Basic operation and types of MF..!!

1. FINANCE CLUB

2. Concept and Role
of Mutual Funds

3. Meaning
• 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.
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4. MF Operation Flow Chart
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5. Role of Mutual funds
• The overall economic development is promoted.
• The mutual fund industry itself, offers livelihood to a large number of employees
of mutual funds, distributors, registrars and various other service providers.
• Higher employment, income and output in the economy boost the revenue
collection of the government through taxes and other means.
• Mutual funds can also act as a market stabilizer, and are viewed as a key
participant in the capital market of any economy.
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6. Advantage of Mutual Fund
• Professional Management
• Diversification
• Economies of scale
• Low Costs
• Liquidity
• Transparency
• Flexibility
• Tax benefits
• Well regulated(systematic approach)
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7. Limitation of a Mutual Fund
• Lack of Portfolio customization
• Choice Overload
• No control over cost
• Dilution
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8. Mutual Fund Scheme
• Mutual funds seek to mobilize money from all possible investors.
• Various investors have different investment preferences. In order to
accommodate these preferences, mutual funds mobilize different pools of
money.
• Each such pool of money is called a mutual fund scheme.
• Every scheme has a pre-announced investment objective.
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9. Frequently Used Terms :
• NAV:- Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by the number of
units outstanding on the valuation date.
• Sale Price:- Is the price you pay when you invest in a scheme. Also called Offer Price. It
may include a sales load.
• Repurchase Price :-Is the price at which units under open-ended schemes are
repurchased by the Mutual Fund. Such prices are NAV related.
• Redemption Price:- Is the price at which close-ended schemes redeem their units on
maturity. Such prices are NAV related.
• Sales Load :- Is a charge collected by a scheme when it sells the units. Also called,
‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.
• Repurchase or ‘Back-end’Load:- Is a charge collected by a scheme when it buys back the
units from the unit holders.
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10. How do Mutual Schemes Operate ?
• Mutual fund schemes announce their investment objective and seek investments from
the public.
• The investment that an investor makes in a scheme is translated into a certain number
of ‘Units’ in the scheme.
• Under the law, every unit has a face value of Rs10. (However, older schemes in the
market may have a different face value). The face value is relevant from an accounting
perspective. The number of units multiplied by its face value (Rs10) is the capital of the
scheme – its Unit Capital.
• The scheme earns interest income or dividend income on the investments it holds.
Further, when it purchases and sells investments, it leads to realized capital gains or
realized capital losses as the case may be.
• Investments owned by the scheme may be quoted in the market at higher than the cost
paid. Such gains in values on securities held are called valuation gains. Similarly, there
can be valuation losses.
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11. • Investments can be said to have been handled profitably, if the following
profitability metric is positive:
(A) Interest income
(B) + Dividend income
(C) + Realized capital gains
(D) + Valuation gains
(E) – Realized capital losses
(F) – Valuation losses
(G) – Scheme expenses
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12. • When a scheme is first made available for investment, it is called a ‘New Fund
Offer’ (NFO). During the NFO, investors may have the chance of buying the units
at their face value. Post-NFO, when they buy into a scheme, they need to pay a
price that is linked to its NAV.
• Mutual funds address differential expectations between investors within a
scheme, by offering various options, such as dividend payout option, dividend re-investment
option and growth option.
• The relative size of mutual fund companies is assessed by their assets under
management (AUM). When a scheme is first launched, assets under
management would be the amount mobilized from investors. Thereafter, if the
scheme has a positive profitability metric, its AUM goes up; a negative
profitability metric will pull it down.
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13. Types of Mutual Funds
• Open Ended Funds:-
 These do not have a fixed maturity.
The key feature is liquidity.
Sale Transaction
Re-purchase Transaction
• Close Ended Funds :-
stipulated maturity period (ranging from 2 to 15 years) are called close ended schemes.
You can invest in the scheme at the time of the initial issue .
The market price at the stock exchange could vary from the scheme’s NAV on account of
demand and supply situation, unitholders’ expectations and other market factors.
 One of the characteristics of the close-ended schemes is that they are generally traded at a
discount to NAV.
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14. • Interval Funds :-
These combine the features of open-ended and close-ended schemes.
For instance, an interval scheme might become open-ended between January 1
to 15, and July 1 to 15, each year. The benefit for investors is that, unlike in a
purely close-ended scheme, they are not completely dependent on the stock
exchange to be able to buy or sell units of the interval fund.
Minimum duration of an interval period in an interval scheme/plan is 15 days.
The specified transaction period where redemption/repurchase of units are
allowed will be of minimum 2 working days, as per revised SEBI Regulations.
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15. • Actively Managed Funds:- Funds where the fund manager has the flexibility to
choose the investment portfolio, within the broad parameters of the
investment objective of the scheme. Since this increases the role of the
fund manager, the expenses for running the fund turn out to be higher.
Investors expect actively managed funds to perform better than the
market.
