1. A mutual fund is a trust that pools savings from investors and invests them in stocks, bonds, and other securities. 2. SEBI regulates mutual funds in India and defines a mutual fund as a trust formed by a sponsor to raise money through the sale of units to the public and invest in securities. 3. The money collected is invested in capital market instruments and the income earned is shared by unit holders proportionate to their investment. This provides investors an opportunity to invest in a diversified basket of securities at low cost.

1. MUTUAL FUNDS

2. Regulated by
• SEBI (mutual fund) Regulation,1996

3. SEBI Definition of Mutual fund?
• As per SEBI definition, ”A fund established in
the form of a trust by a sponsor,
• to raise money by the trustees thru the sale of
units to the public,
• under one or more schemes ,
• for investing in securities in accordance with
the sebi regulations.”

4. SEBI Definition of Mutual fund?
• In simple words,”a mutual fund collects the
savings from the small investors,
– invest them in Govt or corporate securities and
– earns income
– And distributes earnings to the unit holders”

5. • A Mutual Fund is a trust
– that pools
– the savings of
– a number of investors who share a
– common financial goal.
ConceptConcept

6. • The money thus collected is
• then invested in capital market instruments
• such as shares, debentures and other securities.
ConceptConcept

7. • 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.
ConceptConcept

8. • 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.
ConceptConcept

9. What is the structural arrangement of an average
mutual fund?
• The mutual fund industry and all participants
involved in this business are governed by SEBI.

10. What is the structural arrangement of an average
mutual fund?
• The promoters or sponsors
• appoints trustees
• and set up and AMC which in turn
• appoints a custodian/depository, registrars,
transfer agents and auditors.

11. • The trustees play a critical role
• as they hold in trust the investments of the
investors/unit holders of the mutual fund.

12. • The board of trustees does not manage the
day to day activities of the mutual fund
directly.
• Instead it appoints an Asset Management
Company (AMC) to perform that task.

13. • Thus the AMC manages the mutual fund
scheme, while the trustees manage them.

14. Custodian
• A custodian holds the securities of various
schemes of the fund in their custody.
• However, following demat, the term
custodian has given way to the ‘Depository’.

15. Registrar
• The registrar is appointed in order to
• accept and process the shareholder’s applications
and
• inform the AMC about the amount received for
subscription, redemption and so forth.

16. Transfer Agents
• Transfer agents are responsible for issuing and
redeeming units of the scheme .
• They are the conduits through which
• fresh units are issued to new buyers
• or units sent back to the AMC for redemption.

17. • The trustees appoint the top management of
the AMC such as Chief Investment Officer or
Chief Executive Officer.
• The trust company also appoints an auditor to
audit the books of accounts of all schemes.

18. SEBI (mutual fund) Regulation,1996
Structure of MF in India
Organizational Structure of MFOrganizational Structure of MF

19. How does the IPO of a mutual fund differ from the IPO
of a company
• Until the middle of 2005, AMCs announced an
IPO every time they launched a new scheme.
• AMFI and SEBI instructed the AMCs to use the
term – NFO (New Fund offer) instead of IPO
for their schemes.

20. Difference
• IPO - can be priced at a premium while an
NFO is issued at par.
• In case of oversubscription, the AMC retains
the entire amount, while in an IPO the
amount needs to be returned unless there is a
green shoe option.
• The fund starts trading at the NAV (Net Asset
Value).

21. • The NAV is largely governed by the value of
the underlying securities into which the fund
has invested and is therefore far less volatile.

22. Annual Recurring Expenses
• The annual recurring expenses include
– trustee fees,
– custodian fees,
– registrar fees
– and other recurring operating expenses.
• These are normally expressed as a percentage of the
net assets and is known as the expense ratio.

23. Annual Recurring Expenses
• The AMC passes these annual recurring expenses or
fund management fees
• to the Investors as entry or exit loads.

24. Entry Load
• Entry Load or front end charge is applied
when an investor buys units of a scheme.
• Thus if the entry load is 2%,
• then the AMC deducts 2% of the total fund
mobilized straight away and
• invests the balance 98% of the corpus to
create the investor portfolio.

25. Exit Load or Back end Load
• Exit Load or Back end Load is levied when an
investor exits the scheme (i.e sells the Units).
• For example, if the exit load is 2% and the
NAV of the scheme is Rs 20, the 40 paise will
be deducted as exit load and Rs 19.60 will be
received when the Units are sold.

26. Exit Load or Back end Load
• A scheme may also be a no load scheme, if the
AMC chooses not to levy any load on the
scheme.

