ITS ABOUT MUTUAL FUND

1. MUTUAL FUNDS

2. MUTUAL
FUND -
CONCEPT

3. ADVANTAGES
OF MUTUAL
FUNDS

9. Indian Mutual Fund industry’s Average Assets Under Management
(AAUM) stood at ₹ 26.33 Lakh Crore (INR 26.33 Trillion)
Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of October 2019
stood at ₹ 26,32,824 crore.
Assets Under Management (AUM) as on October 31, 2019 stood at ₹26,13,666 crore.
The AUM of the Indian MF Industry has grown from ₹ 7.75 trillion as on 31st October, 2009 to ₹26.33 trillion as
on 31st October, 2019, about 3½ fold increase in a span of 10 years.
The MF Industry’s AUM has grown from ₹ 10.96 trillion as on 31st October, 2014 to ₹26.33 trillion as on 31st
October, 2019, about 2 ½ fold increase in a span of 5 years.

10. STRUCTURE
OF MUTUAL
FUND

19. TYPES OF
MUTUAL
FUNDS

21. Risk Profile
Investment horizon
Days 1 year 3 years
Income Funds
Money Market
Floating Rate Funds
Short Term Plans
Gilt Funds
MIPs
Balanced Funds
Diversified Equity Funds
Sectoral Funds
Risk

22. LIQUID
FUNDS

23. FLOATING
RATE FUND

24. SHORT TERM
FUND

25. INCOME
FUND

26. MONTHLY
INCOME
PLAN

27. BALANCED
FUND

28. EQUITY
FUND

29. EQUITY
FUND -
TYPES

31. Different Ratios to Analyze Mutual Fund
Performance:
• Risk Measures: Volatility Measures:
• Alpha >Capture Ratio
• Beta -Upside
• R2 -Downside
• Sharpe Ratio >Drawdown
• Standard Deviation
• Info Ratio
• Tracking Error

32. Alpha
Alpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility (price risk) of
a security or fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return
of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often
considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. An
alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, an alpha of -1.0
would indicate an under-performance of 1%. For investors, the higher the alpha the better.
Beta
Beta, also known as the beta coefficient, is a measure of the volatility, or systematic risk, of a security or a
portfolio compared to the market as a whole. Beta is calculated using regression analysis and it represents the
tendency of an investment's return to respond to movements in the market. By definition, the market has a beta
of 1.0. Individual security and portfolio values are measured according to how they deviate from the market.
R-squared
R-squared is a statistical measure that represents the percentage of a fund portfolio or a security's movements
that can be explained by movements in a benchmark index.
R-squared values range from 0 to 100. According to Morningstar, a mutual fund with an R-squared value
between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less
typically does not perform like the index.

33. Sharpe Ratio
Developed by Nobel laureate economist William Sharpe, the Sharpe ratio measures risk-adjusted performance.
It is calculated by subtracting the risk-free rate of return from the rate of return for an investment and dividing the
result by the investment's standard deviation of its return. The Sharpe ratio tells investors whether an
investment's returns are due to wise investment decisions or the result of excess risk. This measurement is
useful because while one portfolio or security may generate higher returns than its peers, it is only a good
investment if those higher returns do not come with too much additional risk. The greater an investment's
Sharpe ratio, the better its risk-adjusted performance.
Standard Deviation
Standard deviation measures the dispersion of data from its mean. Basically, the more spread out the data, the
greater the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of
an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual
funds, the standard deviation tells us how much the return on a fund is deviating from the expected
returns based on its historical performance.
Information Ratio
The information ratio measures the excess return and risk relative to a specific benchmark. It is essentially used
to measure the performance of the mutual fund's active manager. Through the use of the information ratio, an
investor can tell by how much the active manager could outperform the benchmark, and it also indicates the
length of time that the active manager could outperform the benchmark. A low information ratio is a signal that a
mutual fund is underperforming and should not be seen as a viable investment. A higher information ratio means
that the active manager had a better ability to outperform the benchmark – and for a longer period of time.

