Mutual Funds PDF

MUTUAL FUNDS FACULTY: DR. RASHMI PARANJPYE MUTUAL FUNDS  A mutual fund is a trust that pools the savings & funds from a large number of investors and invests these savings in stocks, bonds and money market securities.  Units are issued to investors. What is a Mu...

MUTUAL FUNDS FACULTY: DR. RASHMI PARANJPYE MUTUAL FUNDS  A mutual fund is a trust that pools the savings & funds from a large number of investors and invests these savings in stocks, bonds and money market securities.  Units are issued to investors. What is a Mutual Fund (MF)? Common pool of funds contributed by investors and invested in accordance to the objectives. Investments are held in a trust of which the investors alone are the joint beneficial owners. Trustees oversee the management by investment manager. How does a Mutual Fund Work? Pool of investors money. Invested according to pre- specified investment objectives. Benefits accrue to those that contribute to this pool.  Classification of Mutual Funds Based on Based on Based on Investment Investment Structure Objective Style Open Ended Debt Passive Funds Funds Funds Equity Close Ended Active Funds Funds Funds Hybrid Funds  Classification - Based on Structure No fixed maturity date. Open Ended Accept continuous sale and re- Funds purchase requests. Transactions are NAV-based. Close Ended Run for a specific period. Offered in an NFO but are closed Funds for further purchases after NFO. Classification - Based on Investment Objective Invest in short- and long-term debt Debt Funds instruments. Aim to provide regular income. Equity Invest in equity securities. Aim to provide growth and capital Funds appreciation over long term. Invest in a combination of equity and Hybrid debt securities. Proportion of equity and debt may vary. Aim to provide for both Funds income and capital appreciation. Classification - Based on Investment Style Replicate a market index. Invest in same securities and in same proportion as that of index. Passive No active selection of any stock / sector. Expenses are lower. Funds Portfolio is modified every time index composition changes. Invests in securities and sectors that may offer a better return than the index. Actively manage the allocation to market Active securities and cash. May perform better or worse than the Funds market index. Incur a higher cost than passive funds. MUTUAL FUND SCHEMES Innovative Schemes - a. Tax saving schemes b. Sector specific schemes c. Index funds d. Gilt funds e. Real Estate funds f. Infrastructure funds ADVANTAGES OF MUTUAL FUNDS 1. Professional Management 2. Diversification 3. Low cost 4. Choice of schemes 5. Tax benefits 6. Liquidity 7. Transparency 8. Small investments 9. Advantages of stock market  HISTORY OF MFS IN INDIA  The mutual funds industry in India started with formation of Unit Trust of India, 1963.  It was an initiative of Government of India and RBI.  The development of MF industry in India can be studied in 4 phases PHASES OF MF INDUSTRY IN INDIA  First Phase - 1964-1987  Establishment of UTI  Second Phase - 1987-1993  Entry of Public Sector Funds  Third Phase - 1993-2003  Entry of Private Sector Funds  Fourth Phase - since February 2003  Repeal of the Unit Trust of India Act 1963 and its bifurcation into two separate entities, i.e., Specified Undertaking of the Unit Trust of India and the UTI Mutual Fund AMFI  Incorporated on 22nd August,1995  An apex body of all AMCs registered with SEBI  AMFI follows the principle of protecting & promoting the interests of MFs and unitholders  Disseminates information on mutual fund industry and undertakes research  Implements a certificate program of training  Interacts with SEBI  Develops a team of trained agents& implements a programme of training & certificates.  Disseminates information on MF industry & undertakes studies & research either directly or in association with bodies SOURCES OF INCOME OF MFS 1. Dividends 2. Interest 3. Profit on sale/ redemption of assets EXPENSES OF MUTUAL FUNDS 1. Management fees 2. Trusteeship fees 3. Staff cost 4. Office & administrative expenses 5. Registration & legal expenses 6. Commission to agents 7. Publicity expenses 8. Audit fees  NAV (Net Asset Value) The performance of a mutual fund scheme is denoted by its NAV per unit. NAV= ( Current Assets - Current Liabilities) / Number of outstanding units  Mutual Fund Plans Dividend Fund declares dividend from realized profits. Amount and frequency varies and depends upon Payout distributable surplus. NAV falls after dividend payout to the extent of Option dividend paid. Dividend is re-invested in same scheme by Dividend buying additional units at ex-dividend NAV. Reinvestm Number of units standing to the credit of the investor, increases each time a dividend is ent Option declared, and reinvested back into the scheme.  Investment Modes in Mutual Funds One time investment. Lump-sum Usually, large sum of money is invested in one go. Investment Investor faces risk of volatility in markets. Staggered Investment. Systematic Period of commitment - 6 months, 1/3/5 years. Investment Specific intervals - monthly, quarterly, Plan (SIP) half-yearly. Made on specific dates of every month. RUPEE COST AVERAGING  It is an investment technique where an individual invests a fixed amount of money at regular intervals, regardless of the market up and down.  In simple terms, it is a Systematic Investment Plan (SIP) which has the potential to help investors build wealth.  In this process one buys more units of a mutual fund when prices are low and fewer units when prices are high.  