This document provides an overview of mutual funds, including: - A mutual fund is a trust that pools money from investors and invests it in stocks, bonds, and other securities. Income and capital gains are shared proportionally among investors. - There are various types of mutual funds categorized by investment objectives (equity, debt, hybrid/balanced) and maturity periods (open-ended, closed-ended). - Key terms include net asset value (NAV), expense ratio, exit loads, growth vs. dividend options, and alpha which measures a fund's return compared to its benchmark index. - Advantages of mutual funds include liquidity, diversification, professional management, flexibility, and tax benefits for some funds

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Fundamentals of
Mutual Funds
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Agenda
► Advantages and Disadvantages
► Types of Mutual Funds
► What is a Mutual Fund?
► Myths and Facts
► Understanding Alpha (α)
► Terminologies of Mutual Funds

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What is a Mutual Fund?
A Mutual Fund is a trust that pools the money or savings of a number
of investors who share a common financial goal.
The money thus collected is then invested in capital market
instruments such as shares, debentures and other instruments.
The income earned through these investments and the capital
appreciation released are shared by its unit holders in proportion to
the number of units owned by them.

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Mutual Fund Operation

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Some Myths and Facts
Myths Facts
• Mutual Fund invest only in shares • Equity Instruments like shares are only a
part of the securities held by mutual funds.
They also invest in debt securities which are
relatively safer.
• Mutual Funds are prone to very high risks
• Mutual Funds are new in financial
market hence we should not invest in
them
• Mutual Funds are there in India since 1964.
• Mutual Funds are not reliable and people
rarely invest in them
• Mutual Funds are the best solution for
people who want to manage risks and still
get good returns.

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As per SEBI, mutual funds can be broadly classified into 3 categories:
1. Equity Funds
2. Debt Funds
3. Hybrid Funds
Types of Mutual Funds
Mutual Funds
By Maturity
Period
By Investment
Objective
Equity
Income
Balance
fund
Money
market
Gilt fund
Index fund
Close
ended
Open
ended

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Types of Mutual Funds – by maturity period
Open Ended Funds Closed Ended Funds
• Open ended Schemes are
schemes which offers unit
for sale without
specifying any duration
for redemption.
• They sell and repurchase
schemes on a continuous
basis.
• The main feature of such
kind of scheme is liquidity
• These are the schemes in
which redemption period
is specified.
• Once the units are sold by
mutual funds, then any
transaction takes place in
secondary market only i.e.
stock exchange.
• Price is determined by
forces of market.

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Types of Mutual Funds – by investment objective
Equity Funds Debt Funds
• An equity fund is a mutual fund
which invests a minimum of
65% of its assets in equity and
equity related instruments.
• It can invest the balance 0%-
35% in debt or money market
securities.
• Equity funds are capable of
giving relatively high returns as
they primarily invest in stocks of
companies which are responsive
to changes in the stock market
and the economy.
• E.g. – Large Cap, Small Cap, Mid
Cap funds
• A debt fund is a mutual fund which
invests a majority of its assets in
debt and money market securities.
• According to the Income Tax Act, a
mutual fund which invests less than
65% of its total assets in equities is
termed as a debt fund.
• Debt funds are preferred by
investors mainly because they come
with relatively lower levels of risk.
• Since they undertake lower risk,
debt funds in India yield returns
which though higher than returns
offered by fixed return investments,
tend to be lower than those
provided by equity funds in the long
term.
Hybrid/Balanced
Funds
• As the name suggests, a hybrid
fund is a mutual fund which
invests its assets in two or more
asset classes including equities,
debt, money market instruments,
gold, overseas securities, etc.
• A hybrid fund generally invests in
only two asset classes namely
equity and debt.
• The blend of equity and debt
enables a hybrid fund to give
returns similar to those
generated by equity funds while
undertaking relatively lower risk
levels like debt funds.

