A PROJECT ON MUTUAL FUND

Submitted by:
Anurag Jena
MBA Finance
WHAT IS MUTUAL FUND

• A mutual fund is a type of financial vehicle made up of a pool of money collected from
many investors to invest in financial securities such as stocks, bonds, money market
instruments and other assets.
• Mutual funds are operated by professional money managers, who allocate the fund’s
assets and attempt to produce capital gains or income for the fund’s investors.
• A mutual fund’s portfolio is structured and maintained to match the investment
objectives stated in its prospectus.
• Mutual funds give small or individual investors access to professionally managed
portfolios of equities, bonds and other securities.
• Each shareholder, therefore, participates proportionally in the gains or losses of the fund.
• Mutual funds invest in a vast number of securities, and performance is usually tracked as
the change in the total market capital of the fund – derived by the aggregating
performance of the underlying investments.

The basics of Mutual Fund

• Mutual funds pool money from the investing public and use that money to buy other
securities, usually stocks and bonds.
• The value of the mutual fund company depends on the performance of the securities it
decides to buy.
• So, when you buy a unit or share of a mutual fund, you are buying the performance of its
portfolio or more preciously, a part of the portfolio’s value.
• That’s why the price of a mutual fund share is referred to as net asset value (NAV) per share,
sometimes expressed as NAVPS.
• A fund’s NAV is derived by dividing the total value of the securities in the portfolio by the
total amount of shares outstanding.
• Outstanding shares are those held by all shareholders, institutional investors and company
officers or insiders.
• Mutual fund shares can typically be purchased or redeemed or needed at the fund’s current
NAV, which – unlike a stock price – doesn’t fluctuate during market hours, but is settled at the
end of each trading day.
TYPES OF MUTUAL FUNDS

1. Based on fund scheme

• Close – ended funds
• Open – ended funds

2. Based on assets invested in

• Equity funds
• Debt funds
• Hybrid funds
Types of Equity Funds:
1. Large Cap
2. Mid Cap
3. Small Cap
4. Sector Fund
5. Dividend Fund
6. Dividend Yield Fund
7. ELS Fund
8. Thematic Fund
9. Diversified Fund
Types of Debt Fund:
1. Debentures
2. Bonds
3. Certificate of deposits etc.
Types of Debt Fund:
1. Gilt Fund
2. Junk Bond Scheme
3. Fix Maturity Plan
4. Liquid Scheme
Types of Hybrid Fund:
1. Monthly Income Plan
2. Balanced Fund
3. Arbitrage Fund
3. Based on investment objective:
• Growth Funds
• Income Funds
• Balanced Funds
4. Specialty Funds
• Index Funds
• Sector Funds
• Regional Funds
• Tax – saving Funds
BASED ON FUND SCHEME

1. Close – ended funds:

• Close ended fund issues a fixed number of units that are traded on the stock exchange.
• It functions much more like an exchange – traded fund than a mutual fund.
• They are launched via NFO to raise money and then traded in the open market just like
a stock.
• Though the value of the fund is based on the NAV, the actual price of the fund is affected
by supply and demand as it is allowed to trade at prices above or below its actual or real
value.
• Hence, close – end funds can trade at premiums or discounts to their NAVs.
2. Open – ended funds
• Open – ended funds are what you know as a mutual fund.
• These funds do not trade in the open market.
• They don’t have a limit as to how many units they can issue.
• The NAV changes daily because of market fluctuations of the shares or stocks and bond
prices in the fund.
• Open – ended mutual fund units are bought and sold on demand at their Net Asset Value
or NAV which is dependent on the value of the fund’s underlying securities and is
estimated at the end of every trading day.
BASED ON ASSETS INVESTED IN

