1.
What is a Mutual Fund ?
A mutual fund is a collective investment that
allows many investors, with a common
objective, to pool individual investments and
give to a professional manager who in turn
would invest these monies in line with the
common objective.

2.
Operation flow chart
Securities
Returns
Investors
Fund
managers

3.
MUTUAL FUND - FRAMEWORK- India
Fund
Management
Registrar Custody
Marketing
Operations
Distribution
Trustee Company
Sponsor
Asset Management Company
Fiduciary
responsibility to
the
Investors
Bank
Brokers
Markets

4.
SPONSOR & his Role
 SEBI Regulation defines sponsor as any person who either itself
or in association with another body corporate establishes a Mutual
Fund. A sponsor is an entity that sets up the MF.
Promoter of the mutual fund
 Creates a Trust under Indian Trusts Act, 1882
(This trust becomes the MF)
 Appoints trustees to manage the trust with approval of SEBI
 Creates AMC under Companies Act,1956 which will act as the
investment manager of the MF.
 Fulfils necessary formalities and applies to SEBI for registration of
the Trust as a Mutual Fund

5.
Characteristics of Mutual Funds
 Investors own the mutual fund.
 Professional managers (AMC) manage the fund
for a small fee.
Fee is expressed as a percentage of assets
managed
 The funds are invested in a portfolio of
marketable securities, reflecting the investment
objective.
 Value of the portfolio and investors’ holdings,
alters with change in the market value of
investments.

6.
Mutual Funds:
A Packaged Product

7.
Professional Management
• Irrespective of the amount of investment,
benefits from the professional management skills
brought in by FM research into available
investment options.
• Few investors have the skills and resources to
succeed on their own.

8.
Professional Management
• Irrespective of the amount of investment,
benefits from the professional management skills
brought in by FM research into available
investment options.
• Few investors have the skills and resources to
succeed on their own.

9.
Reduction of Transaction cost
• What is true of risk is also true of transaction
costs.
• Mutual Fund provides benefit of economies of
scale.
( Lesser cost because of larger volumes )

10.
Reduction of Transaction cost
• What is true of risk is also true of transaction
costs.
• Mutual Fund provides benefit of economies of
scale.
( Lesser cost because of larger volumes )

11.
Convenience & Flexibility
• Easy way to Invest
• Reduces excessive paperwork
• Outsourcing of expertise
• AMCs offer many investor services that a direct
investor cannot get – Switching, SWP, SIP, Buying/
Selling through internet or email or phone.

12.
Portfolio Diversification
 Portfolio of investments spreads out Risk
 Attempts to Minimize value erosion
 Potential losses are shared with other investor
• (Each investor in a fund is a part owner of all the
funds assets)

13.
Liquidity
• Open-ended:
Assures liquidity
As liquid as the banks.
• Close-ended:
Buying and selling can be done through
the stock exchange
Periodic Redemption by Mutual Funds

14.
Affordability
 Provides an opportunity for a small investor
•
 Invest as less as an amount of
• Rs.5000/Rs.500 and in multiples of
• Rs.1000/100 depending on the Scheme
 Provision to apply using SIP.

15.
Safety
• MF Industry is well regulated by SEBI which lays
down rules to protect the investors.
Wide Choice
 Offers a VARIETY OF SCHEMES.
 Meet the investment needs of all investors.

16.
Drawbacks
of
Mutual Funds

17.
No Guarantees:
No investment is risk free. If the entire stock
market declines in value, the value of mutual
fund shares will go down as well, no matter
how balanced the portfolio. Investors
encounter fewer risks when they invest in
mutual funds than when they buy and sell
stocks on their own. However, anyone who
invests through a mutual fund runs the risk of
losing money.

18.
Fees and commissions:
All funds charge administrative fees to cover
their day-to-day expenses. Some funds also
charge sales commissions or "loads" to
compensate brokers, financial consultants, or
financial planners. Even if you don't use a
broker or other financial adviser, you will pay a
sales commission if you buy shares in a Load
Fund.

19.
Taxes:
During a typical year, most actively managed
mutual funds sell anywhere from 20 to 70
percent of the securities in their portfolios. If
your fund makes a profit on its sales, you will
pay taxes on the income you receive, even if
you reinvest the money you made.

20.
Mutual Fund Types
• Fund are distinguished from each other by their
investment objectives and types of securities they invest
in :
a) Broad types by nature in investments : MF’s may invest in
equities, bonds or other fixed income securities, short
term money market securities.
• Equity schemes
• Bond schemes
• Money market or Liquid funds.
• The above invest in financial assets
• Other invest in physical assets.
E.g. : Gold or other precious metal’s funds
Real estate funds.
Contd…

21.
Mutual Fund Types Contd…
b) Broad fund types by investment objectives :
Growth funds : Invest for medium to long term capital
appreciation.
Income funds : Invest to generate regular income and
less for capital appreciation.
Value funds : Invest in equities that are considered
under-valued today, whose value will be unlocked in
the future.

