Concept of Mutual Fund (MF’s)S Defined:- A fund that is created when a large number of investors put in their money, and is managed by professionally qualified persons.S It is a vehicle for collective investment, a way of becoming part- owner of the investment held under the scheme.S Till 1986, UTI was only mutual fund in India, which has outnumbered to 33 major emerged Mf’s.
Entities in MF’s operationS Sponsor:- It is like promoter of a company, maybe a bank, FI’s or a financial service company. For E.g. sponsor for Templeton Mutual Fund is Templeton international INC. Sponsor is responsible for setting up and establishing the mutual fund.S Trustee:- a corporate body appointed by sponsor. It appoints Asset Management Company(AMC), secure necessary approvals, periodically monitor AMC functions.
Entities in MF’s continues…S Asset Management Company(AMC):- also referred to as the investment manager, is separate company appointed the trustees to run the mutual fund. For E.G.: Templeton Asset Management Pvt. Is AMC of Templeton MF.S Custodian:- it handles investment back office operations of MF’s. It looks after receipt and delivery of securities, collection of income, distribution of dividends.S Registrar & Transfer Agents:- they handle investor related services such as sending fact sheet, annual reports. It may be outsourced to SEBI approved agents like KARVY & CAMS.
Mutual funds ClassifiedOpen ended Growth Tax saving schemes schemes schemesClose ended Income Index schemes schemes schemes Sector Interval Balanced specific schemes schemes schemes Money market schemes
Classification Discussed…S Open ended schemes:- is the one that an investor can buy or sell as and when they intend to at a NAV based price.S Close-ended schemes:- it usually issue units to investors only once, when they launch an offer, called New Fund Offer (NFO). Thereafter, these units are listed in stock exchanges where they are traded on daily basis.S Exchange Traded Funds:- is a hybrid of close-ended & open-ended index funds. It is listed on stock exchange and like an open-ended fund it creates and redeems units in line with rise and fall of demand.
Open-ended Vs. Close-ended Open-ended index fund Close-ended index fundS Subscription on continuous basis. S subscription for limited period (usually 3months).S Permits investor to withdraw funds on continuing basis. S Does not allow withdrawal as and when they like.S No fixed maturity period. S Has a fixed maturity period(5 to 15 yrs).S Not listed in secondary market. S Listed on secondary market.
Structuring in ETF ETF units Cash Buy/sell Arbitrage ETF unitsCreation in-kind Redemption in-kind cash
Mutual Fund TerminologyS NAV- It is actual value of a share on any business day. Its equal to market value of the funds investment +receivable +accrued income – liabilities-accrued expenses Number of shares outstanding
Continues…S Rate of return –It is the of money gained or lost on an investment relative to amount of money invested. It is also called as ROIS Repurchase price –It is the price at which the buyer of the securities is obilized to sell back the asset to the seller in relation to repurchase agreementS Standard deviation- equal to the square root of mean of the squares of the deviations from the arithmetic mean of the distribution.
Continues…S BETA - beta of a fund measures its past price volatility relative to a particular stock market indexS ALFHA- Alpha measures the extra return earned on a scheme on a risk –adjusted basisS Large cap- Larger companies worth $5 billion or more, like General Electric (NYSE: GE).S Mid cap- Medium-size companies worth $1 billion to $5 billion, like Barnes & Noble (NYSE: BKS).S Small cap - Smaller companies worth $250 million to $1 billion, like Hot Topic (Nasdaq: HOTT).
Advantages of Mutual Fundsv Increased Diversificationv Daily Liquidityv Professional Investment Managementv Ability to participate in investments that may be available only to larger investorsv Service & Conveniencev Government oversightv Ease to comparison
Disadvantages of Mutual Funds v Fees v Less control over timing of recognition of gains v Less predictable income v No opportunity to customize