• Passive Funds:- Invest on the basis of a specified index, whose performance
it seeks to track. Thus, a passive fund tracking the BSE Sensex would buy
only the shares that are part of the composition of the BSE Sensex.
• Thus, the performance of these funds tends to mirror the concerned
index. Such schemes are also called index schemes.
• These schemes have low running costs.
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16. • Debt , Equity and hybrid Funds :-
Equity shares and equity-related investments like convertible debentures.
Such schemes are called equity schemes.
Schemes with an investment objective that limits them to investments in
debt securities like Treasury Bills, Government Securities, Bonds and
Debentures are called debt funds.
Hybrid funds have an investment charter that provides for a reasonable
level of investment in both debt and equity.
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17. Types of debt Funds
• Gift Funds
• Diversified Debt Funds
• Junk Bond Schemes
• Fixed Maturity Plans
• Floating rate funds
• Liquid Schemes
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18. Types of Equity Funds
• Diversified Equity Fund
• Sector Funds
• Thematic Funds
• Equity Linked Savings Schemes
• Equity Income Schemes
• Arbitrage Funds
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19. Types of Hybrid funds
• Monthly Income Plan
• Capital Protected Schemes
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20. Gold Funds
• These funds invest in gold and gold-related securities. They can be
structured in either of the following formats:
• Gold Exchange Traded Fund:-which is like an index fund that invests in
gold.
The NAV of such funds moves in line with gold prices in the market.
• Gold Sector Funds i.e. the fund will invest in shares of companies
engaged in gold mining and processing.
Though gold prices influence these shares, the prices of these shares are
more closely linked to the profitability and gold reserves of the
companies.
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21. • Real Estate Funds:- They take exposure to real estate. Such funds make it possible
for small investors to take exposure to real estate as an asset class. Although
permitted by law, real estate mutual funds are yet to hit the market in India.
• Commodity Funds:- Commodities, as an asset class, include:
• food crops like wheat and chana
• spices like pepper and turmeric
• fibres like cotton
• industrial metals like copper and aluminium
• energy products like oil and natural gas
• precious metals (bullion) like gold and silver
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22. International Funds
• These are funds that invest outside the country. For instance, a mutual
fund may offer a scheme to investors in India, with an investment
objective to invest abroad.
• There are two methods to invest in International funds that is is to hire the
requisite people who will manage the fund or the alternative is to have a
tie up with a foreign fund (called the host fund).
• In such schemes, the local investors invest in rupees for buying the Units.
The rupees are converted into foreign currency for investing abroad.
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23. Funds of funds
Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of
these schemes comprise only of units of other mutual fund schemes and cash / money
market securities/ short term deposits pending deployment.
The first FOF was launched by Franklin Templeton Mutual Fund on October 17, 2003.
Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity
FOFs, Objective specific e.g. Life Stages FOFs or Style specific e.g. Aggressive/ Cautious
FOFs etc.
Investment must be done in different schemes to be able to get the combination of
growth, income and stability that is right for you. Remember, as always, higher the return
you seek higher the risk you should be prepared to take.
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24. Exchange Traded funds
 Exchange traded funds popularly also known as ETFs, is a type of mutual fund wherein,
the corpus is invested in a basket of securities, which is being traded on an exchange.
Further, an Exchange traded fund investments are being made either on all the securities
or on a sample of the representative securities that are being traded in the said index.
The exchange traded funds employ the process of arbitration during trading, in order to
keep its trading value in sync with the values of the underlying stocks, which makes up
the portfolio.
All the Exchange Traded Funds in India are regulated by the Association of Mutual Funds
of India (AMFI). Further, the Association of Mutual Funds of India (AMFI) operates in
accordance with the laid down guidelines of the Securities and Exchange Board of India
(SEBI). The Chapter III of the Income Tax Act, 1961 provides tax exemption on
investment on Exchange Traded Funds. The rise of the Indian capital markets and
increasing numbers of exchange has propelled the growth in the numbers of Exchange
traded funds in India.
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25. Trends
• SEBI, The Securities and Exchange Board of India has declared in recent past for some measures to restore the share
market of India via wider participation of retail investors in mutual funds in India apart from IPOs. This measure is taken
with a vision that this is going to stabilize the volatile
• These reforms brought into action by SEBI at that time of Indian Share market when analysts are stressing on the key
point of retail FDI and retail investment. This move will walk towards an increase penetration and bas of mutual funds in
India.
• The retail investors here are few things a retail investor needs to know before investing in the mutual funds.
 Analyze your current personal financial situations and plans for future
 Research well before investing in any of the financial instruments
 Make a diversified investment portfolio to reduce the chances of loss
 Never walk towards making your portfolio crowded which hinders a regular track
 Manage and monitor funds on regular basis by limited the number of funds
 Always keep a long term investment perspective, it reduces loss
 Mutual funds are of many types, research properly before investing in any of them.`
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26. THANK YOU.
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