2. What is a Mutual Fund?
• Pooled Vehicle: A mutual fund is a vehicle to pool money from investors, with a
promise that the money would be invested in a particular manner, by professional
managers who are expected to honor the promise.
• In India, Mutual Funds are governed by SEBI
• Professional Management: Individual investors generally lack the time and the
inclination or skills to manage their own investments. Thus mutual funds, appoint an
Asset Management Company AMC that hires professional fund managers to manage
the investments for the benefit of their investors. In return the AMC earns a
management fee from the investors. This is payable irrespective whether an investor
makes a profit or not.
3. Mutual Fund Schemes
• It is reasonable to group the investors together based on their
preferences, in order to save on time and cost required to manage
investments.
• Collectively it is called a ‘Mutual Fund Scheme’
• Every scheme has an :
• Investment portfolio (Portfolio Statement)
• Account of income and expenditure (Revenue Account) and
• Account of assets and liabilities (Balance Sheet)
• In order to ensure fairness to investors, SEBI regulates the
expenditure that can be charged to a scheme (including management
fees and other expenses)
4. Legal Framework
• Mutual Fund sector is a critical mechanism to channelize investor
funds to the capital market. Since these investors are not often so
well qualified to invest, the mutual fund business in highly regulated.
• AMFI (Association of Mutual Funds in India) is a body that represents
the interests of the industry.
5. Who are the Parties Involved?
Investors: Investors who lack the time, inclination and skills to invest in
individual securities, they can delegate this role to mutual fund, while
retaining the right and obligation to monitor their investments in the
scheme.
In the absence of mutual fund option, the fund of these investors
would lie either in bank deposits or other safe investments, thus
depriving them of a possibility of earning a better return
Trustees: are the people within a mutual fund organization who are
responsible for ensuring that investors’ interests are taken care of. In
turn for their services, they are paid trustee fees which is directly
charged to the scheme.
https://groww.in/mutual-funds/amc/axis-mutual-funds
6. Who are the Parties Involved?...
Asset Management Companies (AMCs): AMC manage an investment
scheme and handles various other routine activities of a mutual fund
business.
An AMC’s income comes from the management fees it charges to the
scheme it manages. Management fee is calculated as some percentage of
net assets managed.
An AMC has to naturally employ people and bear all the establishments costs
that are related to its activity, such as for premises, furniture, computers,
and other assets, software development, communication costs etc. These
are to be met out from management fees earned.
So long as the income earned through management fees more than covers
its expenses, an AMC is economically viable.
As a thumb rule for an AMC to be economically viable in Indian context,
Asset Under Management (AUM) should be at least Rs. 10000 crores.
7. Who are the Parties Involved?...
Distributors: they earn commission for bringing investors into the
schemes of a mutual fund. This commission is an expense for the
scheme. Depending on the financial and physical resources at their
disposal, the distributors could be:
Tier1 distributors who have their own or franchised network
across the country
Tier2 distributors who are generally regional players
Tier3 distributors who are marginal and small players with limited
reach
8. Who are the Parties Involved?...
Registrars: Registrar and transfer agents (RTA) typically records the
holding of investors in a mutual fund scheme. Some AMCs prefer to
handle this role in house. An RTA maintain the investments and
disinvestments of an investor. And handles corporate actions such as
dividend payments.
Custodian: the custodian holds the securities in which the scheme has
invested. A Custodian is distinct from RTA who records investment in a
scheme. Thus it is the custodian who receives or makes the delivery of
a security in a mutual fund scheme. This ensures and independent
record of the investments.
9. Capital Flow in the Economy
The mutual funds add depth to the securities markets where they
invest, thus contributing to price discovery and liquidity.
This is again a significant factor in channeling more money into the
market, instead of this being locked up in unproductive physical capital
like gold, real estate etc.
Corporate Governance
As large and informed investors, mutual funds can perform an active
role in ensuring that their investee companies operate with highest
standards of corporate governance.
10. Schemes and Units
• Every scheme has an investment objective or philosophy i.e. a
promise by AMC on how the funds would be managed. Investor
basically buy into this philosophy or objective.
