MUTUAL FUNDS

• Mutual Funds are an important financial intermediary for an

investor.
• They are a vehicle to mobilise money from investors, to invest
in different avenues, in line with the investment objectives of
the scheme.
• Professional expertise along with diversification becomes
available to an investor through Mutual Fund route of
investment.
 Advantages of Mutual Funds

A) Portfolio Diversification
B) Professional Management
C) Diversification of Risk
D) Liquidity
E) Convenience and Flexibility
F) Low Cost
 Types of Mutual Funds

a) Money Market or Cash or liquid Funds

b) Debt Funds
c) Equity Funds
d) Hybrid Funds
e) Exchange Traded Funds (ETFs)
f) Fund of Funds
 MCQ Time

• Mutual Funds is a type of………….?

• A. Risky Investment but offers Good Profit to
investor
• B. High Yield with High risk
• C. Low Yield with High risk
• D. Diversified Portfolio Investment to spread risk
with high returns and risk
 a) Money Market / Liquid Funds

• a) Money Market / Liquid Funds-These Mutual Funds invest the investor’s

money in most liquid assets, like, Treasury Bills, Certificates of deposit,
Commercial papers etc.
• These are considered to be most liquid and least risky investment vehicles.
• Though interest rate risk and credit risk are present, the impact is low as the
investment vehicle’s maturities are short and quality of papers is sound.
• These are ideal for investors looking to park their short term surplus with an
objective of high liquidity with high safety.
• They carries the maturity date of 1 year or less than 1 year depending upon
the maturity date chosen by client.
 b. Debt or Income Funds

These funds invest in fixed income generating debt instruments, issued

by
• government,
• private companies,
• banks,
• financial institutions, and other entities such as infrastructure
companies/utilities.
• The main objective of these funds is to generate stable income at a
low risk for the investor. As compared to the Gilt funds these debt
funds have a higher risk of default by their borrowers.
These funds can further be categorized as,
• a) Diversified Debt funds,
• b) Short Term Debt funds,
• c) High Yield Debt funds,
• d) Fixed Term Plans,
• e) Gilt Funds
 • Diversified Debt Funds
• These funds invest in a diversified basket of debt securities. They can invest
in debentures issued by Government, companies, banks, public sector
undertakings, etc.
• The objective of these schemes could be to provide safety of capital and
regular income.
• At the same time, some funds may also have an objective of generating
higher returns than traditional debt investments.
• This objective can be achieved by proper management of certain risks, viz.
1. credit risk,
2. interest rate risk or
3. liquidity risk.
 MCQ Time

• Which type of Mutual Funds enjoy Safety as well

fixed income over a period of time
• A. Equity Mutual Fund
• B. Debt Mutual Fund
• C. Money Market Mutual Fund
• D. Tax Saving Mutual Fund
 • Gilt Funds
• These funds invest in government securities. Since the funds invest largely
in the securities issued by Government of India, the credit risk can be
assumed to be non-existent.
• However, these government securities, also called dated securities, may
face interest rate risk, which means as the interest rates rise, the NAV of
these funds fall (and vice versa).
• The NAVs of these funds could be highly volatile, if the maturity is long.
• These funds are also known as Government Securities Funds or G-Sec
Funds
 Short Term Debt Funds

• In order to reduce interest rate risk, some funds are mandated to invest in
debt securities with short maturity, generally less than 3 years.
• Such funds earn large part of returns in form of interest accrual and are less
sensitive to interest rate movements.
• These funds may or may not take liquidity and credit risks. One would be
advised to read the scheme objectives and investment style to know more
about specific schemes
 High Yield Debt Funds

• High quality (those having high credit rating) debt securities offer low
interest rates and hence some investors are not happy with such low returns.
• They are willing to take some risk without getting exposed to the risk of
equity.
• High yield debt funds are ideally suited for such investors. These funds
invest in debt securities with lower credit rating. The lower rating ensures
securities offer higher interest rates compensating the investor for the extra
risk taken.
 • Fixed Term Plans
• As seen earlier, debt funds are subject to interest rate risk and the NAVs of
these funds fluctuate if the interest rates change. Investors willing to hold
• the investments for a defined term face the risk when they need to take the
money out of the scheme.
• If there was an option where the investor’s risk could be reduced as the
withdrawal time approaches, it serves a major purpose for the investor.
Fixed term plans, popularly known as FMPs (Fixed maturity plans), have a
defined maturity period; say 3 months, 6 months, 1 year, 3 years, etc.
• The maturity of the debt securities in which the fund invests, and the
maturity of the scheme are almost the same.
• when the scheme matures and money has to be returned to the investors, the
fund does not have to sell the bonds in the market, but the bonds themselves
mature and the fund gets maturity proceeds.
• Since the fund does not have to sell the bonds in the market, the fund is not
exposed to interest rate risk.
 MCQ Time

