MUTUAL FUNDS

1. Investment and Portfolio
Management
TYBBA Sem.6
2021-22
Ch-5 Introduction to Mutual Funds
Prepared by- Dr. Dhimen Jani, Head, BBA Dept.
Dolat-Usha and Dhiru-Sarla Inst. Valsad,
Securities Market Trainer (SMART-SEBI)
Special thanks to SEBI, NISM

2. Mutual Fund
• Mutual fund is an investment instrument which mobilizes the
savings of millions of small and retail Investors into huge capital
formation.
• The basic objective behind investment in mutual fund is goods
return with relative low risk.
• Investors invest their money into mutual fund through Asset
Management Company (AMC).
• There are experts available in the market, which are in constant
touch with micro and macro aggregates of the economy viz. share
market, G.D.P, G.N.P. N.N.P., General Price Level, Investor
preference; trend, fashion etc. act as fund manager.
• When Investors invest some money in mutual fund, the invested
amount is converted into units at prevailing price of fund
(generally called NAV- Net Asset Value), which are declared on
daily working basis.
• If the value of units that is NAV increases that would be
appreciation in the invested amount and if it decrease the value
of invested amount decreases.

4. Working of Mutual Fund

8. Types of Mutual Fund
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units at
Net Asset Value ("NAV") related prices. The key feature of open-end schemes is
liquidity.
2. Close - Ended Schemes:
These schemes have a pre-specified maturity period. One can invest directly in
the scheme at the time of the initial issue. Depending on the structure of the
scheme there are two exit options available to an investor after the initial offer
period closes.
Investors can transact (buy or sell) the units of the scheme on the stock exchanges
where they are listed. The market price at the stock exchanges could vary from the
net asset value (NAV) of the scheme on account of demand and supply situation,
expectations of unitholder and other market factors.
Alternatively some close-ended schemes provide an additional option of selling
the units directly to the Mutual Fund through periodic repurchase at the schemes
NAV; however one cannot buy units and can only sell units during the liquidity
window. SEBI Regulations ensure that at least one of the two exit routes is provided
to the investor.

9. 3. Interval Schemes:
Interval Schemes are that scheme, which combines
the features of open-ended and close-ended
schemes. The units may be traded on the stock
exchange or may be open for sale or redemption
during pre-determined intervals at NAV related prices.

11. Overview of existing schemes existed in
mutual fund category: BY NATURE
• Equity fund:These funds invest a maximum part of their corpus into
equities holdings. The structure of the fund may vary different for different
schemes and the fund manager’s outlook on different stocks. The Equity
Funds are sub-classified depending upon their investment objective, as
follows:
• Diversified Equity Funds
• Mid-Cap Funds
• Sector Specific Funds
• Tax Savings Funds (ELSS)
• Equity investments are meant for a longer time horizon, thus Equity funds
rank high on the risk-return matrix.

12. • Debt funds:
• The objective of these Funds is to invest in debt papers. Government authorities,
private companies, banks and financial institutions are some of the major issuers of
debt papers. By investing in debt instruments, these funds ensure low risk and provide
stable income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as
Government of India debt papers. These Funds carry zero Default risk but are
associated with Interest Rate risk. These schemes are safer as they invest in papers
backed by Government.
• Income Funds: Invest a major portion into various debt instruments such as bonds,
corporate debentures and Government securities.
• MIPs: Invests maximum of their total corpus in debt instruments while they take
minimum exposure in equities. It gets benefit of both equity and debt market. These
scheme ranks slightly high on the risk-return matrix when compared with other debt
schemes.
• Short Term Plans (STPs): Meant for investment horizon for three to six months. These
funds primarily invest in short term papers like Certificate of Deposits (CDs) and
Commercial Papers (CPs). Some portion of the corpus is also invested in corporate
debentures.

13. • Liquid Funds: Also known as Money Market Schemes, These funds
provides easy liquidity and preservation of capital. These schemes
invest in short-term instruments like Treasury Bills, inter-bank call
money market, CPs and CDs. These funds are meant for short-term
cash management of corporate houses and are meant for an
investment horizon of 1day to 3 months. These schemes rank low on
risk-return matrix and are considered to be the safest amongst all
categories of mutual funds.
• Balanced funds:
• As the name suggest they, are a mix of both equity and debt funds.
They invest in both equities and fixed income securities, which are in
line with pre-defined investment objective of the scheme. These
schemes aim to provide investors with the best of both the worlds.
Equity part provides growth and the debt part provides stability in
returns.
Further the mutual funds can be broadly classified on the basis of
investment parameter viz,
Each category of funds is backed by an investment philosophy, which is
pre-defined in the objectives of the fund. The investor can align his
own investment needs with the funds objective and invest accordingly.

