F2 module-2 Notes

1. MUTUAL FUNDS
A mutual fund is a pure intermediary which
performs a basic function of buying and selling
securities of its unit holders which the latter
also can perform but not as easily, conveniently,
economically and profitably.
According to SEBI(MF) Regulations 1993, “ a fund
established in the form of a trust by a sponsor, to
raise money by the trustees through the sale of
units to the public under one or more schemes,
for investing in securities in accordance with the
regulations
Meaning of corpus: The funds so pooled by many
investors is known as corpus.
Meaning of Units: The total fund is divided into a
small fraction called units of equal value.

2. Origin of Mutual Fund
 Concept of MF was introduced in
India with the formation of UTI in
1963.
 1st scheme launched was Unit
Scheme 64
 In India, it gained momentum only
in 1980, though it began in the
year 1964.

3. Types of Schemes
 On the basis of execution and operation-
 a)Open ended Schemes-everyday units are sold and
redeemed continuously b) corpus of the fund and its
duration are not prefixed c)Anybody can buy this
unit at any time and sell it at any time based on their
discretion.
 B) Closed ended schemes-a) corpus of the fund and
its duration are prefixed (b)Once the subscription
reaches the pre-determined level, the entry of
investors is closed. (c)After the expiry, the entire
corpus is disinvested & proceeds are distributed to
the various unit holders in proportion to their
holding.

4. On the basis of income
 A)Income funds-a) the fund aims at generating and distributing
regular income to the members on a periodical basis b)concentrates
to give average return is higher than that of the income from bank
deposits.
 B)Growth oriented funds: a)Mainly concentrates on long run gains
b)they do not offer regular income & they aim at capital appreciation
in the long run. They are also called as Nest eggs investments
 C)Balanced Fund: a) Also called as income-sum-growth fund. B) it is a
combination of income & growth fund c)aims at distributing regular
income and capital appreciation by way of investing in high growth
equity shares and fixed income earning securities
 D) Specialised Fund: Special fund are launched to meet the specific
needs of specific categories of people ex. For pensioners, widowers
or for fertilizers, petroleum.etc
 E)Money market mutual fund(MMMF): a)similar to open ended
scheme and has all the features b)fund amount is invested in highly
liquid and safe securities like commercial paper, banker’s acceptance,
certificate of deposit.etc.

5. contd
 Taxation Funds: a) basically a growth oriented fund, but it offers tax
rebates to the investors either in the domestic or foreign capital market
b)investor gets 20% rebate in IT for investments subject to a maximum
investment of Rs.10000 p.a
 Index fund: Index fund replicate the portfolio of a particular index such
as the BSE Sensitive Index, S&P NSE50 Index. These schemes
invest in the securities in the same weightage comprising of an index.
 Gilt Fund: These funds invest exclusively in Government securities.
Government securities have no default risk. NAV of these schemes
also fluctuate due to change in interest rates
 Load Fund: A load fund is one that charge a percentage of NAV for
entry or exit. Each time one buys or sells units in the fund, a charge will
be payable.
 Hedge Fund: A hedge fund is a fund that can take both long and short
positions, use arbitrage, buy and sell undervalued securities, trade
options or bonds and invest in almost any opportunity in any market
where it foresees impressive gains at reduced risks.

6. Organization of MF
 Mutual funds consists of players or constituents like:
 The sponsor(s)- A sponsor is the person who acting alone or in
combination with another body or corporate, establishes a mutual
fund and applies to SEBI for its registration. A minimum of 40% of
networth has to be contributed by the sponsor to the AMC.
 Board of trustees or trust company- A person or a group of persons
having an overall supervisory authority over the fund managers, they
ensure that the managers keep to the trust deed that the unit prices
are calculated correctly and the assets of the funds are held safely.
 Asset management company(AMC)- A company set up primarily for
managing the investment of mutual funds. It makes investment
decisions in accordance with the scheme objectives, deed of trust and
provision of the Investment Management Agreement
 The custodian-Custodian is registered with SEBI, holds the securities
and other assets of various schemes of the fund in its custody.
 Unit holders- A person who holds unit(s) under a mutual fund.