• 1. Which Instrument is regarded as security issued

by RBI on auction basis?
• A. Commercial Papers
• B. Certificate of Deposit
• C. T-Bills
• D. Call Money Market
 c) Equity Funds
• These funds invest in equities and depending on the type of equities .
• these funds have been further classified as,
• a) Growth funds,
• b) Value funds,
• c)Dividend Yield funds,
• d) Large Cap funds,
• e) Mid Cap or Small Cap funds,
• f)Speciality funds or Sector funds,
• g) Diversified Equity funds and
• h) Equity
• Index funds. Certain equity funds have tax benefit under section 80C of the
Income-tax Act, 1961 and have a lock in period of three years.
• These are Equity Linked Savings Schemes popularly called as ELSS.
• These funds have higher risk, but potential for higher returns.
 • Growth funds

• These funds invest in the growth stocks, which i.e stocks that
exhibit and promise above average earnings growth.
• Managers using the growth style select stocks which are
normally quite high profile. Such stocks being high growth are
more visible and also have high investor interest.
 • Value funds

• As the name suggests, value funds buy value stocks as we

discussed earlier.
• Such stocks are generally out of favour with most investors in
the market and hence the market price is low as compared to
the inherent value of the business. The value style managers
generally hold the stocks for longer time horizon than their
growth style counter parts.
 • Dividend yield funds

• One of the valuation parameters a value style fund manager looks for is
high dividend yield.
• However, there is a category of funds that consider this one parameter as
the most important factor to select stocks. As compared to other parameters
of considering value, dividend is believed to be more reliable as it involves
cash movement from the company account to the share holder account and
hence there is no room for any subjectivity.
 Large cap funds / Mid cap funds / Small
cap funds
• Equity mutual funds can be classified based on the size of
companies invested in. In capital market terms, the size of the
companies is measured in terms of its market capitalisation,
which is the product of number of outstanding shares and the
market price.
• Larger the market capitalisation, larger the company. In
popular usage, the word market capitalisation is referred to as
“cap”.
• Fund investing in stocks of large companies are called Large
Cap Funds and
• Those investing in stocks of midsized companies are called
Small Cap Funds.
 Speciality / sector funds
• Certain funds invest in a narrow segment of the overall market. The belief
here is that stocks in similar industry move together, as companies in such
sectors are similarly impacted due to some factors.
• There are funds that invest in stocks of only one industry, e.g. Pharma
Funds, FMCG Funds or broader sectors, e.g. Services Sector Fund or
Infrastructure Fund. Similarly,
• There could be thematic or speciality funds that invest based on some
common theme, e.g. PSU Funds or MNC Funds.
 Diversified equity funds
• These funds invest in stocks from across the market
irrespective of size, sector or style. The fund manager has a
greater freedom to pick up stocks from a wider selection.
• Most advisors advise investors to have diversified funds as core
part of their portfolio.
• These funds, being diversified in nature, are considered to be
less risky than thematic or sector funds.
 d) Hybrid Funds

• These are mixed equity and debt funds. Depending on the objective
these funds can be further classified as a) Balanced funds, b)
Monthly Income Plans (MIP) and c) Asset allocation funds.

Balanced funds
• The most popular among the hybrid category, these funds were
supposed to be investing equally between equity and fixed income
securities. However, in order to benefit from the provisions of the
prevailing tax laws, these funds invest more than 65% of their assets
into equity and remaining in fixed income securities
 • Asset allocation funds
Advisors have a choice of either constructing portfolios for their clients
through careful selection of components.
Alternately, they can also look at readymade solutions available in the form of
“Asset Allocation Funds” launched by certain mutual fund companies.
These funds are designed with certain investor profiles in mind and most of the
fund houses also offer tools to match the investor profile with the various
options under these fund
 Exchange Traded Funds (ETFs

• These funds combine the best features of open and closed mutual fund
schemes, and trade like a single stock on stock exchange. Thus these funds
can be purchased and sold at real time price rather than at NAV, which
would be calculated at the end of the day. These funds, available in India
track indices (e.g. Nifty, Junior Nifty or Sensex) or commodities like Gold
(Gold ETFs). Recently, active ETFs have also been introduced in Indian
market.

• ETFs are very popular in other countries, especially USA. The biggest
advantage offered by these funds is that they offer diversification at costs
lower than other mutual fund schemes and trade at real time prices
 Fund of Funds (FOF)

• Mutual funds that do not invest in financial or physical assets, but invest in
other mutual fund schemes, are known as Fund of Funds.
• Fund of Funds maintain a portfolio comprising of units of other mutual fund
schemes, just like conventional mutual funds maintain a portfolio comprising
of equity/ debt/money market instruments or non financial assets.
• There are different types of ‘fund of funds’, each investing in a different type
of collective investment scheme. Fund of Funds provide investors with an
added advantage of diversifying into different mutual fund schemes with
even a small amount of investment, which further helps in diversification of
risks.