27. • Incorporated on 22 August, 1995.
• Apex body of all the registered AMCs.
• All AMCs are its member.
• Objective to maintain high ethical and professional
standard.
• Provide certificate to Agents to sell MF
• Best practice guidelines.
• Code of ethics.
Role of AMFIRole of AMFI

28. Facts about Mutual Funds
1. The biggest advantage of Mutual Funds is their ability
to diversify the risk.
2. Mutual Funds are their in India since 1964. Mutual
Funds market is very evolved in U.S.A and is there for
the last 60 years.
3. Mutual Funds are the best solution for people who
want to manage risks and get good returns.

29. Mutual Funds
An equity fund would buy equity assets –
ordinary shares, preference shares, warrants
etc.
A bond fund would buy debt instruments such
as debenture bonds, or government
securities/money market securities.
A balanced fund will have a mix of equity
assets and debt instruments.
Mutual Fund shareholder or a unit holder is a
part owner of the fund’s asset.

30. Mutual Funds
Operations Flow Chart
(Reference: amfiindia.com)

31. Advantages of Mutual Funds
• Portfolio diversification: It enables him to hold a diversified investment
portfolio even with a small amount of investment like Rs. 2000/-.
• Professional management: The investment management skills, along with the
needed research into available investment options, ensure a much better return
as compared to what an investor can manage on his own.
• Reduction/Diversification of Risks: The potential losses are also shared with
other investors.
• Reduction of transaction costs: The investor has the benefit of economies of
scale; the funds pay lesser costs because of larger volumes and it is passed on to
the investors.
• Wide Choice to suit risk-return profile: Investors can chose the fund based on
their risk tolerance and expected returns.

32. Advantages of Mutual Funds
• Liquidity: Investors may be unable to sell shares directly, easily and quickly.
When they invest in mutual funds, they can cash their investment any time by
selling the units to the fund if it is open-ended and get the intrinsic value.
Investors can sell the units in the market if it is closed-ended fund.
• Convenience and Flexibility: Investors can easily transfer their holdings from
one scheme to other, get updated market information and so on. Funds also
offer additional benefits like regular investment and regular withdrawal options.
•Transparency: Fund gives regular information to its investors on the value of
the investments in addition to disclosure of portfolio held by their scheme, the
proportion invested in each class of assets and the fund manager's investment
strategy and outlook

33. Disadvantages of Mutual Funds
• No control over costs: The investor pays investment management fees
as long as he remains with the fund, even while the value of his
investments are declining. He also pays for funds distribution charges
which he would not incur in direct investments.
• No tailor-made portfolios: The very high net-worth individuals or large
corporate investors may find this to be a constraint as they will not be
able to build their own portfolio of shares, bonds and other securities.
• Managing a portfolio of funds: Availability of a large number of funds
can actually mean too much choice for the investor. So, he may again
need advice on how to select a fund to achieve his objectives.
• Delay in redemption: It takes 3-6 days for redemption of the units and
the money to flow back into the investor’s account.

34. Broad Types of Mutual Funds

35. Schemes according to Maturity Period
• A mutual fund scheme can be classified into
– open-ended scheme or
– close-ended scheme
• depending on its maturity period.

36. Open-ended Fund/ Scheme
• available for subscription and repurchase on a
continuous basis.
• does not have a fixed maturity period.
• 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.

37. Close-ended Fund/ Scheme
• Stipulated maturity period e.g. 5-7 years.
• Open for subscription only during a specified
period at the time of launch of the scheme.
• Investors can invest in the scheme at the time
of the initial public issue and thereafter they
can buy or sell the units of the scheme on the
stock exchanges where the units are listed.

38. • 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 i.e. either
repurchase facility or through listing on stock
exchanges.
• These mutual funds schemes disclose NAV generally
on weekly basis.

39. Schemes according to Investment Objective:
• Growth scheme, income scheme, or balanced
scheme considering its investment objective.
• Such schemes may be open-ended or close-
ended schemes.
• May be classified mainly as follows:

40. Growth / Equity Oriented Scheme
• The aim of growth funds is to provide capital appreciation
over the medium to long- term.
• Such schemes normally invest a major part of their corpus in
equities.
• Such funds have comparatively high risks.
• Growth schemes are good for investors having a long-term
outlook seeking appreciation over a period of time.

41. Income / Debt Oriented Scheme
• The aim of income funds is to provide regular and
steady income to investors.
• Such schemes generally invest in fixed income
securities such as bonds, corporate debentures,
Government securities and money market
instruments.
• Such funds are less risky compared to equity
schemes.
• These funds are not affected because of fluctuations
in equity markets.