A. Equity Funds
• An equity fund is a mutual fund that invests principally in stocks.
• It can be actively or passively (index fund)managed.
• Equity funds are also known as stock funds.
• Stock mutual funds are principally categorized according to company size, the investment
style of the holdings in the portfolio and geography.
Types of Equity Fund:
1. Large Cap Funds:-
Large cap funds are those funds which invest a large proportion of their corpus in
Corpus in companies with large market capitalization.
• Trustworthy, reputable and strong are three adjectives that are often used to describe a
large – cap company.
• These are the old and well – established players with a track record.
2. Mid Cap Fund:-
• A mid – cap fund is a type of investment fund that focuses its investments on companies
with a capitalization in the middle range of stocks in the investable market.
• Companies with market capitalizations ranging from $2 billion to $10 billion are typically
considered mid – cap companies.
3. Small Cap Fund:-
• Small Cap Fund is a term used to classify companies with relatively small market
capitalization.
• A company’s market capitalization is the market value of its outstanding shares.
• The definition of small cap can vary among brokerages, but it is generally a company with
a market capitalization of between US$ 300 million and US$ billion.
4. Sector Fund:-
A sector fund is a fund that invests solely in businesses that operate in a particular industry
or sector of the economy.
Sector Funds are commonly structured as mutual funds or exchange – traded funds (ETFs).
5. Dividend Fund:-
• A dividend fund is a type of mutual fund which invests exclusively in equity shares which
pay regular dividends.
• A dividend fund seeks to provide investors with income from common and preference
shares of stock which yield dividends in cash and stock on a regularly – occurring basis.
• It is the opposite of a growth fund, which seeks to provide investors with long – term
appreciation of capital.
6. Dividend Yield Fund:-
• Dividend yield is the ratio of past dividend paid per share to its market price.
• Dividend includes final and interim dividend.
• A stock can be one that pays good dividends every year, but the stock’s price can be high.
• To ensure that the asking price for this stable dividend is not too much, the dividend yield
comes into play.
7. ELSS Fund:-
• Equity Linked Savings Scheme popularly known ad ELSS are close – ended, lock in period
of 3 years diversified equity schemes offered by mutual funds in India.
• They offer tax benefits under the new section 80C of the Income Tax Act, 1961.
• ELSS can be invested using both SIP (Systematic Investment Plan) and lump sums
investment options.
• There is a 3 years lock – in period, and thus has better liquidity compared to other
options like NSC and Public Provident Fund.
8. Thematic Fund:-
• The thematic funds are a kind of mutual funds that invests across the sectors related to
the common theme.
• Both the sector funds are volatile and riskier than the broad market as their performance
is solely based on the performance of the sector.
9. Diversified Fund:-
• A diversified fund is a fund that is broadly diversified across multiple market sectors or
geographic regions.
• It holds multiple securities, often in multiple asset classes.
• Its broad market diversification helps to prevent idiosyncratic events in one area from
affecting an entire portfolio.
B. Debt Fund:
• A debt fund is an investment pool such as a mutual fund or exchange – traded fund in
which core holdings are fixed income investments.
• A debt fund may invest in short – term or long – term bonds, securitized products, money
market instruments or floating rate debt.
Types of Debt Fund –
1. Income Funds:-
• Income funds are a type of debt mutual fund that attempts to provide a stable rate of returns
in all market scenarios through active portfolio management.
• It is even possible that the active fund manager could pick lower – rated instruments that
could offer potentially higher returns.
2. Dynamic Bond Funds:-
• Though active and “dynamic” portfolio management, dynamic bond funds seek to
Maximize the returns to investors by switching up the investment portfolio depending on
market conditions and fluctuations.
3. Liquid Fund:-
• The entire point of investing in a liquid fund is to maintain a high degree of liquidity (i.e.
convertibility to cash / cash value) in the investment.
• Securities and instruments that are invested in by liquid fund schemes have a maximum
maturity period of 91 days.
4. Credit Opportunities Funds:-
• These funds are the riskier type of debt mutual funds.
• They undertake calculated risks like investing in lower – rated instruments to generate
Potentially higher returns.
5. Short – term and Ultra Short – term Debt Funds:-
• These fund schemes are popular among new investors who want a short term investment
with minimal risk exposure.
• The securities, instruments, papers etc. that are invested in these schemes have a maximum
maturity of 3 years and usually a minimum maturity of 1 year.
6. Gilt Funds:-
• These schemes invest primarily in government – issued securities which carry a very low level
of risk and are generally rated quite high (as the default rate is very low and sometimes non –
existent).
7. Fixed Maturity Plans:-
• Fixed maturity plans can be closely linked to fixed deposits.
• These schemes have a mandatory lock – in period that varies depending on the scheme
chosen.
• The investment must be done once during the initial offer period after which further
investments cannot be made in this scheme.
C. Hybrid Funds –
• Hybrid funds are mutual funds or exchange – traded funds (ETFs) that invest in more
than one type of investment security, such as stocks and bonds.
Types of Hybrid Funds:
1. Monthly Income Plan:-
• A monthly Income Plan (MIP) is a type of mutual fund scheme that invest in debt and
equity securities.
• An MIP aims to provide a steady stream of income in the form of dividend payments.
• Therefore, it is typically attracted to retired persons or senior citizens without other
substantial sources of monthly income.
2. Balanced Fund:-
• A balanced fund is another option for intermediate – term investors.
• Balanced funds which are often called hybrid funds, own both stocks and bonds.
• They earn the “balanced” moniker by keeping the balance between the two asset classes
pretty steady, usually placing about 60% of their assets in stocks and 40% in bonds.
3. Arbitrage Fund:-
• Arbitrage Fund is a type of mutual fund that leverages the price differential in the cash
and derivatives market to generate returns.
• The returns are dependent on the volatility of the asset.
BASED ON INVESTMENT OBJECTIVE

