2. What is a Mutual Fund?
It is a trust that pools
savings of several
investors
Invests these into
different kinds of
securities (shares,
debentures, money
market instruments, or
combination of these) .
Income thus generated
and the capital
appreciation is
among unit holders in
proportion to the
of units held by them.
2
4. Benefits of Mutual funds
Which Stock should I invest In ? Mutual Funds are run by
professional Managers who have
necessary skills for stock selection
How many shares can I really buy
with Rs 1000
To achieve diversification : lets say
there 1000 investors who invest
INR 1000 with a fund, the total
amount with fund will be INR
10,00,000 they can now achieve
the diversification by purchasing
no of shares across various sectors
4
5. Lets say they buy 3 stocks
Company No of
shares
Cost per share
(Rs)
Total Amount Rs
HDFC Bank 500 800 500* 800 = 4,00,000
RIL 225 1000 225*1000 = 2,25,000
TCS 250 1500 250* 1500= 3,75,000
TOTAL 10,00,000
5
How much of this you hold on pro-rata basis ?
Company Shares worth Rs shares you own
HDFC Bank 400 400/800 = .50
RIL 225 225/1000 = .225
TCS 375 375/1500= .25
1000
You could not have achieved this on your own as you would
have buy minimum 1 share in each case
7. STRUCTURE
7
Regulator : Frames the rules and regulates the industry . Mutual Fund
are a highly regulated as they have been set up for small investors.
SEBI has strict regulation on fees , reporting standards and audits
8. STURCTURE OF MUTUAL FUND
SPONSORS : Sponsor is
basically the promoter
of the fund.
ASSEST MANAGEMENT
COMPANY : A set of
Financial professionals
who manage the fund
TRUSTEES :
Professionals who
supervise the activities
of AMC.
CUSTODIAN : keeps
safe custody of
Investments and
benefits Interest
÷nds
TRANSFER AGENTS :
maintains record of
unit holders & provide
services like purchase ,
transfer and
redemption
8
9. Structure of a mutual fund
`
9
SPONSOR Asset Management Company
AMC
The sponsor
initiates the idea
to set up a mutual
fund
AMC raises money from
Investors and invest in
group of assets
SPONSOR
Asset Management Company
AMC
10. Asset Management Companies
ICICI
Prudential
Mutual Fund
HDFC Mutual
Fund
Aditya Birla
Sun Life
Mutual Fund
Reliance
Mutual Fund
SBI Mutual
Fund
L&T Mutual
Fund
Kotak
Mahindra
Mutual Fund
Franklin
Templeton
Mutual Fund.
Motilal Oswal
Mutual Fund
Mirae Asset
Mutual Fund
10
11. Sebi sets 5 broad categories for MF
Equity
Schemes
Debt
Schemes
Hybrid
Schemes
Solution
Oriented
Schemes
Other
Schemes
11
12. Sebi defines Large Cap, Mid cap cos
Top 100 companies in terms of
market capitalisation will come
under the large cap segment,
while those 101st- 250th firm will
be mid-cap and 251st company
onwards in terms of market
capitalisation will be small-cap.
12
14. Net Asset Value ( NAV)
The price of each unit is known as “ net
asset value” of the fund
NAV on any day reflects the value of the
funds investment divided by number of
units issued by the fund
Customer’s purchase and sale price per unit
is based on this amount
14
15. MF NAV Calculation
15
■ NAV is thus combination of market value of all investments in the portfolio
including cash and accrued income minus accrued expense
Market value of funds investment + Income accrued - Expenses accrued
NAV = No of units outstanding
16. MF NAV Calculation
XYZ Investments
launches a Equity
Fund.
It raises Rs 150 crore
by issuing 15 crore
units of funds at Rs
10 each.
Post issue, investors
can buy and sell from
the fund.
Suppose on a particular day, the number of units outstanding were
15.5 crore, the market value all the investments ( including cash)
was Rs 178.25 crore , the dividend income accrued was Rs 1.5 crore
and expenses accrued totaled Rs 3.25 crore
What is the NAV of
each unit ?