42. Balanced Fund
• The aim of balanced funds is to provide both growth and
regular income as such schemes invest both in equities and
fixed income securities in the proportion indicated in their
offer documents.
• These are appropriate for investors looking for moderate
growth.
• They generally invest 40-60% in equity and debt instruments.
• These funds are also affected because of fluctuations in share
prices in the stock markets.
• However, NAVs of such funds are likely to be less volatile
compared to pure equity funds.

43. Money Market or Liquid Fund
• These funds are also income funds and their aim is to provide
easy liquidity, preservation of capital and moderate income.
• These schemes invest exclusively in safer short-term
instruments such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money, government
securities, etc.
• Returns on these schemes fluctuate much less compared to
other funds.
• These funds are appropriate for corporate and individual
investors as a means to park their surplus funds for short
periods.

44. Gilt Fund
• These funds invest exclusively in government
securities.
• Government securities have no default risk.
• NAVs of these schemes also fluctuate due to
change in interest rates and other economic
factors as is the case with income or debt
oriented schemes.

45. Index Funds
• Index Funds replicate the portfolio of a particular
index such as the BSE Sensitive index, S&P NSE 50
index (Nifty), etc
• These schemes invest in the securities in the same
weightage comprising of an index.
• NAVs of such schemes would rise or fall in
accordance with the rise or fall in the index, though
not exactly by the same percentage due to some
factors known as "tracking error" in technical terms.

46. What is a Fund of Funds (FoF) scheme?
• A scheme that invests primarily in other
schemes of the same mutual fund or other
mutual funds is known as a FoF scheme.
• An FoF scheme enables the investors to
achieve greater diversification through one
scheme.
• It spreads risks across a greater universe.

47. What is a sales or repurchase/redemption
price?
• The price or NAV a unitholder is charged while
investing in an open-ended scheme is called
sales price. It may include sales load, if
applicable.
• Repurchase or redemption price is the price or
NAV at which an open-ended scheme
purchases or redeems its units from the
unitholders. It may include exit load, if
applicable.

48. How to invest in a scheme of a mutual fund?
• Mutual funds normally come out with an advertisement in
newspapers publishing the date of launch of the new
schemes.
• Investors can also contact the agents and distributors of
mutual funds who are spread all over the country for
necessary information and application forms.
• Forms can be deposited with mutual funds through the
agents and distributors who provide such services.
• Now a days, the post offices and banks also distribute the
units of mutual funds.

49. What is the procedure for registering a mutual fund
with SEBI ?
• An applicant proposing to sponsor a mutual fund in India
must submit an application in Form A along with a fee of
Rs.25,000.

50. What is the procedure for registering a mutual fund
with SEBI ?
• The application is examined and
• once the sponsor satisfies certain conditions such as being in
the financial services business and possessing positive net
worth for the last five years,
• having net profit in three out of the last five years
• and possessing the general reputation of fairness and
integrity in all business transactions,
• it is required to complete the remaining formalities for setting
up a mutual fund.

51. • These include inter alia,
– executing the trust deed and investment management agreement,
– setting up a trustee company/board of trustees comprising two- thirds
independent trustees,
– incorporating the asset management company (AMC),
– contributing to at least 40% of the net worth of the AMC and
appointing a custodian.
– Upon satisfying these conditions, the registration certificate is issued
subject to the payment of registration fees of Rs.25.00 lacs
• Details are in the SEBI (Mutual Funds) Regulations, 1996.

52. Distribution Channels

53. Distribution Channels
Mutual Funds are primary vehicles for large collective investments, working on
the principle of pooling funds.
A substantial portion of the investments happen at the retail level.
Agents and distributors are a vital link between the mutual funds and investors.

54. Distribution Channels
Agents
- Is a broker between the fund and the investor and acts on behalf of the
principal.
- He is not exclusive to the fund and also sells other financial services. This in a
way helps him to act as a financial advisor.

55. Distribution Channels
Distribution Companies
- Is a company which sells mutual funds on behalf of the fund.
- It has several employees or sub-broker under it.
- It manages distribution for several funds and receives commission for its
services.

56. Distribution Channels
Banks and NBFCs
- Several banks, particularly private and foreign
banks are involved in a fund distribution by
providing similar services like that of distribution
companies.
- They work on commission basis.

57. Distribution Channels
Direct Marketing
- Mutual funds sell their own products through
their sales officers and employees of the AMC.
- This channel is normally used to mobilise funds
from high net worth individuals and institutional
investors.