• What shares are for a company, the units are for a mutual fund
scheme. Thus investors invest in a scheme by buying its units. The
total outstanding units of a scheme multiplied by the face value of its
units constitutes the unit capital of a scheme.
https://www.edelweissmf.com/assets/pdfIP/Edelweiss%20MF%20Equity%20Investment%20Philosophy%20&%
20Process.pdf
11. Net Asset Value NAV
• The NAV represents intrinsic value of a scheme. NAV per unit
represents the worth of each unit that investors hold in that scheme.
For this purpose, all investments that a scheme owns are marked to
market (MTM), i.e. they are valued at the prevailing market price.
• Unlike a stock whose price changes with every passing second,
mutual funds don’t trade in real time. Instead, mutual funds are
priced based on end of the day methodology based on their assets
and liabilities.
The formula for a mutual fund's NAV calculation is straightforward:
NAV = (Assets - Liabilities) / Total number of outstanding shares
12. Example of NAV
Calculation
Assume that a mutual fund has 100 million worth of total
investments in different securities, which is calculated based
on the day's closing prices for each individual asset. It also has
7 million of cash and cash equivalents on hand, as well 4
million in total receivables. Accrued income for the day is
75,000. The fund has 13 million in short-term liabilities and 2
million in long-term liabilities. Accrued expenses for the day
are 10,000. The fund has 5 million shares outstanding. The
NAV is calculated as:
NAV = (Assets - Liabilities) / Total number of outstanding
shares
NAV = [(100,000,000 + 7,000,000 + 4,000,000 + 75,000) -
(13,000,000 + 2,000,000 + 10,000)] / 5,000,000 = (111,075,000
- 15,010,000) / 5,000,000 = 19.21
For the given day, the mutual funds shares will be traded at
19.21 per share.
13. Types of Mutual Funds
Based on Asset Class
Equity Funds
Debt Funds
Money Market Funds
Hybrid Funds
Based on Structure
Open-ended Funds
Closed-ended Funds
Interval Funds
Based on Investment
Goals
Growth Funds
Income Funds
Liquid Funds
Tax-Saving Funds
Based on Risk
Very Low-Risk Funds
Low-Risk Funds
Medium Risk Funds
High-Risk Funds
Specialized Mutual
Funds
14. Mutual Fund Types Based on Asset Class
Equity Funds: Primarily investing in stocks, they also go by the name stock funds. They invest the money
amassed from investors from diverse backgrounds into shares of different companies. The returns or losses are
determined by how these shares perform (price-hikes or price-drops) in the stock market. As equity
funds come with a quick growth, the risk of losing money is comparatively higher
Debt Funds: Debt funds invest in fixed-income securities like bonds, securities and treasury bills – Fixed
Maturity Plans (FMPs), Gilt Fund, Liquid Funds, Short Term Plans, Long Term Bonds and Monthly Income Plans
among others – with fixed interest rate and maturity date. Go for it, only if you are a passive investor looking
for a small but regular income (interest and capital appreciation) with minimal risks.
Money Market Funds: Just as some investors trade stocks in the stock market, some trade money in the money
market, also known as cash market. It is usually run by the government, banks or corporations by issuing
money market securities like bonds, T-bills, dated securities and certificate of deposits among others. The fund
manager invests your money and disburses regular dividends to you in return. If you opt for a short-term plan
(13 months max), the risk is relatively less.
Hybrid Funds: As the name implies, Hybrid Funds (also go by the name Balanced Funds) is an optimum mix of
bonds and stocks, thereby bridging the gap between equity funds and debt funds. The ratio can be variable or
fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of assets in stocks and the rest in
bonds or vice versa. This is suitable for investors willing to take more risks for ‘debt plus returns’ benefit rather
than sticking to lower but steady income schemes.
15. Mutual Fund Types Based On Structure
Mutual funds can be categorized based on different attributes (like risk profile, asset class etc.).
Structural classification – open-ended funds, close-ended funds, and interval funds – is broad in
nature and the difference depends on how flexible is the purchase and sales of individual mutual
fund units.
Open-Ended Funds :These funds don’t have any constraints in a time period or number of units – an
investor can trade funds at their convenience and exit when they like at the current NAV (Net Asset
Value). This is why its unit capital changes constantly with new entries and exits. An open-ended
fund may also decide to stop taking in new investors if they do not want to (or cannot manage large
funds).