22.
Risk
Potential
for return
Liquid Funds
Debt
Funds
c) Broad Fund types by Risk Profile
Growth Funds
Aggressive, Value,
Growth
Balanced Funds
Sectoral Funds
Gilt Funds, Bond
Funds, High
Yield Funds
Ratio of Debt : Equity
Hedge Funds

23.
Money Market/Liquid Funds
• Lowest range in the order of risk level.
• Invest in debt securities of a short term
nature, means securities of less than one-year
maturity (invests in T-Bills issued by govt, CBs
issued by banks and CPs issued by companies)

24.
Gilt Funds
• Gilt Funds are govt. securities with medium to long term
maturities, typically of over one year.
• Issuer is the Govt. of India/ states, therefore these funds
have little risk of default. They face interest rate risk
however.

25.
Debt Funds (or Income Funds)
• Next in order of risk level is debt funds, they
invest in Debt instruments issued not only by
Govt. but also by private co’s, banks and financial
institutions. These funds target low risk and
stable income. They have higher price
fluctuation risk, since they invest in long term
securities. Higher risk of default debt funds can
also be of different risk profile :
a) Diversified Debt Funds : Invests in all available
types of debt securities, issued by entities across
all industries and sectors.
Contd…

26.
Debt Funds Contd..
Diversified debt fund is less risky than a narrow
focus fund that invests in debt securities of a
particular sector or industry.
b. Focused Debt Funds : E.g. Sector, specialized
offshore debt funds.They have narrower focus,
with less diversification in its investments.Other
examples are those that invest only in corporate
debentures or bonds or only in municipal bonds,
mortgage locked bond funds that invest in
special securities created after securitarization of
loan receivables of housing finance co’s.

27.
Debt Funds Contd…
c) High Yield Debt Funds :They seek to obtain
higher interest returns by investing in debt
instruments that are considered “below
investment grade” E.g.Below BBB, Junk bond
funds in U.S.
d) Assured Return Funds : An Indian variant :
E.g.MIP’s of UTI whose returns were indicated in
advance for all the future years of these close
ended schemes. The market regulator SEBI
permits only those funds whose sponsors have
adequate net worth to offer assurance of
returns.
Contd…

28.
Debt Funds Contd…
In these funds investor is forced with the credit risk of
the guarantor who must remain solvent enough to
honour his guarantee during the lock-in period.
e) Fixed Term Plan Series : Another Indian variant :
These are debt schemes essentially closed ended in
nature for a time period varying from 1 month to 13
months most commonly.These are schemes of longer
maturity too.Here the underlying debt instruments
are held to maturity in these schemes.
Contd….

29.
Debt Funds
Contd…
Such offerings are made in a series of plans
under one offer document.No separate OD is
issued each time a new series is launched.

30.
Equity Funds
There is large variety of equity funds each with
slightly different risk profile.Equity funds are
generally considered at higher end of risk spectrum
amongst all available funds in the market.
a) Aggressive Growth Funds : Less researched stocks
that are considered to have future growth
potential and even some speculative stocks of
somewhat unknown or unproven issuers are
invested into these funds.These schemes target
max capital appreciation.Therefore they tend to be
more volatile & riskier than other funds.
Contd...

31.
Equity Funds Contd…
b) Growth Funds : The primary objective of growth
funds is capital appreciation over 3-5 years.Growth
funds are therefore less volatile than funds that
target aggressive growth. They invest in co’s whose
earnings are expected to rise at an above avg. rate.
E.g. Technology.
c) Specialty Funds : They have a narrow portfolio
orientation and invest in only companies that need
predefined criteria. Some funds may build
portfolio’s that will exclude tobacco companies.
E.g.Emerging markets fund, India fund.
Contd…

32.
Equity Funds Contd…
1) Sector Funds : Info, FMCG
2) Foreign Securities Funds : E.g. International Bond
Fund.They invest in equities in one or more
foreign countries thereby achieving
diversification across the country’s borders.
3) Mid-Cap or Small-Cap Funds
4) Option Income Funds : They unite options in a
significant part of their portfolio. Conservative
option funds invest in large diversifying co’s and
then sell options against their stock position.
Contd…

33.
Equity Funds Contd…
5) Diversified Equity Funds : A fund that seeks to
invest only in equities except for a very small
portion in liquid money market instruments but
is not focused on any one or two sectors or
shares, is called diversified equity fund.
1) ELSS : An Indian Variant.
6) Equity Index Funds : Sensex, Nifty index funds,
Bank index, Pharma index, Mindex fund.
Contd….