7. NET ASSET VALUE(NAV)
 The performance of a particular scheme of a
mutual fund is denoted by Net Asset
Value(NAV).NAV is the market value of the
assets of the scheme minus its liabilities.
 Per Unit NAV is the net asset value of the
scheme divided by the number of units
outstanding on the valuation date.
 Calculation of NAV- Sum of market value of
shares/debentures+ Liquid assets/ cash held
,if any+ Dividends/Interest accrued

8. VALUATION OF UNITS
 NAV=
Total market value of the assets or securities in
the portfolio of the fund-liabilities
Number of fund’s units(Shares)outstanding

9. Importance of mutual funds
 Channelizing savings for investment
 Offering wide portfolio investment
 Providing better yields
 Rendering expertised investment service at low cost
 Providing research service
 Offering tax benefits
 Introducing flexible investment schedule
 Providing greater affordability and liquidity
 Simplified record keeping
 Supporting capital market
 Promoting industrial development
 Acting as substitute for IPO’s
 Reducing the marketing cost of new issues
 Keeping the money market active

10. Mutual funds industry in
India
 Monopoly by UTI
 Preferred as an investment only from 1990
 Rate of growth is comparatively slow and not
very satisfactory
 Public sector mutual funds are not very
popular like the private players
 Huge repurchases and redemptions are a
common feature

11. Reasons for slow growth/Limitations of
mutual funds In India
 Disparity between NAV and listed price
 No uniformity in the calculation of NAV
 Lack of Transparency
 Poor Investor servicing
 Too much dependence on outside agencies
 Investor’s psychology
 Absence of Qualified sales force
 Other reasons like non performance of funds,
compulsory listing of close ended funds has
kept away some of the companies, lack of
investor education

12. Structure and Size, Investment
Pattern of Mutual Funds
 In comparison with the other financial intermediaries mutual funds
are a new type of subsidiary on the Indian financial scene.
 Until February 1976, UTI(1st MF) was an associate institution of the
RBI but after that it became an associate institution of the IDBI.
 UTI got its borrowing powers from these parent institutions. It
provides attractive investment opportunities through issue of
shares and units of various schemes.
 Initial capital was contributed by the RBI,LIC, SBI and other banks.
 From April 1986,UTI is now allowed to grant term loans, rediscount
bills, undertake equipment leasing, hire –purchase financing.
 Mutual fund should invest mostly in public limited companies
because only such companies are listed and quoted on the stock
markets. Mainly the mutual funds are investing the corpus in the
corporate sector investments.
 10% of corpus amount is invested in Government securities. 50-
58% of funds would be invested in equities, investments in
debentures has varied between 25-33%.

13. Return on Investment in
Units
 The unit holder’s rates of return take the form of dividend
or interest and capital appreciation.
 Rate of return on units have declined after 1995. Units listed
on the stock market have been quoted at prices below their
NAV’s in many years.
 Units of many listed funds are being traded at 33-45% of
discount to their NAV’s.
 SEBI allowed MF’s to promise the minimum assured rate of
return on their schemes. But this practice has been
disallowed since 1996 as per the directives of SEBI
 Tax concessions have strongly influenced the rates of
return on units and their attractiveness
 Rate of return on financial instruments like units is closely
related to liquidity.

14. Regulations related to MF
 AMC’s can have cross trusteeship and directorship provided there is
no conflict of interest
 AMC have now been permitted to diversify into management of
pension funds, offshore funds and venture capital funds
 Consent of investors must be obtained by mutual funds for making
any change in the fundamental attributes of a scheme
 Mutual fund can mention, while floating different schemes,
indicative but not assured return on those schemes
 They are free to determine their portfolio composition
 Have to use a standard format for scheme prospectus
 Non –performing assets have to be identified as per the guidelines of
SEBI
 MF have to pay interest to unit holders for delay in dispatch of
repurchase/redemption proceeds
 MF have to disclose their entire portfolios along with rise/fall in NAV
since the time of its inception on half yearly basis in a format as
prescribed by SEBI

15. Contd-Regulations related to MF
 MF’s are required to display their half yearly financial results on their
web sites and also on the web site of Association of Mutual funds
 MF are required to disclose the number of large investors and total
holdings held by them
 Guidelines have been issued to all MF to ensure a minimum due
diligence or risk management system while undertaking various
activities
 Investment policies of each scheme are dictated by the investment
objective of the scheme as stated in the offer document
 MF should follow common or uniform methods for valuation of
securities
 SEBI permits MF’s to invest abroad in American Depository
Receipts/Global Depository Receipts
 No MF under all its schemes should own more than 10%of any
company’s paid up capital carrying voting rights

16. Mutual funds of various
companies and Banks
 SBI Magnum Balanced Fund
 LIC Unit Linked Insurance Schemes
 UTI Master Index fund
 SBI Monthly Income Plan
 HDFC Mutual Fund
 Birla Sun life MF
 ICICI MF
 PNB MF

17. THANKYOU