58. Accounting and Taxation

59. Accounting
Calculating Net Asset Value
NAV = (Market value of investments +
Receivables + Other Accrued Income + Other
assets – Accrued Expenses – Other Payables –
Other liabilities) / ( No. of Units Outstanding as at
the NAV date)

60. Accounting
SEBI regulations for NAV
• The day on which NAV is calculated by a fund is
called valuation date.
• NAV of all schemes must be calculated and
published at least weekly.
• This is applicable to both open-end and closed-
end fund.

61. Accounting
Since investments held by a mutual fund in its
portfolio are to be marked to the market, the
NAV includes two components:
a) Realized gains or losses.
b) Unrealized gains or losses.
As per SEBI guidelines, unrealized appreciation
cannot be distributed by a fund, whereas the
realized gain can be distributed.

62. Taxation
Taxation in the Hands of the Fund
 Income earned by any mutual fund registered with SEBI or set up by a public
sector bank/Financial Institution or authorized by RBI is exempt from tax.
 Income distributed to unit holders by a closed-end or debt fund has to pay a
distribution tax of 10% plus surcharge of 1% I.e. a tax of 11%.
This tax is also applicable to distributions made by open-end funds which
have less than 50% allocation to equity.

63. Taxation
The Impact on the Fund and the Investor
 Due to the tax payment by the fund, the NAV and the value of the investor’s
investment will come down.
 The tax bears no relationship to the investor’s tax bracket.
 This tax makes the income schemes less attractive than growth schemes.
 The fund cannot avoid tax even if the investor chooses to reinvest the
distribution back into the fund.

64. What tax benefits are available to those who
invest in mutual funds?
• Dividends declared by debt-oriented mutual
funds (i.e. mutual funds with less than 65% of
assets in equities), are tax-free in the hands of
the investor.
• However, a dividend distribution tax (which
varies for individual and corporate investors)
is to be paid by the mutual fund on the
dividends declared.

65. • Dividends declared by equity-oriented funds (i.e.
mutual funds with more than 65% of assets in
equities) are tax-free in the hands of investor.
• There is also no dividend distribution tax applicable
on these funds.
• Diversified equity funds, sector funds, balanced
funds (with more than 65% of net assets in equities)
are examples of equity-oriented funds.

66. Taxation
Taxation in the Hands of the Investor
Dividend Tax : The tax paid by the investor on receiving dividends from a mutual
fund. There is no dividend tax to be paid at the investor’s end.
 There is no dividend distribution tax deduction from NAV in all funds which are
open-end and with over 50% allocation of investment to equities.
 Tax of 10.2% is deducted from the NAV by the fund in the following cases:
- All closed end funds including equity.
- All open end funds with less than 50% allocation in equity.

67. Taxation
Taxation in the Hands of the Investor
Capital Gains on Sale of Units: Capital Gains tax is charged when something is sold
at profit. If the investor sells his units and earns “Capital Gains”, the investor is
subject to the Capital Gains Tax.
If the units are held for less than 12 months, they will be treated as short term
capital gain. Otherwise they are called long term capital gains.
For short term, capital gains = Sale consideration – (Cost of Acquisition + Cost of
Improvements + Cost of Transfer)
The tax charged depends on the income bracket of the investor.
For long term capital gains, the investor gets the benefit of ‘Indexation’ by which
his purchase price is marked up by an inflation index.
Cost of acquisition or improvement = actual cost of acquisition or improvement *
cost of inflation index for year of transfer/cost of inflation index for year of
acquisition or improvement.

68. Long Term Capital Gains
• As per section 10(38), Long-term capital gains
arising on transfer of equity shares
or
• units of equity oriented mutual fund is not
chargeable to tax from the
assessment year 2005-06 if such a transaction
is covered by securities transaction
tax.

69. Long Term Capital Gains
• In case of other shares and securities, person
has an option to either index costs to inflation
and pay 20% of indexed gains, or pay 10% of
non indexed gains.
• The indexation rates are released by the I-T
department each year.

70. • In case of all other long term capital gains,
indexation benefit is available and tax rate is
20%.

71. Short term capital gains
• Under section 111A, for shares or mutual
funds where STT is paid, For Asst Yr 2009-10
the tax rate is 15%.
• In all other cases, it is part of gross total
income and normal tax rate is applicable.

72. Measuring and Evaluating Mutual
Fund Performance

73. Why Measure Fund
Performance
The Investor Perspective
-To make intelligent decisions on whether he should continue with the
investment or not.
- He needs the basic knowledge of fund evaluation to judge the performance of
the fund.

74. Why Measure Fund
Performance
The Advisor’s Perspective
-The potential investors would expect the advisor to give them a proper advise
on which funds have good performance.
- In order to compare different funds, the advisor must have the correct
knowledge and appropriate measures of evaluating the fund performance.