Closed-Ended Funds: Here, the unit capital to invest is fixed beforehand, and hence they cannot sell
a more than a pre-agreed number of units. Some funds also come with an NFO period, wherein
there is a deadline to buy units. It has a specific maturity tenure and fund managers are open to any
fund size, however large. SEBI mandates investors to be given either repurchase option or listing on
stock exchanges to exit the scheme.
16. Mutual Fund Types Based on Investment Goals
Growth Funds: Growth funds usually put a huge portion in shares and growth sectors, suitable for
investors (mostly Millennials) who have a surplus of idle money to be distributed in riskier plans
(albeit with possibly high returns) or are positive about the scheme.
Income Funds: This belongs to the family of debt mutual funds that distribute their money in a mix
of bonds, certificate of deposits and securities among others. Helmed by skilled fund managers who
keep the portfolio in tandem with the rate fluctuations without compromising on the portfolio’s
creditworthiness, Income Funds have historically earned investors better returns than deposits and
are best suited for risk-averse individuals from a 2-3 years perspective.
Liquid Funds: Like Income Funds, this too belongs to the debt fund category as they invest in debt
instruments and money market with a tenure of up to 91 days. The maximum sum allowed to invest
is Rs 10 lakhs. One feature that differentiates Liquid Funds from other debt funds is how the Net
Asset Value is calculated – NAV of liquid funds are calculated for 365 days (including Sundays) while
for others, only business days are calculated.
Tax-Saving Funds: ELSS or Equity Linked Saving Scheme is gaining popularity as it serves investors
the double benefit of building wealth as well as save on taxes – all in the lowest lock-in period of
only 3 years. Investing predominantly in equity (and related products), it has been known to earn
you non-taxed returns from 14-16%. This is best-suited for long-term and salaried investors.
17. Mutual Fund Types Based on Risks
Very Low-Risk Funds: Liquid Funds and Ultra Short-term Funds (1 month to 1 year) are not risky at
all, and understandably their returns are low (6% at best). Investors choose this to fulfill their short-
term financial goals and to keep their money safe until then.
Low-Risk Funds: In the event of rupee depreciation or unexpected national crisis, investors are
unsure about investing in riskier funds. In such cases, fund managers recommend putting money in
either one or a combination of liquid, ultra short-term or arbitrage funds. Returns could be 6-8%,
but the investors are free to switch when valuations become more stable.
Medium-risk Funds: Here, the risk factor is of medium level as the fund manager invests a portion
in debt and the rest in equity funds. The NAV is not that volatile, and the average returns could be
9-12%.
High-risk Funds: Suitable for investors with no risk aversion and aiming for huge returns in the form
of interest and dividends, High-risk Mutual Funds need active fund management. Regular
performance reviews are mandatory as they are susceptible market volatility. You can expect 15%
returns, though most high-risk funds generally provide 20% returns (and up to 30% at best).
18. Specialized Mutual Fund Types
Sector Funds :Investing solely in one specific sector, theme-based mutual funds. As these funds invest only in
specific sectors with only a few stocks, the risk factor is on the higher side. One must be constantly aware of
the various sector-related trends, and in case of any decline, just exit immediately. However, sector funds also
deliver great returns. Some areas of banking, IT and pharma have witnessed huge and consistent growth in
recent past and are predicted to be promising in future as well.
Index Funds: Suited best for passive investors, index funds put money in an index. It is not managed by a fund
manager. An index fund simply identifies stocks and their corresponding ratio in the market index and put the
money in similar proportion in similar stocks. Even if they cannot outdo the market (which is the reason why
they are not popular in India), they play it safe by mimicking the index performance.
Funds of Funds: A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’
aka multi-manager mutual funds are made to exploit this to the tilt – by putting their money in diverse fund
categories. In short, buying one fund that invests in many funds rather than investing in several achieves
diversification as well as saves on costs.
Emerging market Funds: To invest in developing markets is considered a steep bet and it has undergone
negative returns too. India itself a dynamic and emerging market and investors to earn high returns from the
domestic stock market, they are prone to fall prey to market volatilities. However, in a longer-term perspective,
it is evident that emerging economies will contribute to the majority of global growth in the coming decade as
their economic growth rate is way superior to that of the US or the UK.
19. Specialized Mutual Fund Types…
International/ Foreign Funds :Favored by investors looking to spread their investment to other countries,
Foreign Mutual Funds can get investors good returns even when the Indian Stock Markets do fare well. An
investor can employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a
feeder approach (getting local funds to place them in foreign stocks) or a theme-based allocation (eg, Gold
Mining).
