1-3
years)

 Other Schemes
 Tax Saving Schemes
 Special Schemes
 ULIP
EQUITY FUNDS
 Equity Funds are defined as those funds which have at
least 65% of their Average Weekly Net Assets invested in
Indian Equities.

 Equity Funds include Index Funds, diversified Large

Cap Funds and the Sector Funds.

EQUITY SCHEMES
- Arbitrage Funds - Multicap Funds
- Quant Funds - P/ E Ratio Fund
- International Equities Fund - Growth Schemes
- ELSS - Fund of Funds
EXCHANGE TRADED FUNDS
 Exchange Traded Funds (ETFs) are mutual fund units
which investors buy/sell from the stock exchange, as
against a normal mutual fund unit, where the investor
buys / sells through a distributor or directly from the
AMC.

 ETFs have relatively lesser costs as compared to a

mutual fund scheme.
GOLD EXCHANGE TRADED FUNDS

 Gold ETFs (G-ETFs) are a special type of ETF

which invests in Gold and Gold related securities. This
product gives the investor an option to diversify his
investments into a different asset class, other than
equity and debt.
The way Gold ETFs work is as under:
 During New Fund Offer (NFO)
On an on going basis
MARKET MAKING BY APS
MARKET MAKING BY APS
DEBT FUNDS
 Debt funds are funds which invest money in debt
instruments such as short and long term bonds,
government securities, t-bills, corporate paper,
commercial paper, call money etc.

 Debt paper is issued by Government, corporate and

financial institutions to meet funding requirements
DEBT MUTUAL FUND SCHEMES

Fixed Maturity Plans

Capital Protection Funds

Gilt Funds
Monthly Income Plans

Child Benefit Plans

LIQUID FUNDS
 It accounts for approximately 40% of industry

 Liquid paper having maturity less than 182 days

 Less risky and better returns than a bank current

account, are the two plus points of Liquid Funds

FLOATING RATE SCHEME

 These are schemes where the debt paper has a
Coupon which keeps changing as per the changes in the
interest rates.
TAXATION
•All dividends declared by debt / equity oriented schemes are tax free
in the hands of the investor
• Dividend distribution tax @ 14.1625% for individuals and 22.66%
for corporate under debt oriented schemes
• No DDT under equity schemes
• Long term capital gain in equity schemes – exempt from tax
• Indexation benefit available for long term non equity schemes
• Equity short term capital gain @10%
• STCG in Debt funds – Rates applicable for the investor
• Deduction of Rs. 1 lack under section 80C
CAPITAL GAINS TAXATION
RISK AND RETURNS
SPECIAL SCHEMES
 Funds based on Size of the Companies Invested in

 Large cap funds: Funds that invest in companies

whose total market cap is above Rs40bn

 Mid cap funds: Funds that invest in companies whose

market cap is between Rs20-40bn

 Small cap funds: Funds that invest in companies

whose market cap is below Rs20bn
INVESTMENT STRATEGIES
 Systematic Investment Plan (SIP)

 Invest a fixed sum every month. (6 months to 10

years- through post-dated cheques or Direct Debit
facilities)

 Fewer units when the share prices are high, and

more units when the share prices are low. Average
cost price tends to fall below the average NAV.

 Systematic Transfer Plan (STP)

 Invest in debt oriented fund and give instructions

to transfer a fixed sum, at a fixed interval, to an
equity scheme of the same mutual fund.
INVESTMENT STRATEGIES

 Systematic Withdrawal Plan (SWP)

 The investor invests a lump sum amount and withdraws some

money regularly over a period of time.

 This results in a steady income for the investor while at the

same time his principal also gets drawn down gradually.
REGULATIONS
 No scheme can invest more than 15% of its NAV in rated
debt instruments of a single issuer. This limit may be increased
to 20% with prior approval of Trustees. This restriction is not
applicable to Government securities.

 No scheme can invest more than 10% of its NAV in unrated

paper of a single issuer and total investment by any scheme in
unrated papers cannot exceed 25% of NAV

 No fund, under all its schemes can hold more than 10% of
company’s paid up capital.

 No scheme can invest more than 10% of its NAV in a single

company.
REGULATIONS
 If a scheme invests in another scheme of the same or
different AMC,no fees will be charged. Aggregate inter
scheme investment cannot exceed 5% of net asset value of
the mutual fund.

 No scheme can invest in unlisted securities of its

sponsor or its group entities.

 Schemes can invest in unlisted securities issued by

entities other than the sponsor or sponsor’s group. Open
ended schemes can invest maximum of 5% of net assets in
such securities whereas close ended schemes can invest up
to 10% of net assets in such securities.
OBJECTIVES OF AMFI
 Promote the interests of the mutual funds and unit
holders and interact with regulators-
SEBI/RBI/Govt./Regulators.

 To set and maintain ethical, commercial and

professional standards in the industry and to recommend
and promote best business practices and code of conduct
to be followed by members and others engaged in the
activities of mutual fund and asset management.
OBJECTIVES OF AMFI
 To increase public awareness and understanding of the
concept and working of mutual funds in the country, to
undertake investor awareness programmer and to
disseminate information on the mutual fund industry.

 To develop a cadre of well trained distributors and to

implement a program me of training and certification for
all intermediaries and others engaged in the industry.
INVEST EARLY INVEST
REGULARLY
THANK YOU!!!