34. Tracking Error
Tracking error is the divergence between the price behavior of a position or a portfolio and the price behavior of a
benchmark. This is often in the context of a hedge fund, mutual fund or exchange-traded fund (ETF) that did not work as
effectively as intended, creating instead an unexpected profit or loss.
Tracking error is reported as a standard deviation percentage difference, which reports the difference between the return
an investor receives and that of the benchmark they were attempting to imitate.
Capture ratio
Capture ratio tells us how much the fund returned relative to its benchmark in periods of up market and down market.
Upside capture will take the instances where the markets were positive and show how much of it the fund had
captured. Similarly, downside capture will only take the instances where the market has lost and see how much of this
loss the fund captured.
It is calculated by taking the fund’s return as a percentage of the market returns for a period.
For instance, if the benchmark index returned 5% (representing the market movement) and the fund also returned 5%,
capture ratio would be 100% implying that the fund captured all of the market movement in that period. Therefore,
anything above 100% means that the fund went up/down more than the market.

35. Interpretation of capture Ratio
Both the upside and the downside captures need to be looked at together to draw a conclusion. A low upside doesn’t
automatically mean a poor fund and a high upside doesn’t mean the fund is a great one. Look at the table below. It shows
the capture ratio calculated based on monthly returns of the fund and benchmark for the past 3 years. Alongside, the
average 1-year rolling returns delivered by the fund during the same period is also mentioned.
Importance of downside capture
What we can see is that ABSL Frontline Equity has the least downside capture ratio, even lesser than the category average.
However, on the upside, it’s not able to catch the entire market up move. Its average returns, though, is better than the
category. The ability to limit losses is what has helped. When a fund contains downsides well, it finds it easier to benefit
when markets pick up again. Over time, this translates into lower volatility and better overall returns.
Consider Reliance Largecap. The fund has an upside capture of 102% which means it returned more than the benchmark
in up market even while the category found it difficult to beat it. It’s also much higher than ABSL Frontline Equity. Even so,
Reliance Largecap’s average return is not that much better than ABSL Frontline Equity. This is because it lost much more
than the market during slumps with a downside capture of 109%.

36. Drawdown
It refers to how much an investment declines from the historical peak in a particular period and then
regains its original position. In other words, how much an investment in a stock or a fund is down from
its peak mark before it reaches back the peak position. It is a measure of downside volatility of
investment whether in stocks or funds. It is also important for comparing the historical fund
performance as compared to its peers or monitor the personal trading of individuals.

37. TAX IMPLICATIONS ON
MUTUAL FUNDS

38. Tax Benefit of Mutual Funds
Equity-Linked Savings Scheme (ELSS) is a type of equity fund and the only mutual
fund scheme which qualifies for a tax deduction of Rs. 1.5 lakh per annum
under Section 80C of the Income Tax Act.
An ELSS comes with a lock-in period of 3 years which means an investment made in it
cannot be withdrawn before 3 years.

41. Let’s understand indexation better with the help of an example. Assuming that Mr. X
invested Rs. 100 in a debt fund in FY 2015-16 and sold it for Rs. 150 in FY-2018-19.
Since Mr. X sold it after 3 years, the gain is long term and an LTCG tax of 20% with
indexation is applicable. The CII in FY16 was 254 and in FY19, it was 280. As a result, Mr.
X’s purchase price for tax purposes will be raised to (280/254)*100 = 110 and his taxable
gain will be 150 – 110 = 40. The tax payable will be 20% of 40 = Rs. 8 and not Rs. 10
(20% of 50).
•Capital losses incurred on a mutual fund scheme can be adjusted against the capital
gains earned on another mutual fund investment of the same year. This set-off cannot be
done against any other head of income.
•Short term capital losses can be adjusted against both long term and short term capital
gains. However, long term capital losses can only be adjusted against long term capital
gains.
EXAMPLE :

42. Dividend
Stripping
• When companies announce dividends, all investors holding the
share on a specified date (record date) are eligible to receive it. Once
the dividend is paid, the stock goes ex-divided and begins to trade at
a lower price. If you happen to buy the share just ahead of the record
date and sell it just after it goes ex-dividend, you pocket tax-free
dividend. You can also book (fictional) short-term capital ‘losses’ on
your stock. You can then ‘set off’ this loss against other profits you
made to claim a tax exemption. This is dividend stripping.
• In recent times, though, dividend stripping has been used mostly in
mutual funds. Investors get information about a fund’s dividend
payout in advance and buy its units in advance. Once the dividend is
announced, they collect it and also book a capital ‘loss’ as the fund’s
Net Asset Value (NAV) dips due to the payout. These losses are then
used to claim tax breaks.
• In order to discourage dividend stripping, in 2004, dividend payout
rules were tweaked by the tax department. The new rules specified
that an investor can claim a notional loss on NAV due to dividends,
only if the units were purchased three months before the record date
or were held for at least nine months after the dividend is paid.

43. Bonus Stripping