14. By investment objective:
• Growth Schemes: Growth Schemes are also known as equity schemes. The aim
of these schemes is to provide capital appreciation over medium to long term.
These schemes normally invest a major part of their fund in equities and are
willing to bear short-term decline in value for possible future appreciation.
• Income Schemes: Income Schemes are also known as debt schemes. The aim
of these schemes is to provide regular and steady income to investors. These
schemes generally invest in fixed income securities such as bonds and
corporate debentures. Capital appreciation in such schemes may be limited.
• Balanced Schemes: Balanced Schemes aim to provide both growth and income
by periodically distributing a part of the income and capital gains they earn.
These schemes invest in both shares and fixed income securities, in the
proportion indicated in their offer documents (normally 50:50).
• Money Market Schemes: Money Market Schemes aim to provide easy liquidity,
preservation of capital and moderate income. These schemes generally invest
in safer, short-term instruments, such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money.

15. Other schemes
• Tax Saving Schemes:
• Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from
time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity
Linked Savings Scheme (ELSS) are eligible for rebate.
• Index Schemes:
• Index schemes attempt to replicate the performance of a particular index such as the
BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those
stocks that constitute the index. The percentage of each stock to the total holding will
be identical to the stocks index weightage. And hence, the returns from such schemes
would be more or less equivalent to those of the Index.
• Sector Specific Schemes:
• These are the funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds
are dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time.

16. Types of returns
• Income is earned from dividends on stocks and interest on bonds. A
fund pays out nearly all income it receives over the year to fund
owners in the form of a distribution.
• If the fund sells securities that have increased in price, the fund has a
capital gain. Most funds also pass on these gains to investors in a
distribution.
• If fund holdings increase in price but are not sold by the fund
manager, the fund's shares increase in price. You can then sell your
mutual fund shares for a profit. Funds will also usually give you a
choice either to receive a check for distributions or to reinvest the
earnings and get more shares.

17. Pros & cons of investing in mutual funds:
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by
well qualified professional. Investors purchase funds because they do not have the time or the
expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive
way to make and monitor their investments.
2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the
investors risk is spread out and minimized up to certain extent. The idea behind diversification is to
invest in a large number of assets so that a loss in any particular investment is minimized by gains in
others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to
reducing transaction costs, and help to bring down the average cost of the unit for their investors.4.
Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as
and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available
instruments in the market, and the minimum investment is small. Most AMC also have automatic
purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

18. Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesn’t perform in neither the
market, as their management is not dynamic enough to explore the
available opportunity in the market, thus many investors debate over
whether or not the so-called professionals are any better than mutual fund
or investor him self, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry &
exit load which they charge from an investors, at the time of purchase. The
mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies,
high returns from a few investments often don't make much difference on
the overall return. Dilution is also the result of a successful fund getting too
big. When money pours into funds that have had strong success, the
manager often has trouble finding a good investment for all the new
money.
4. Taxes - when making decisions about your money, fund managers don't
consider your personal tax situation. For example, when a fund manager
sells a security, a capital-gain tax is triggered, which affects how profitable
the individual is from the sale. It might have been more advantageous for
the individual to defer the capital gains liability.

19. Risk Involved in Mutual Fund
• THE RISK-RETURN TRADE-OFF
• The most important relationship to understand is the risk-return trade-off. Higher
the risk greater the returns/loss and lower the risk lesser the returns/loss.
• Hence it is up to you, the investor to decide how much risk you are willing to take.
In order to do this you must first be aware of the different types of risks involved with your
investment decision.
• MARKET RISK:
• Sometimes prices and yields of all securities rise and fall. Broad outside influences
affecting the market in general lead to this. This is true, may it be big corporations or
smaller mid-sized companies. This is known as Market Risk. A Systematic Investment
Plan (“SIP”) that works on the concept of Rupee Cost Averaging (“RCA”) might help
mitigate this risk.
• CREDIT RISK:
• The debt servicing ability (may it be interest payments or repayment of principal) of
a company through its cash flows determines the Credit Risk faced by you. This credit risk
is measured by independent rating agencies like CRISIL who rate companies and their
paper. An ‘AAA’ rating is considered the safest whereas a ‘D’ rating is considered poor
credit quality. A well-diversified portfolio might help mitigate this risk.

