Untitled Quiz

Mutual Funds - Concept

• Mutual funds pool money from investors to invest in different markets and securities, aligning with agreed-upon investment objectives.
• Investors gain access to markets and professional management services unavailable otherwise.

Fund Structure

• Fund Sponsor: The initiating corporate entity.
• Trustees: Oversee fund management, acting as internal regulators.
• Asset Management Company (AMC): Manages investor money. Charges a fee.
• Depository: Stores and manages securities.
• Agent: Facilitates transactions between AMC and investors.
• Custodian: Holds and protects securities.

Structure of Mutual Funds in India

• Follows a 3-tier structure.
• Sponsor initiates the fund.
• Trustees ensure money is managed per objectives.
• AMC manages investor money.
• AMC charges a fee for services provided.

Sponsor

• A corporate body launching a mutual fund.
• Must have a sound track record and 5+ years' experience in financial services.
• Must meet SEBI requirements (professional competence, financial soundness, reputation).
• Contributes 40% of the AMC's net worth.

Trustee

• Appointed by the sponsor to act on behalf of the trust.
• Holds the fund's assets.
• Responsible for ensuring fund management aligns with stated objectives.
• At least 75% of trustees must be independent of the sponsor.
• Appoints the AMC.

Custodian

• Keeps custody of securities.
• Monitors corporate actions (rights, bonus, dividends).
• Participates in clearing and settlement through depositories.
• Responsible for deliveries and receipt of fund units.
• Must be separate from the sponsor.

AMC (Asset Management Company)

• Manages investor money.
• Charges a fee for services.
• Board of Directors must have a minimum of 50% independent directors
• Approved by SEBI.
• Follows SEBI rules and regulations.
• Manages schemes, buys and sells securities.

AMC - Continued

• Manages investor money daily.
• Cannot deal with a single broker beyond a certain limit.
• Cannot act as trustee for another mutual fund.
• Prepares offer documents.
• Appoints intermediaries (IFAs, distributors).
• Responsible for employee and service provider actions.

Registrar and Transfer Agents

• Appointed by the AMC.
• Process application forms.
• Issue unit certificates.
• Manage unit transfers.
• Maintain records.
• Process redemptions and issue dividends.

Fund Accountants

• Appointed by the AMC.
• Maintain proper books of account.
• Calculate the net asset value (NAV) daily.
• Monitor compliance with SEBI regulations.
• Prepare reports for unit holders and SEBI.
• Monitor custodian and other service provider performance.

Lead Manager

• Carries out intermediary activities.
• Develops and executes marketing campaigns.
• Attracts investors through meetings and exhibitions.
• Promotes sales and publicity.

Investment Advisors

• Analyze market conditions.
• Design investment strategies for the AMC.
• Paid based on the average weekly value of the fund's assets.

Legal Advisors

• Provide legal guidance on scheme planning and execution.

Auditors and Underwriters

• Appointed by the AMC to independently verify accounting activities.
• Underwrite issues generating additional income for mutual funds -require SEBI approval.

Income and Expenses

• Include interest, dividend income, realized capital gains,+ valuation gains
• Subtract realized capital losses, valuation losses, scheme expenses
• Used to calculate Net Asset Value (NAV).

Types of Funds

• Open-Ended Funds
• Close-Ended Funds
• Interval Funds

Open-Ended Funds

• Investors can enter/exit at any time (even after NFO).
• Additional units acquired/existing units sold—called a sale transaction.
• Returning units—called a repurchase transaction.
• Unit capital changes regularly.
• Examples in India include HDFC Equity Fund, SBI Bluechip Fund, ICICI Prudential Balanced Advantage Fund.

Close-Ended Funds

• Fixed maturity.
• Investors buy units only during the NFO.
• Post-NFO, units trade on a stock exchange.
• Listing on a stock exchange is mandatory.
• Examples in India include ICICI Prudential Growth Fund, SBI Tax Advantage Fund, and Mirae Asset Emerging Blue Chip Fund.

