OD of a mutual fund scheme is a prospectus issued by an Asset Management Company/ sponsor inviting public for subscription in units of the scheme disclosing information which is adequate to enable an investor to make informed investment decision.
Role of the Distribution Channels “ MFs are primarily vehicles for large collective investments , based on the principle of pooling the funds from a large number of investors” Hence, “ Majority of schemes are targeted at the retail level, from where a substantial portion of investment takes place” So, “ Distribution network becomes critical in view of the spread of investor community”
Types of Distribution Channels: 1.Individual Agents 2. Distribution Companies 3. Banks / NBFCs 4. Direct Marketing ( By the Sales Officers) 5.Current Distribution patterns - Non UTI funds rely on the 2&3 above.
MF BS is different from a bank or a company. MF have special requirements concerning accounting for the fund’s assets, liabilities and transactions with investors and other outside constituents such as banks, securities custodians and registrars.
Follows accounting policies laid down by SEBI regulations 1996.
Knowledge is essential to explain the scheme performance to the investors
Purchase price of a long term capital asset after indexation is computed
Cost of acquisition or improvement = actual cost of acquisition or improvement * cost inflation index for the year of transfer / cost inflation index for the year of acquisition or 1981 which ever is later)
Capital gains tax of sale of long term capital asset is exempt in
section 54EC of IT Act
if the amount of the gain is invested in bonds of NABARD, NHAI, and REC within 6 months. These must be held for at least 3 years, and during this time, one cannot take loan/advance against security of such bonds.
Capital gains tax of sale of mutual funds, if long
term in nature, is exempt in section 54ED of IT
if the gain is invested in equity shares within 6 months. These units must then be held for at least 1 year.
Includes brokerage commission,stamp duty,registrars’ fees,custodian fees,dealers’ spreads.
Borrowing by MF
Performance Measurement (cont’d) Sharpe Ratio measure fund performance in terms of total risk Sharpe index = r t - r * / sd t r t = average return on portfolio t r * = risk less rate of return sd t = standard deviation of the returns of the portfolio t
Treynor Ratio measure the fund performance in term of market risk : Treynor index = r n - r * / beta n r n = average return on portfolio n r * = risk less rate of return beta n = beta coefficient of portfolio
Alpha as measure the performance of the fund manager:
It is the difference between a security’s expected return and its equilibrium expected return
positive alpha indicates undervalued securities
negative alpha indicate over valued securities
Price/Earning multiple is also another risk measure: Fund P/E ratio = Weighted average of P/E ratio of all the stock held in the portfolios P/E = Market price per share / Earning per share
50% in diversified Equity ‘value’ Fund 25% in Govt. security fund 25% in High Grade corporate Bond fund 50 % in Index portfolio 50% in Total Bond market portfolio 85% in a Balanced 60/40 Fund 15% in medium term Bond Fund 20 % in diversified equity fund 20% in aggressive growth funds 10% in specialty funds 30% in long-term bond funds 20% in short term bond fund Singe index fund with 60/40 equity / bond holdings
Investment is for the same amount at regular intervals
Over a period of time , average per share price will be more than guessing the highs and lows
it does not tell you when to buy , sell or switch from one scheme to another
Rupee cost averaging has no serious shortcomings
Investors rights and services The rights of investors under the scheme Access to information Investor friendly services SEBI stipulation regarding despatch of dividend/repurchase/maturity /cheques