16
17. NAV EXAMPLE
■ Using the formula given below
17
Market value of funds investment + Income accrued - Expenses accrued
NAV = No of units outstanding
NAV = 178.25 + 1.5 -3.25
15.5
NAV = Rs 11.387
18. Loads and commissions
Entry load and front-end load
: Entry load or front-end load
is the commission paid by the
investor while buy into the
fund. Entry load Abolished
now by SEBI
Exit or back-end load : Exit or back-end
load is the commission paid while
redeeming the units (exiting ) from the
fund
Trail Commission : Distributor
also receives a Trail
commission from AMC. This is
paid based on net assets of
the investors during the
period
• Trail commission varies
between equity and debt
funds. In equity mutual funds,
it can range between 0.20% to
1%
For debt fund investments, this
commission can be between
0.10% to 1%. The trailing
commission is calculated as a
percentage of the entire
investment brought to a fund
by a particular intermediary.
18
23. MUTUAL FUNDS IN INDIA
■ Lets understand the types of mutual funds that are available in India
■ Mutual funds in India can be classified in india based on
23
Mutual finds
in India
Structure
Investment
Objective
Investment
Plan
24. Based on Structure
■ Mutual fund can be broadly classified on the basis of structure into two
categories as shown below.
24
Based on
Structure
Open
ended fund
Close
ended fund
25. OPEN ENDED FUNDS
An open-ended fund or scheme is one that remain open all the
time. Investors can buy or sell into the fund any time .
These schemes do not have a fixed maturity period. Fund
corpus is not fixed
Investors can conveniently buy and sell units at Net Asset
Value (NAV) related prices which are declared on a daily basis.
The key feature of open-end schemes is liquidity.
25
26. Open ended funds
These funds cannot invest 100% of the funds because of the
need to maintain cash reserves to provide for shareholder
redemptions in uncertain amounts
The portfolio manager needs to be dynamic ; he needs to
strike a balance on two things.
(a) Should he keep cash for redemptions ? or
(b) Should he invest cash to generate returns for the unit
holders ?
26
27. The retail investors tend to behave in an irrational
behavior i .e they buy when the markets are high
and sell when the markets are low
The fund manager has to do the same thing as well,
to generate cash when you are selling and invest
when you are buying .
This means he will buy when the markets are high
and sell when the markets are low but he would
ideally like to do the opposite
27
28. CLOSE ENDED FUND
The fund is open for subscription only once and the corpus
is fixed once the issue closes .
Thereafter they can buy or sell the units of the scheme on
the stock exchanges where the units are listed
A close-ended fund are non redeemable ie investors cannot
buy or sell into the fund . They have a stipulated maturity
period.
Investors cannot transact daily.
28
29. In order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units
to the mutual fund through periodic repurchase at NAV
related prices.
SEBI Regulations stipulate that at least one of the two
exit routes is provided to the investor ie either
repurchase facility or through listing on stock exchanges.
These mutual funds schemes disclose NAV generally on
weekly basis.
29
30. FIXED CORPUS : As the corpus is fixed , the
fund manager is not subject to the vagaries
like in open ended fund.
The fund manager knows exactly the cash he
has any time he can decide when to hold
cash and when to invest thereby using his
skills to maximize the returns for the unit
holders
30
36. Equity Schemes
Category Characteristics
1 Multi Cap Fund Minimum investment in equity related instruments 65% of the
total assets
2 Large Cap Fund Minimum investment in equity related instruments of large
cap companies : 80% of the total assets
3 Large & Mid Cap Minimum investment in equity related instruments of large
cap companies : 35% of the total assets .