75. Different Performance Measures
Change in NAV
-most commonly used by investors to evaluate fund performance and most
commonly published by fund managers.
-NAV Change in absolute terms:
(NAV at the end of period) – (NAV at the beginning of period)
NAV Change in percentage terms:
(Absolute change in NAV/NAV at the beginning of period) * 100
Annualised NAV Change:
{[(Absolute Change in NAV/NAV at the beginning)/months covered]*12}*100

76. Different Performance
Measures
No, percentage NAV change cannot give a correct picture as it does not take
into account the interim dividends paid. The correct measure here is Total
Return Method.
Total Return Method
- It takes into account the dividends paid in the interim period and is suitable for
all types of funds.
- It must be interpreted in the light of market conditions and investment
objective of the fund.
- Its limitation is that it ignores the fact that distributed dividends also get
reinvested if received during the year.
Total Return is:
[(Distributions + Change in NAV)/NAV at the beginning of the period]* 100

77. Expense Ratio
The Expense Ratio
- Indicator of fund’s efficiency and cost effectiveness.
- It is defined as the ratio of total expenses to average net assets of the fund.
-If a fund’s income levels or returns are small say a debt fund with 10% return,
expense ratio becomes important and difference of even 0.5% between two
funds can make lot of difference.

78. Income Ratio
The Income Ratio
- Defined as its net investment income divided by its net assets for the period.
-
- Cannot be used in isolation, but only with expense ratio and total return.

79. Benchmarking
Importance of Benchmarking
- A funds performance can be judged in relation to investor’s expectations.
- However, it is important for the investor to define his expectations in relation
to certain “guideposts”.
- These guideposts or indicators of performance can be thought of as
benchmarks against which a fund’s performance ought to be measured.
- For instance, BSE-30 will be a benchmark for diversified equity fund and BSE IT
index for tech funds.
While an advisor needs to look at the absolute measures of performance, he
needs to select the right benchmark to evaluate a fund’s performance, so that
he can compare the measured performance figures against the selected
benchmark.

80. Benchmarking
Basis for choosing an Appropriate Performance Benchmark
The appropriate benchmark has to be selected by reference to:
1. The Asset Class it invests in. Thus, an equity fund has to be judged by from
an appropriate benchmark from the equity market and so on.
2. The fund’s stated Investment Objective.
There are three types of benchmarks that can be used to evaluate a fund’s
performance:
1. Relative to the market as a whole.
2. Relative to other mutual funds.
3. Relative to other comparable financial products or investments options
open to the investor.

81. Benchmarking relative to other
Financial Products
 An investor will compare the mutual fund performance with other
-investment products like bank deposits, NSC’s Indira Vikas Patra etc.
 Only instruments of similar investment characteristics and with returns and
calculated over the same periods should be used for meaningful comparisons.

82. Why Invest in Mutual Funds?
• Liquidity
• Minimal transaction costs
• Convenience
• Instant diversification
• Level the playing field
between professional and
individual investors
• Share administrative
expenses

83. Disadvantages of Mutual Fund Investing
• Lower-than-market performance
• Costs

84. The Costs of Mutual Funds
• Load funds -- sales commissions charged to the investor
when purchasing fund shares
• Management fees and expenses -- fees associated
with the operation of the company
• fees -- fees charged to cover the fund’s cost of
advertisement and marketing

85. Stock Mutual Funds
• Aggressive growth funds
• Small-company growth funds
• Growth funds
• Growth-and-income funds
• Sector funds
• Index funds
• International funds
• Emerging markets funds

86. Buying a Mutual Fund
• Step 1: Determine your risk
preferences
• Step 2: Determine your asset
allocation
• Step 3: Identify family of funds
that meet your objectives
• Step 4: Evaluate the funds.

87. Steps 1 & 2: Determine Your Risk Preferences
and Asset Allocation
• Determine your time horizon and risk
tolerance
• Determine your asset allocation preferences

88. Step 3: Identify Funds That Meet Your
Objectives
• Look to third-party publications
– Look for no-load, open-end, low-fee funds
– Find a family of funds to manage your asset
allocation

89. Step 4: Evaluate the Fund
• Read the prospectus!!!
• Compare returns, risk, turnover, and costs of
funds with the same objective
• Evaluate the fund’s long-term performance
• Look at returns in both up and down markets

90. Questions for Revision
• What is a Mutual Fund? Describe the organizational
structure of a mutual fund?
• Write short Notes on the following:
– Entry Load
– Exit Load
– Closed Ended Fund
– Open Ended Funded
• What are the advantages of investing in Mutual
Funds

91. Thank You!