MUTUAL FUNDS

RAJINDER S AURORA PhD

Professor in Finance
 Retail Investors NAV Dividend
Investment Portfolio
Exit Load
Risk Management
Factsheets Fund Manager

Repurchase Price
Return Open Ended
AUMs
Close Ended
Portfolio
Growth Professional Management
Sale Price
Tax Saving
Redemption
Close Ended
Entry Load Asset Allocation
Investment Objective
 Snapshot….
NAV
Investme
nt
Retail Investors Exit Load Dividend
Open Ended Portfolio
Factsheets
AUMs
Risk Management Fund Manager

Repurchase Price
Return
Mutual Fund Close Ended
Portfolio

Growth Professional
Sale Price
Tax Saving Management
Redemption Close Ended

Entry Load Investment Objective Asset Allocation

 Why did Mutual Funds come into existence?

An old Axiom:

“It is not wise to put all eggs into

one basket”

……… was probably in the minds of

those who formed the first mutual fund.
Process of Mutual Funds

Investors

Mutual Fund
Returns
Funds Managers

Securiti
es
Mutual Fund ….. A Look at the Cash Flow

Investors Pool their

Passed
back to Money with

Mutual Fund
Returns Managers
Funds

Generates Invest in
Securities
Mutual Fund Defined: Flow Cycle explained…

• 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 realized 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
 Difference between MF and Direct
Investment

Mutual fund investing vs. Direct

investing

• Professional investment
management
• Risk reduction through
diversification
• Convenience
• Availability of alternative portfolio
objectives
• Unit holders’ account administration and
 Advantages


 Professional Management
 Diversification
 Return Potential
 Low Costs
 Liquidity
 Transparency
 Flexibility
 Choice of schemes
 Tax benefits
 Well regulated
 Disadvantages

 Costs Control Not in the Hands of an Investor

 No Customized Portfolios
 Difficulty in Selecting a Suitable Fund Scheme
 Dilution
Difference between Bank and Mutual Fund

Mutual Fund Balance Sheet Bank Balance Sheet

Liabilities Assets Liabilities Assets
Unit Capital Investment in  Share Capital Loans and
collected Financial  Deposits Advances
through sale of Securities
schemes
 Types Of Mutual Funds

 Equity Funds
 Debt/Income Funds
 Money Market/Liquid Funds
 Hybrid Funds
 Gilt Funds
 Others:
 Commodity Funds
 Real Estate Funds
 Exchange Traded Funds
 Fund of Funds
 Classification of Mutual Fund Schemes

AMFI Classification of MF Schemes

Fund schemes Portfolio objectives
Growth & Income High Risk & High Return
Balanced Moderate Risk & Return
Liquid & Money Market Fixed Return
Gilt Zero Risk
ELSS Tax Saving
Fund of funds Additional diversification
ETFs Market Driven
Each category is classified into more sub-categories.
 History Of The Indian Mutual Fund
Industry

 First Phase – 1964-87

 Second Phase – 1987-1993 (Entry of Public Sector
Funds)
 Third Phase – 1993-2003 (Entry of Private Sector
Funds)
 Fourth Phase – since February 2003
Organizational Structure of Mutual Fund
 Organizational Structure of Mutual Fund
Sponsor
• Akin to the Promoter of the company,
• Contribution of minimum 40% of net worth of AMC,
• Posses sound financial record over five years period,
• Establishes the Fund,
• Gets it registered with the SEBI,
• Forms a trust, & appoints Board of trustee.
Trustees
• Holds assets on behalf of unit holders in trust,
• Trustees are caretaker of unit holders money,
• Two third of the trustees shall be independent persons (not associated with the
sponsor),
• Trustees ensure that the system, processes & personnel are in place,
• Resolves unit holders GRIEVANCES,
• Appoint AMC & Custodian, & ensure that all activities are accordance with the
SEBI regulation.
 Organizational Structure of Mutual Fund

•
Custodian
•
Holds the fund’s securities in safekeeping,
•
Settles securities transaction for the fund,
•
Collects interest & dividends paid on securities,
Records information on corporate actions.
Asset
• Management Company
• Floats schemes & manages according to SEBI,
• Can not undertake any other business activity, other than portfolio mgmt services,
• 75% of unit holders can jointly terminate appointment of AMC,
• At least 50% of independent directors,
Chairman of AMC can not be a trustee of any MF.
Distributor / Agents
• Sell units on the behalf of the fund,
• It can be bank, NBFCs, individuals.
 Organizational Structure of Mutual Fund

Banker:
• Facilitates financial transactions,
• Provides remittance facilities.