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Types of Mutual Funds Contd..
Money Market Funds Gilt Funds
• 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, commercial
paper and government securities,
etc.
• These funds are appropriate for
corporate and individual investors
as a means to park their surplus
funds for short periods.
• These funds invest exclusively in
government securities.
• Government securities have no
default risk.
Index Funds
• This schemes invest in the
securities in the same weightage
comprising of an index.
• This schemes would rise or fall in
accordance with the rise or fall in
the index.
Sectoral Funds - Sectoral funds are those mutual funds which invest in a particular sector of the
market, e.g. banking, information technology etc. Sector funds are riskier than equity diversified funds
since they invest in shares belonging to a particular sector which gives them fewer diversification
opportunities.

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Systematic Investment Plan - SIP
• Systematic investment plan is an effective way
to do financial planning that allows you to
invest a fixed amount regularly at a specified
frequency say, weekly, monthly or quarterly
according to your convenience.
• Systematic investment plans work best for
investors who are seeking for long term goals,
such as children higher education or for their
retirement plans.
• You can choose any plan according to your
convenience and achieve your financial goals,
systematically.

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SIP Benefits

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Rupee Cost Averaging
1st Month 2nd Month 3rd Month 1st Month
Net Asset
Value
25 30 18 23
Investment 2500 2500 2500 7500
Units 100 84 139 323

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Power of Compounding
SIPof Rs.1000 invested per month @ 8% PAtill the age of 60
STARTING AGE TOTAL AMOUNT SAVED VALUE AT THE AGE OF 60
25 4,20,000 23,09,175
30 3,60,000 15,00,295
35 3,00,000 9,57,367
40 2,40,000 5,92,947

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Mutual Fund Terminologies
Term Definition
Asset Under Management
(AUM)
Imagine you are investing some money into a mutual fund, there would be more people like you investing money
into that particular fund. So AUM is nothing but the sum of total money invested by investors in that particular fund!
Net Asset Value (NAV)
This is the price of purchasing one unit of a particular mutual fund. Think about it as the share price of that
particular mutual fund.
Total Expense Ratio (TER) A mutual fund needs funds to run, so the TER is an annual recurring fee which they charge to an investor.
Exit Load
Investing is a long term game and will only work if you invest for more than at least 1 year. Which is why mutual fund
companies charge exit load, which says that incase you take out your investment before 1 year, they would take a
percentage of your investment at the time of redemption of your mutual fund units. Generally the exit load is 1%.
Direct vs Regular
Whenever you buy a mutual fund unit from an investment advisor, there is a higher expense ratio as the mutual fund
company has to pay the advisor too. However, if you invest into a mutual fund using platforms like Zerodha Coin,
PayTM money or the mutual fund’s site themselves, they charge a lower expense ratio. Hence, it is suggested you to
always go direct unless of course you need an investment advice!
Growth vs Dividend
The mutual fund gives an investor 2 options:
Dividend: Giving the investor a payout (AKA Dividend) over a specified period of time like every month, quarter etc;
or
Growth: Re-investing the dividend payout into the fund.
It is always beneficial to invest into a growth mutual fund because of the compounding effect in the future. But if
you want a regular income, then you can also chose the dividend option.

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What is Alpha?
The previous slide had very basic terms that you need to know while investing in mutual funds.
‘Alpha’ is a technical term which tells you the performance of the mutual fund as compared to the index (which is Nifty 50 and
Sensex 30). For example, if the Nifty 50 has given a return of say 10%, and the mutual fund that you have invested in has given
you a return of 12%, Alpha is 2%. Hence, we can say that:
Alpha = Returns of your mutual fund - Returns by Nifty 50

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Advantages of Investing in Mutual Funds
 Liquidity to enter and exit anytime
 Diversification to balance risk
 Professional management of funds
 Flexibility to invest in smaller amounts
 Accessibility
 Different schemes for different goals
 Tax benefits – ELSS Funds

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