Global Funds: Aside from the same lexical meaning, Global Funds are quite different from International Funds.
While a global fund chiefly invests in markets worldwide, it also includes investment in your home country. The
International Funds concentrate solely on foreign markets. Diverse and universal in approach, Global Funds can
be quite risky to owing to different policies, market and currency variations, though it does work as a break
against inflation and long-term returns have been historically high.
Real Estate Funds :In spite of the real estate boom in India, many are wary about investing in such projects due
to multiple risks. Real Estate Fund can be a perfect alternative as the investor is only an indirect participant by
putting their money in established real estate companies/trusts rather than projects. A long-term investment,
it negates risks and legal hassles when it comes to purchasing a property as well as provide liquidity to some
extent.
Commodity-focused Stock Funds: Ideal for investors with sufficient risk-appetite and looking to diversify their
portfolio, commodity-focused stock funds give a chance to dabble in multiple and diverse trades. Returns are
not periodic and are either based on the performance of the stock company or the commodity itself. Gold is
the only commodity in which mutual funds can invest directly in India. The rest purchase fund units or shares
from commodity businesses.
20. Indian Mutual Fund Industry (Size)
Average Assets Under Management (AAUM) of Indian Mutual Fund Industry
for the month of March 2019 stood at ₹ 24,58,016 crore.
The AUM of the Indian MF Industry has grown from ₹ 4.17 trillion as on 31st
March, 2009 to ₹23.80 trillion as on 31st March, 2019, more than 5 ½ fold
increase in a span of 10 years!!
The MF Industry’s AUM has grown from ₹8.25 trillion as on 31st March, 2014
to ₹23.80 trillion as on 31st March, 2019, about 3 fold increase in a span of 5
years !!
The total number of accounts (or folios as per mutual fund parlance) as on
March 31, 2019 stood at 8.25 crore (82.5 million), while the number of folios
under Equity, ELSS and Balanced schemes, wherein the maximum investment
is from retail segment stood at 6.93 crore (69.3 million)
23. Average AUM
Mutual Funds
March
2019
% Share
HDFC Mutual Fund 342,291 14.01%
ICICI Prudential Mutual Fund 320,793 13.13%
SBI Mutual Fund 283,807 11.61%
Aditya Birla Sun Life Mutual Fund 246,480 10.09%
Reliance Mutual Fund 233,617 9.56%
UTI Mutual Fund 159,694 6.53%
Kotak Mahindra Mutual Fund 150,099 6.14%
Franklin Templeton Mutual Fund 118,912 4.87%
Axis Mutual Fund 89,720 3.67%
DSP BlackRock Mutual Fund 78,363 3.21%
L&T Mutual Fund 70,944 2.90%
IDFC Mutual Fund 69,352 2.84%
Tata Mutual Fund 54,194 2.22%
Sundaram Mutual Fund 30,497 1.25%
Mirae Asset Mutual Fund 24,191 0.99%
Invesco Mutual Fund 23,990 0.98%
Motilal Oswal Mutual Fund 19,090 0.78%
LIC Mutual Fund 15,240 0.62%
Canara Robeco Mutual Fund 14,583 0.60%
Edelweiss Mutual Fund 11,665 0.48%
Baroda Pioneer Mutual Fund 11,320 0.46%
HSBC Mutual Fund 11,054 0.45%
IDBI Mutual Fund 8,949 0.37%
JM Financial Mutual Fund 8,712 0.36%
DHFL Pramerica Mutual Fund 7,627 0.31%
BNP Paribas Mutual Fund 7,209 0.29%
PRINCIPAL Mutual Fund 7,091 0.29%
Indiabulls Mutual Fund 4,808 0.20%
Mahindra Mutual Fund 4,748 0.19%
Union Mutual Fund 4,259 0.17%
BOI AXA Mutual Fund 3,626 0.15%
PPFAS Mutual Fund 1,805 0.07%
IIFL Mutual Fund 1,640 0.07%
Essel Mutual Fund 1,416 0.06%
Quantum Mutual Fund 1,360 0.06%
Taurus Mutual Fund 424 0.02%
Quant Mutual Fund 196 0.01%
Shriram Mutual Fund 124 0.01%
Sahara Mutual Fund 55 0.00%
Total 2,443,948 100.00%