20. • INFLATION RISK:
• Things you hear people talk about: “Rs. 100 today is worth more than Rs. 100 tomorrow.” “Remember the time when a bus ride costed 50
paise?”
• “Mehangai Ka Jamana Hai.”
• The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions
to protect their capital but end up with a sum of money that can buy less than what the principal could at the time of the investment. This happens
when inflation grows faster than the return on your investment. A well-diversified portfolio with some investment in equities might help mitigate
this risk.
• INTEREST RATE RISK:
• In a free market economy interest rates are difficult if not impossible to predict. Changes in interest rates affect the prices of bonds as well as
equities. If interest rates raise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate this risk.
• POLITICAL/GOVERNMENT POLICY RISK:
• Changes in government policy and political decision can change the investment environment. They can create a favorable environment for
investment or vice versa.
• LIQUIDITY RISK:
• Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity Risk can be partly mitigated by
diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities.

21. Mutual Funds investment procedure
Indicate whether you are a First Time Investor/ Existing Investor.
Visit official website of KRA and check whether you are KYC compliant or not.
You must submit this KYC status.
Provide your details like name, address, etc.
Submit Bank account details and copy of “Cancelled Cheque”.
Once documents are accepted by Mutual Fund Company, you may start
making investment.
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- This presentation may be used with the permission of SEBI and only for non-profit awareness programs.

22. Investment Modes in Mutual Funds
• One time investment.
• Usually, large sum of money is invested in one go.
• Investor faces risk of volatility in markets.
Lump-sum
Investment
• Staggered Investment.
• Period of commitment - 6 months, 1 / 3 / 5 years.
• Specific intervals - monthly, quarterly, half-yearly.
• Made on specific dates e.g. 1st, 5th, 10th, 15th of
every month.
Systematic
Investment
Plan (SIP)
22
- This presentation may be used with the permission of SEBI and only for non-profit awareness programs.

23. Investment Modes in Mutual Funds
Direct Mutual Fund
• Directly offered by fund house.
• No involvement of third party
agents – brokers or
distributors.
• No commissions and
brokerage.
• Have low Expense ratio
(because of no commissions).
• Have high NAV.
• Return is higher due to a lower
expense ratio
Regular Mutual Fund
• Bought through an
intermediary.
• Intermediaries can be brokers,
• advisors or distributors.
• Commissions and brokerage paid.
• High Expense ratio as there
are commissions to pay.
• Low NAV.
• Return is lower due to a higher
expense ratio
- This presentation may be used with the permission of SEBI and only for non-profit awareness programs.

24. Mutual Fund Plans – Growth vs Dividend Options
18
• Gains made in portfolio are retained and reflected in NAV.
• Realized profit/loss is treated as capital gains or loss.
• No increase or decrease in number of units, except if units
are purchased or sold, by the investor.
Growth
Option
• Fund declares dividend from realized profits.
• Amount and frequency varies and depends upon distributable
surplus.
• NAV falls after dividend payout to the extent of dividend paid.
Dividend
Payout
Option
• Dividend is re-invested in same scheme by buying additional
units at ex-dividend NAV.
• Number of units standing to the credit of the investor,
increases each time a dividend is declared, and reinvested
back into the scheme.
Dividend
Reinvestment
Option
- This presentation may be used with the permission of SEBI and only for non-profit awareness programs.

25. How to check information about
the Mutual Funds (Offer Document)?
• Contains generic and statutory information of
mutual fund.
• Contains financial information of mutual fund.
• Lays down rights of investor.
• Other additional information.
Statement
of additional
information
(SAI)
• Scheme type (open or closed end).
• Investment objective.
• Asset allocation.
• Investment strategies.
• Terms with regard to liquidity.
• Fees and expenses.
• Other information relating to the scheme.
Scheme
information
document
(SID)
25
- This presentation may be used with the permission of SEBI and only for non-profit awareness programs.