Minimum investment in equity related instruments of Mid cap
companies : 35% of the total assets
4 Mid Cap Fund Minimum investment in equity related instruments of Mid cap
companies : 65% of the total assets
5 Small Cap Fund Minimum investment in equity related instruments of Small
cap companies : 65% of the total assets
36
37. Equity Schemes
Category Characteristics
6 Dividend Yield
Fund
Fund should invest in dividend yielding stocks Minimum
investment in equity 65%
7 Value Fund Scheme should follow value strategy Minimum
investment in equity 65%
8 Contra Fund Scheme should follow contrarian strategy, Minimum
investment in equity 65%
9 Focussed fund A scheme focussed on number of stocks ( maximum 30)
Minimum investment in equity 65%
10 Sectoral Fund Minimum investment in equity related instruments of a
particular sector / particular theme : 80% of the total
assets
11 ELSS Fund Minimum investment in equity 80% in accordance with
ELSS scheme 2005 notified by ministry of finance
37
42. TYPES OF MUTUAL FUND : INVESTMENT PLAN
» The classification based on Investment plan is as follows
42
Growth Plan
Dividend
Plan
Systematic
Investment
plan
43. Growth Plans
These are the plans where the fund
automatically reinvests the returns made
by you into the Fund.
This is good for those investors who have a
long term horizon and not interested in
regular income .
Example : Birla sunlife Top 100-G…open
ended scheme
43
44. Dividend Plan
These are the plans where the returns are distributed
in the form of dividend back to the investor at regular
intervals.
This is good for those investors who want regular
income . Thus is a better investment at time of
retirement or if you want to supplement your income.
Example : Axis Equity-Dividend ..open ended scheme
44
45. Systematic Investment Plan ( SIP)
Under a SIP money is invested by the investor in
committed installments over a certain period.
For example Rs 2500/- every month over next 12
months
SIP helps one to cover both ups and downs across
the period .
It also helps in getting better weighted average
cost to the investors
45
47. ETF’s
Exchange Traded Funds are essentially Index
Funds that are listed and traded on exchanges
like stocks.
Until the development of ETFs, this was not
possible before.
Globally, ETFs have opened a whole new
panorama of investment opportunities to Retail
as well as Institutional Money Managers.
47
48. ETF’s
They enable investors to gain
broad exposure to entire stock
markets in different Countries
and specific sectors with
relative ease, on a real-time
basis and at a lower cost than
many other forms of investing.
48
49. ETF’s
An ETF is a basket of stocks that reflects the
composition of an Index, like S&P CNX Nifty or
BSE Sensex.
The ETFs trading value is based on the net
asset value of the underlying stocks that it
represents. Think of it as a Mutual Fund that
you can buy and sell in real-time at a price
that change throughout the day.
49
50. What are the costs of investing in ETFs through the exchange?
While the Expense Ratio of ETFs is generally low, there are
certain costs that are unique to ETFs.
Since ETFs, like stocks, are bought as shares through a broker,
every time an investor makes a purchase, he/she pays a
brokerage commission.
In addition, an investor can suffer the usual costs of trading
stocks, including differences in the ask-bid spread etc.
Of course, traditional Mutual Fund investors are also subjected
to the same trading costs indirectly, as the Fund in turn pays
for these costs.
50
51. What are the advantages of ETFs over normal open-ended
mutual fund?
1. Buying / Selling ETFs is as simple as buying / selling any other stock on the
exchange.
2. ETFs allow investors to take benefit of intraday movements in the market,
which is not possible with open-ended Funds.
3. With ETFs one pays lower management fees. As ETFs are listed on the
Exchange, distribution and other operational expenses are significantly lower,
making it costeffective. These savings in cost are passed on to the investor.
4. Due to its unique structure, the long-term investors are insulated from
short term trading in the fund.
51
52. EXCHANGE TRADED FUNDS (ETF’S)
A security that tracks an index, a commodity or a
basket of assets like an index fund, but trades like a
stock on an exchange.
ETFs experience price changes throughout the day
as they are bought and sold.
52
53. Exchange Traded Funds
(ETFs) represent a basket of
securities that is traded on
an exchange, similar to a
stock.
Hence, unlike conventional
mutual funds, ETFs are
listed on a recognised stock
exchange and their units are
directly traded on stock
exchange during the trading
hours.
In ETFs, since the trading is
largely done over stock
exchange, there is minimal
interaction between
investors and the fund
house.
53
58. ETFs are either actively or
passively managed. Actively
managed ETFs try to
outperform the benchmark
index, whereas passively-
managed ETFs attempt to
replicate the performance of a
designated benchmark index.
58