34.
Equity Funds
Contd…
7) Value Funds : They hold shares of companies
with good or improving profit prospects whose
shares are currently under-priced in the market.
These schemes will add only that shares that are
available at low P/E’s E.g. Cyclical industries
shares.
8) Dividend Yield Funds : Designed to give investors
a high level of current income along with some
steady capital appreciation by investing in high
dividend yield stocks. E.g. Power/ Utility stocks.

35.
Equity Funds Contd…
b) Growth Funds : The primary objective of growth
funds is capital appreciation over 3-5 years.Growth
funds are therefore less volatile than funds that
target aggressive growth. They invest in co’s whose
earnings are expected to rise at an above avg. rate.
E.g. Technology.
c) Specialty Funds : They have a narrow portfolio
orientation and invest in only companies that need
predefined criteria. Some funds may build
portfolio’s that will exclude tobacco companies.
E.g.Emerging markets fund, India fund.
Contd…

36.
Equity Funds Contd…
1) Sector Funds : Info, FMCG
2) Foreign Securities Funds : E.g. International Bond
Fund.They invest in equities in one or more
foreign countries thereby achieving
diversification across the country’s borders.
3) Mid-Cap or Small-Cap Funds
4) Option Income Funds : They unite options in a
significant part of their portfolio. Conservative
option funds invest in large diversifying co’s and
then sell options against their stock position.
Contd…

37.
Equity Funds Contd…
5) Diversified Equity Funds : A fund that seeks to
invest only in equities except for a very small
portion in liquid money market instruments but
is not focused on any one or two sectors or
shares, is called diversified equity fund.
1) ELSS : An Indian Variant.
6) Equity Index Funds : Sensex, Nifty index funds,
Bank index, Pharma index, Mindex fund.
Contd….

38.
Equity Funds
Contd…
7) Value Funds : They hold shares of companies
with good or improving profit prospects whose
shares are currently under-priced in the market.
These schemes will add only that shares that are
available at low P/E’s E.g. Cyclical industries
shares.
8) Dividend Yield Funds : Designed to give investors
a high level of current income along with some
steady capital appreciation by investing in high
dividend yield stocks. E.g. Power/ Utility stocks.

39.
Accounting
NAV = Net assets of scheme / No of units Outstanding
i.e. (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.
Imp : Day of NAV Calculation is known as valuation day.
NAV is computed for each business day ( at least every Wednesday for
close ended schemes & daily for open ended schemes)
The day’s NAV must be posted on AMFI’s website by 8 pm (for those
close ended funds which are not mandatorily required to be listed in any
Stock Exchange- Those funds may publish NAV at monthly or quarterly
intervals as permitted by SEBI.
NAV- Computation

40.
NAV - Other information
Open end funds to declare NAV daily
NAV to be published at least weekly
Close end Schemes (which are not listed) may publish NAV monthly/qt with
prior approval from SEBI (MIP)
For all schemes except liquid schemes the cut-off time is 3 pm. For liquid
schemes the cut-off time is 1 pm.For repurchases in liquid funds the
corresponding cut-off time is 10 am.
NAV has to consider up to date transactions
Major expenses such as Mgt. Fees should be accrued on a day to day basis
while others need not be so accrued if non-accrual does not affect NAV by
more than 1%.
NAV’s are required to be rounded off up to 4 decimal places in case of liquid
funds & up to 2 decimal places for all other schemes.

41.
HOW NAV IS COMPUTED
Market value of Equities - Rs.100 crore - Asset
Market value of Debentures - Rs.50 crore - Asset
Dividends Accrued - Rs.1 crore - Income
Interest Accrued - Rs.2 crore - Income
Ongoing Fee payable - Rs.0.5 crore - Liability
Amt. payable on shares purchased -Rs.4.5 crore - Liability
No. of units held in the Fund : 10 crore units
NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10
= [153-5]/10
= Rs. 14.80

42.
NAV
• Nav is influenced by
–Purchase and sale of Investment Securities
–Valuation of all Investment Securities held
–Other assets and Liabilities &
–Units sold or redeemed.

43.
NAV Concept & calculation
• NAV of the fund represents the net value of the fund on a
particular date & reflects the total value of underlying assets
of the fund after making adjustments for certain expenses.
• Calculation of NAV per Unit:
Total of Mkt. prices of Incomes Total
Equity & debt (assets) accrued Liabilities
Total number of units held in the fund