26. NAV
• The performance of a
particular scheme of a Mutual
Fund is denoted by Net Asset
Value (NAV). In simple words,
NAV is the market value of the
securities held by the scheme.
The NAV per unit is the market
value of securities of a
scheme divided by the total
number of units of the scheme
on any particular date.

27. Entry and Exit load
• Entry Load is a percentage
of fee levied on the
purchase of a mutual fund
scheme. The levying of
entry load reduces the
investors' investment.
• Exit load is levied as a
percentage amount when
the investor wishes to exits
or redeem one's mutual
fund investments before the
otherwise stipulated period.

28. Exchange Traded (ETF)
• Exchange Traded Fund. A fund that tracks an index, but can be traded like a stock.
ETFs always bundle together the securities that are in an index; they never track
actively managed mutual fund portfolios (because most actively managed
funds only disclose their holdings a few times a year, so the ETF would not know
when to adjust its holdings most of the time).
• Investors can do just about anything with an ETF that they can do with a normal
stock, such as short selling. Because ETFs are traded on stock exchanges, they can be
bought and sold at any time during the day (unlike most mutual funds).
Their price will fluctuate from moment to moment, just like any other stock's price,
and an investor will need a broker in order to purchase them, which means that
he/she will have to pay a commission.
• On the plus side, ETFs are more tax-efficient than normal mutual funds, and since
they track indexes they have very low operating and transaction costs associated with
them. There are no sales loads or investment minimums required to purchase an ETF.
The first ETF created was the Standard and Poor's Deposit Receipt (SPDR,
pronounced "Spider") in 1993. SPDRs gave investors an easy way to track the S&P
500 without buying an index fund, and they soon become quite popular.
•
Read more: http://www.investorwords.com/1755/ETF.html#ixzz2GPkRjx3Y

29. Mutual Funds – Investment Modes
Lumpsum
 One time bulk investments (like salary Bonus, maturity of the
products)
 Minimum amount Rs. 5,000 approx
SIPs
• Regular Investments with fixed amount from
time to time
• Minimum amount to start is Rs. 500/-
• Buy More units @ low Price & Buy Fewer
units @ High Prices

30. Transactions in Mutual Funds
• Purchase
• One time (Min Rs 5000)
• SIP (Systematic Investment Plan) (Min Rs 100-500)
• Periodic transfer from Bank account to Selected Scheme
• STP (Systematic Transfer Plan)
• Periodic transfer from One Scheme to Other Scheme
• Redemption
• SWP (Systematic Withdrawal Plan)

31. Mutual Fund Investment and wealth creation
• Those investors who do not want to take risks in directly investing in equities can
go through mutual fund route.
• Mutual Funds are those institutions that mobilizes funds from large sections of
public and invest them in securities and transfer the benefits to the investors.
• Systematic Investment Plan (SIP) of Mutual Funds help salaried class and others
to invest a fixed sum regularly, say, every month and participate in the wealth
creation process.

32. • Disciplined Saving
• Flexibility
• Long term Gains
• Convenience
Benefits of SIP

33. • A Systematic Investment Plan (SIP), more popularly known as SIP,
is a facility offered by mutual funds to the investors to invest in a
disciplined manner. SIP facility allows an investor to invest a fixed
amount of money at pre-defined intervals in the selected mutual
fund scheme.
• The fixed amount of money can be as low as Rs. 500, while the
pre-defined SIP intervals can be on a
weekly/monthly/quarterly/semi-annually or annual basis.
• By taking the SIP route to investments, the investor invests in a
time-bound manner without worrying about the market dynamics
and stands to benefit in the long-term due to average costing and
power of compounding.
What is SIP?

34. Systematic Investment Plan
Advantages of investing through SIP are:
Discipline: Stay focused, invest regularly, and
maintain discipline
Power of Compounding: The larger the period,
higher the return
Rupee Cost Averaging: Investment at regular
intervals over time enable to buy more units when
the price is lower
Convenience : Through giving an ECS mandate to
your banker.