Interval Funds

• Combine features of both open-ended and close-ended funds.
• Largely close-ended but become open-ended at specific intervals.
• Units can be bought/sold only during these specific time intervals.
• Examples in India include Aditya Birla Sun Life Interval Income Fund, Nippon India Interval Fund, and UTI Quarterly Interval Fund.

Key Features of Interval Funds

• Limited Liquidity: Units can only be bought/sold at predetermined intervals.
• Investment Strategy: Can invest in illiquid assets.
• Asset Allocation: Focus on lower-risk assets (usually debt).
• Taxation: Tax treatment depends on asset allocation.

Who Should Invest in Interval Funds?

• Investors seeking exposure to unconventional assets.
• Low-to-moderate risk tolerance.
• Investment horizon aligns with fund intervals.

Actively Managed Funds

• Fund manager has flexibility in choosing investments (within broad objectives).
• Expenses are generally higher.
• Investors expect higher returns than the market.

Passive Funds

• Invest based on a specified index (e.g., S&P BSE Sensex).
• Mirror the index's performance.
• Not designed to outperform the market.

Exchange Traded Funds (ETFs)

• Passive funds.
• Replicate an index or benchmark (e.g., equity market index, commodity index).
• Units are issued in NFO, traded on stock exchanges.

Example of ETFs India

• Kotak Nifty PSU Bank ETF (tracks publicly owned banks).
• Nippon India ETF PSU Bank BeES (focuses on public sector banks).
• Bharat 22 ETF (diversified portfolio investing in various sectors).

NAV Calculation

• Formula used to calculate the net asset value per unit of a mutual fund.
• Values for stocks, bonds, money market instruments, dividends, interest earned, fees payable, and outstanding units are used.

Sale Price, Re-purchase Price, and Loads

• In open-ended schemes, sale price and repurchase prices were once higher/lower than the NAV.
• These loads ("entry load," "exit load") are no longer permitted.
• The sale price is the same as NAV.

Initial Issue Expenses

• Incurred during NFO.
• Once considered up to 6% of mobilized amount.
• Now borne by the AMC.

Recurring Expenses

• Expenses incurred in managing fund money.
• Affect NAV.
• SEBI limits the types of expenses and how much is charged to the scheme.

Measures of Returns (Simple Return)

• Formula to calculate percentage returns on an investment.

Annualized Return

• Used to compare returns from different-duration investments.
• Formula to calculate annualized simple return.

Compounded Annual Growth Rate (CAGR)

• Measures the average annual growth rate of an investment over a specific time period.
• Considers the effect of dividend reinvestment.

Portfolio Risk

• Risk related to the overall portfolio of assets held within a mutual fund.
• Standard deviation measures fluctuation in periodic returns.

Drivers of Risk (in a scheme)

• Portfolio Risk
• Portfolio Liquidity

Standard Deviation

• Measures the dispersion of returns around the average return.
• Indicates volatility and risk.

Total Risk

• Systematic Risk + Unsystematic Risk
• Systematic Risk - Market Risk (external to organization)
• Unsystematic Risk - Firm Specific Risk

Diversification

• Investing in diverse securities reduces specific risk, thereby reducing portfolio risk.

Beta

• Measures the systematic risk of a security (or scheme).
• Compares its volatility with the market's.
• Calculated via covariance between security and market, then dividing by variance of market.

Sharpe Ratio

• Measures risk-adjusted return.
• Formula: (Rp) - R(f)/ sigma(p)
• Higher Sharpe ratios indicate better performance.

Treynor Ratio

• Measures risk-adjusted return, using beta instead of standard deviation as the risk measure.

Jensen's Alpha

• Measures a fund manager's ability to outperform the market relative to its beta.

Tracking Error

• Measures consistency of a fund's outperformance relative to its benchmark.