1. Growth Funds:-
• A growth fund is a diversified portfolio of stocks that has capital appreciation as its
primary goal, with little or no dividend payouts.
• The portfolio mainly consists of companies with above – average growth that reinvests
their earnings into acquisition, expansions and research and development.
2. Income Funds:-
• Income funds are mutual funds, ETFs or any other type of fund that seeks to generate an
income stream for shareholders by investing in securities that offer dividend or interest
payments.
• The funds can hold bonds, preferred stock, common stock or even real estate investment
trusts (REITs).
3. Balanced Fund:-
• A balanced fund is a mutual fund that contains a stock component, a bond component
and sometimes a money market component in a single portfolio.
• Generally, these funds stick to a relatively fixed mix of stocks and bonds.
• Their holdings are balanced between equity and debt with their objective between
growth and income.
SPECIALTY FUNDS

1. Index Funds:-
• An index fund is a type of mutual fund with a portfolio constructed to match or track
the components of a financial market index, such as the Standard & Poor’s 500 index
(S&P 500).
• An index mutual fund is said to provide broad market exposure, low operating expenses
and low portfolio turnover.
2. Regional Funds:-
• A regional fund is a mutual fund run by managers who invest in securities from a specified
geographical area, such as Latin America, Europe or Asia.
• A regional mutual fund typically owns a diversified portfolio of companies based in and
operating out of its specified geographical area.
3. Tax – saving Funds:-
• A tax saving mutual fund, also called Equity Linked Savings Scheme (ELSS), is a mutual fund
scheme that invests in equity and equity related securities.
• Saves Rs. 46800 in Taxes with Tax Saving Fund.
• Average returns around 15% in last 3 years, better than FD or PPF.
• Has a lock in period of 3 years only.
• Invests upto Rs. 150000 in these funds as per Section 80C.
HOW DO MUTUAL FUND WORK

• A mutual fund is both an investment and an actual company.

• This dual nature may seem strange, but it is no different from how a share of AAPL is a
representation of Apple, Inc.
• When an investor buys Apple Stock, he is buying part ownership of the company and its
assets.
• Similarly, a mutual fund investor is buying part ownership of the mutual fund company and
its assets.
• The difference is that Apple is in the business of making smartphones and tablets, while a
mutual fund company is in the business of making investments.
Investments typically earn return from a mutual fund in three ways:-
1. Income is earned from dividends on stocks and interest on bonds held in the fund’s
portfolio. A fund pays out nearly all of the income it receives over the year to fund
owners in the form of a distribution. Funds often give investors a choice either to
receive a check for distributions or to reinvest the earnings and get more shares.
2. If the fund sells securities that have increased in price, the fund has a capital gain. Most
funds also pass on these gains to investors in a distribution.
3. If fund holdings increase in price but are not sold by the fund manager, the fund’s
shares increase in price.You can then sell your mutual fund shares for a profit in the
market.
• If a mutual fund is construed as a virtual company, its CEO is the fund manager,
sometimes called its investment adviser.
• The fund manager is hired by board of directors and is legally obligated to work in the
best interest of mutual fund shareholders.
• Most fund managers are also owners of the fund.
• There are very few other employees in a mutual fund company.
• The investment advisor or fund manager may employ some analysts to help pick
investments or perform market research.
• Mutual funds need to have a compliance officer or two, and probably an attorney, to keep
up with government regulations.
HOW DO MUTUAL FUND WORK
WHAT IS NAV

• Net Asset Value represents a fund’s per share market value.