35. Merits of SIP over Lumpsum Investment
Lumpsum
Month
Monthly
Investment NAV Units Purchased
January 12000 10 1200
Feburary
March
April
May
June
July
Aug
Sep
Oct
Nov
Dec
Total 12000 11 1200
Current Market
Price of
Investment 13200

36. MF SIP – Route to wealth creation
SIP
Month
Monthly
Investment NAV Units Purchased
January 1000 10 100.00
Feburary 1000 9 111.11
March 1000 8.5 117.65
April 1000 9 111.11
May 1000 10.1 99.01
June 1000 8.5 117.65
July 1000 8.25 121.21
Aug 1000 8.75 114.29
Sep 1000 9.25 108.11
Oct 1000 10.1 99.01
Nov 1000 9 111.11
Dec 1000 11 90.91
Total 12000 1,301.16
Current Market
Price of
Investment 14312.78516

38. Risk-o-meter and its importance
• Risko-meter - Introduced in 2015, riskometer for mutual funds is a tool to assign risk levels associated with
various mutual fund scheme.
• The riskometer methodology of equity funds factors in three parameters - market capitalisation,
volatility and impact cost (liquidity) to assign risk grades. A risk score is assigned to each of these
parameters.
“For example, a fund investing a higher portion of its assets in mid caps and small caps will earn a
higher risk score on the market capitalisation parameter. Similarly, funds whose underlying
investments are more volatile and less liquid will attract higher risk scores on those two parameters,
respectively.”
These three risk scores are then aggregated through a simple average to arrive at the fund's overall risk score,
which forms the basis of bucketing it into one of the six risk labels (Low, Low to Moderate, Moderate,
Moderately High, High and Very High).
Likewise, for debt funds, risk factors comprise credit risk, interest-rate risk and liquidity risk.

39. Risk-o-Meter and its importance
Six levels of risk for mutual fund
schemes:
i. Low Risk
ii. Low to Moderate Risk
iii. Moderate Risk
iv. Moderately High Risk
v. High Risk and
vi. Very High Risk
Importance of Risk-o-meter :
- Helps align risk that a fund carries with
the risk profile of the investor.
- Equity as asset class: Volatile: High risk
- Debt as asset class: Stable: Low risk
- Hybrid: Moderate: Depends on
allocation and concentration
39
- This presentation may be used with the permission of SEBI and only for non-profit awareness programs.

40. Meaning of Net Asset Value (NAV)
• Net Asset Value (NAV) is the market value of all securities held by the
mutual fund scheme. You would find the performance of a mutual
fund scheme denoted by NAV or the Net Asset Value.
• NAV, in simple terms, is the price you pay for the units of the mutual
fund scheme. Generally, mutual fund units begin with a unit-cost of
₹10 and it rises as the fund’s assets under the management grow.
• Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of
outstanding units

41. NAV Explanation
• If you invest Rs 5,000 in a mutual fund with a net asset value of Rs
500, then you can purchase 10 units of the mutual fund.
• For example, you put Rs 1 lakh in Mutual Fund Scheme A and Mutual
Fund Scheme B. The NAV of mutual fund scheme A is Rs 10 and that
of mutual fund scheme B is Rs 20.
• You have units of mutual fund scheme allocated as follows:
• Mutual Fund Scheme A : Rs 1,00,000 / Rs 10 = 10,000 units
• Mutual Fund Scheme B: Rs 1,00,000 / Rs 20 = 5,000 units.

42. NAV Explanation
• When the value of the securities in the fund increases, the NAV
increases. When the value of the securities in the fund decreases,
the NAV decreases. The NAV number alone offers no insight as to
how “good” or “bad” the fund may be.
• Investor can see the NAV on closing basis every trading day on
respective Mutual fund website or on AMFI website:

43. Fact Sheet and its utility
• A mutual fund fact sheet allows investor to be aware and up to date
on the key facts of a fund.
• A mutual fund fact sheet is a basic three-page document that gives an
overview of a mutual fund.
• For potential investors, this is a necessary and easy report to read
before investing.
“It's a great starting point when you're evaluating an investment,”
Sample FactSheet -
Sample Fact
Sheet

44. How to choose Mutual fund for Investment
• Think of your Investment horizon
• Check MF performance against benchmark over a period of time.
• Check MF performance vis a vis its categories of funds.
• Check whether MF performance is consistent over the years.
• Check Fund Manager Experience.
• Check AMC track record.
• Check fund’s Expense Ratio
• Read the Fact Sheet of MF and its various schemes.

45. Source-
• Sebi std. MF ppt
• NISM modules
• SBI mf