Registrar & Transfer Agent

Maintains records of unit holders’ accounts & transactions
Disburses & receives funds from unit holder transactions,
Prepares & distributes a/c settlements,
Tax information, handles unit holder communication,
Provides unit holder transaction services.
 Other classification of MF 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
– Liquid/Money Market – Short-term Money Market (CPs, CDs, Treasury Bills)
– Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)
– Gilt Funds – primarily in G-Sec
• Other Schemes
– Tax Saving Schemes such as ELSS
– Special Schemes (ETFs, foreign funds)
History of Mutual Funds
Phases of Mutual Fund Industry in India

1964

1987

1993

2009  ?
Risk –Return of different schemes
 Regulations
• Governed by SEBI (Mutual Fund) Regulation 1996
– All MFs registered with it, constituted as trusts ( under Indian Trusts
Act, 1882)
• Bank operated MFs supervised by RBI too
• AMC registered as Companies registered under Companies Act, 1956
• SEBI- Very detailed guidelines for disclosures in offer document, offer
period, investment guidelines etc.
– NAV to be declared everyday for open-ended, every week for closed
ended
– Disclose on website, AMFI, newspapers
– Half-yearly results, annual reports
– Select Benchmark depending on scheme and compare
Portfolio Management Process
 Risk Management
Risk Category Risk Factors

Fund Management Volatility in performance, portfolio

concentration, interest rate movement, Liquidity
risk & Credit Risk,
Operations Deal Error, Settlement Risk Problem, NAV, Fund
Pricing, Inaccurate Financial reporting, Frauds
Customers Error in deal processing, Fraud,

Marketing & New Product Development, Selling & Distribution

Distribution
Other Business Risk Critical Knowledge Risk, Skills Shortage, Third
Party Risk
Disaster Recovery & Business Contingency Plans
Insurance against Third Party Loss Arising from Error & Omission
Investing Checklist
• Draw up your asset allocation
– Financial goals & Time frame (Are you investing for retirement?
A child’s education? Or for current income? )
– Risk Taking Capacity
• Identify funds that fall into your Buy List
• Obtain and read the offer documents
• Match your objectives
– In terms of equity share and bond weightings, downside risk
protection, tax benefits offered, dividend payout policy, sector focus
• Check out past performance
– Performance of various funds with similar objectives for at least 3-5
years (managed well and provides consistent returns)
Mutual Fund Comparison
• Absolute returns
– % difference of NAV
– Diversified Equity with Sector Funds– No
• Benchmark returns
– SEBI directs
– Fund's returns compared to its benchmark
• Time period
– Equal to time for which you plan to invest
– Equity- compare for 5 years, Debt- for 6 months
• Market conditions
– Proved its mettle in bear market
 Expenses of Mutual Fund
Accounted for in FUND RETURN Not included in FUND RETURN
Management fee* Front end sales load
Group fee* Back end sales load
Performance fee* Transaction fee
Administrative fee* Redemption fee
Brokerage costs Account maintenance fee
Interest costs Bid ask spreads

• An asterisk * indicates fee which is included in a fund’s expense ratio.

• As per SEBI Rule, expense ratio should be 2.5% for equity & 2.25% for
debt fund of fund value.
 NAV Calculation

 NAV = (Value of stocks + Value of bonds + Value of

money market instruments + Dividend accrued but
not received + Interest accrued but not received –
Fees payable) / No. of outstanding units
 Example 0n NAV

 Calculate the NAV given the following information:

 Value of stocks: Rs. 150 cr,
 Value of bonds: Rs. 67 cr
 Value of money market instruments: Rs. 2.36 cr,
 Dividend accrued but not received: Rs. 1.09 cr,
 Interest accrued but not received: Rs. 2.68 cr
 Fees payable: Rs. 0.36 cr,
 No. of outstanding units: 1.90 cr
 NAV = (150 + 67 + 2.36 + 1.09 + 2.68 – 0.36) / 1.90
= 222.77 / 1.90 = Rs. 117.25
 What Mutual Funds are not?

• MFs are not ‘get rich quick investments’

• MFs are not ‘risk free investment’
• MFs are not ‘assured return investment’
• MFs are not ‘a universal solution to all investment needs’
 Recurring Expenses Limits:

SEBI has stipulated the following annual limits on recurring expenses

(including management fees) for schemes other than index schemes: Net
Assets (Rs crore) Equity Schemes Debt Schemes
Upto Rs 100 crore 2.50% 2.25%
Next Rs 300 crore 2.25% 2.00%
Next Rs 300 crore 2.00% 1.75%
Excess over Rs 700 crore 1.75% 1.50%
In case of debt funds the above percentages shall be lesser by 0.25%. The above
percentages are to be calculated on the average daily net assets of the scheme.
ThankYou