• This is the price at which investors buy fund shares from a fund company and sell them
to a fund company.
• It is derived by dividing the total value of all the cash and securities in a fund’s portfolio,
less any liabilities, by the number of shares outstanding.
• An NAV computation is undertaken once at the end of each trading day based on the
closing market prices of the portfolio’s securities.
1. Liquidity:-
Unless you opt for close – ended mutual funds, it is relatively easier to buy and exit a
scheme.You can sell your units at any point (when the market is high). Do keep an eye on
surprises like exit load or pre – exit penalty.
2. Diversification:-
Mutual funds have their own share of risks as their performance is based on the market
movement. Hence, the fund manager always invests in more than one asset class (equities,
debts, money market instruments etc.) to spread the risks.
3. Expert Management:-
Mutual fund is favored because it doesn’t require the investors to do the research and
Asset allocation. A fund manager takes care of it all and makes decisions on what to do with
your investment. He decides whether to invest in equities or debt. He also decides on whether
to hold them or not and for how long.
4. Less cost for bulk transactions:-
You must have noticed how price drops with increased volume, when you buy any product. For
instance, if a 100g toothpaste costs Rs.10, you might get a 500g pack for, say, Rs.40. the same
logic applies to mutual fund units as well. If you buy multiple units at a time, the processing fees
and other commission charges will be less compared to when you buy one unit.
5. Invest in smaller denominations:-
By investing in smaller denominations, you get exposure to the entire stock (or any other asset
Class). This reduces the average transactional expenses – your benefit from the market lows and
highs. Regular (monthly or quarterly) investments as opposed to lumpsum investments give you
the benefit of rupee – cost averaging.
6. Suit four financial goals:-
There are several types of mutual funds available in India catering to investors from all walks of
life. No matter what your income is, you must make it a habit to set aside some amount
towards investments. It is easy to find a mutual fund that matches your income, expenditure,
investment goals and risk appetite.
7. Cost – Efficiency:-
You have the option to pick zero – load mutual funds with less expense ratios.You can check
the expense ratio of different mutual funds and choose one that fits in your budget and
Financial goals. Expense ratio is the fee for managing your fund. It is a useful tool to assess a
mutual fund’s performance.
8. Quick and painless process:-
You can start with one mutual fund and slowly diversify. These days it is easier to identify and
handpick fund most suitable for you. Maintaining and regulating the funds too will take no extra
efforts from your side.
9. Tax – efficiency:-
You can invest upto Rs.150000 in tax – saving mutual funds mentioned under 80C deductions.
ELSS is an example for that. Though a 10% Long Term Capital Gains (LTCG) is applicable for
returns in excess of Rs. 100000 after one year, they have constantly delivered higher than
Other tax – saving instruments like FD in the recent years.
10. Automated payments:-
It is common to forget or delay SIPs or prompt lumpsum investments due to any given
reason.You can opt for paperless automation with your fund house or agent. Timely email
and SMS notifications help to counter this kind of negligence.
11. Safety:-
There is a general notion that mutual funds are not as safe as bank products. This is a myth
as fund houses are strictly under the purview of statutory government bodies like SEBI and
AMFI. One can easily verify the credentials of the fund house and the asset manager from
SEBI.
12. Systematic or one – time investment:-
You can plan your mutual fund investment as per your budget and convenience. For
instance, starting an SIP (Systematic Investment Plan) on a monthly or quarterly basis suits
investors with less money. On the other hand, if you have surplus amount, go for a one –
time lump sum investment.
1. Cost to manage the Mutual Fund:-
The salary of the market analysts and fund manager basically comes from the investors.
Total fund management charge is one of the main parameters to consider while choosing a
mutual fund. Greater management fees do not guarantee better fund performance.
2. Lock in periods:-
Many mutual funds have long – term lock – in periods, ranging from 5 to 8 years. Existing
such funds before maturity can be an expensive affair. A certain portion of the fund is
always kept in cash to pay out an investor who wants to exit the fund. This portion in cash
cannot earn interest for investors.
3. Dilution:-
While diversification averages your risk of loss, it can also dilute your profits. Hence, you
should not invest in more than 7 – 9 mutual funds at a time.
As you have just read above, the benefits and potential of mutual funds can certainly
override the disadvantages, if you make informed choices. However, investors may not have
the time, knowledge or patience to research and analyze different mutual funds.