Over time, this strategy aims to reduce the impact of market volatility on overall investment. Dr. Ras hmi Para njpy e RUPEE COST AVERAGING  Priya invests a fixed amount of Rs 1,000 on the tenth of each month with a SIP in a mutual fund scheme.  She started investing in April of a particular year and the market went up for 8 months. Dr. Ras hmi Para njpy e RUPEE COST AVERAGING-GROWING MARKET Month Amount invested each Price of each unit No. of units month accumulated April 1000 15 66.66 May 1000 16.5 60.60 June 1000 18.3 54.64 July 1000 22 45.45 August 1000 24.6 40.65 September 1000 25 40 October 1000 28.1 35.59 November 1000 29 34.48 Total Rs 8000 378.07 Dr. Rashmi Paranjpye RUPEE COST AVERAGING – FALLING MARKET Month Amount invested Price of each unit No. of units each month accumulated April 1000 27 37.03 May 1000 25.5 39.21 June 1000 23 43.48 July 1000 21.6 46.29 August 1000 20.1 49.75 September 1000 18.5 54.05 October 1000 16 62.5 November 1000 15 66.67 Total Rs 8000 398.98 Dr. Rashmi Paranjpye RUPEE COST AVERAGING  Average cost per unit = Total amount invested / Total units accumulated  The average cost of buying each unit in growing market comes at a much lower Rs 21.16  If we assume that the markets fall during the 8 months, the average cost of each unit would come to Rs 20.05 Dr. Ras hmi Para njpy e REGULAR AND DIRECT PLAN  Every mutual fund scheme has direct and regular plans  Direct plan is bought from the AMC  Regular plans are bought through mutual fund distributors who provide advisory services, submission of KYC documents, helping with investment process REGULAR AND DIRECT PLAN  Consolidated Account Statement (CAS) is a single/ combined account statement which shows the details of transactions made by an investor during a month across all Mutual Funds and other securities held in their demat account(s).  The Total Expense Ratio (TER) is a measure of the total costs associated with managing and operating a mutual fund. These costs consist primarily of management fees and additional expenses, such as trading fees, legal fees, auditor fees, and other operational expenses. DIRECT VS. REGULAR PLANS Direct Plan Regular Plan Returns Higher returns Less returns than direct plan Intermediary No intermediary, Broker is present, who purchase directly from receives commission AMC Expense Ratio (TER) Lower expense ratio Higher expense ratio as commission is paid to third party NAV Higher, due to lower Lower, due to higher expense ratio expense ratio EXCHANGE TRADED FUNDS (ETFS)  ETFs are commonly traded as intraday shares through AMCs  These have the potential to yield higher returns ETF VS. INDEX FUNDS Features ETFs in India Index Funds in India Trading Offer greater flexibility, allowing Priced once a day at Flexibility buying and selling throughout the close of Indian the trading day at current market stock market prices Intraday Permit intraday trading, enabling No option of intraday Trading investors to capitalize on price trading fluctuations within the trading day Redemption Can be bought and sold on the Can only be redeemed process secondary market at market through the fund house prices, offering flexibility in at the applicable redemption closing NAV, limiting redemption options ETF VS. INDEX FUNDS Features ETFs in India Index Funds in India Management styles Passively managed, or Follow a passive actively managed management style funds allowing for diverse investment strategies Minimum investment Lower than ETF More than Index fund amount STRUCTURE OF MUTUAL FUND STRUCTURE OF MUTUAL FUND  1. Sponsor - An entity that has the right to set up a mutual fund  The eligibility criteria to become a sponsor are  The Sponsor must have made a profit in 3 out of the last five years, including the immediately preceding year.  The Sponsor must have five years of experience in financial services.  The net worth of the Sponsor must be positive for all the preceding five years. Out of the total net worth of the AMC, 40% must be participated in by the Sponsor. STRUCTURE OF MUTUAL FUND  2. Trust and Trustees -The role of the trustees is to maintain the investors’ trust and work on the fund’s growth. According to the SEBI regulations, Trustees are supposed to provide a report on the fund and the functioning of the AMC on a semi-yearly basis.  The Trustee is responsible for supervising the entire functioning of the AMC and regulating the mutual funds’ operations. Due to the rule of transparency, the AMC cannot float a new mutual fund scheme without the permission and approval of the Trust. STRUCTURE OF MUTUAL FUND  3. Asset Management Companies (AMC)  An AMC is responsible for floating various schemes of mutual funds in the market, keeping in mind the investors’ needs and the market’s nature.  4. Custodian  A Custodian is an entity responsible for the safekeeping of Securities. They are registered with SEBI and are responsible for transferring and delivering units and securities.  They manage the account of investment of the Mutual Fund, wherein investors can also track their investments and update their holdings.  Along with safekeeping, custodians also facilitate the collection of corporate benefits such as bonus issues, interest, dividends, etc. What is an Asset Management Company (AMC)? Investment manager of the mutual fund. Appointed by the trustees, with SEBI approval. Trustees and AMC enter into an investment management agreement. Required to invest seed capital of 1% of amount raised subject to a maximum of Rs.50 lakh in all open-ended schemes. Should have a net worth of at least Rs.50 crore at all times. AMC of one mutual fund cannot be an AMC or trustee of another fund. AMCs cannot engage in any business other than that of financial advisory and investment management STRUCTURE OF MUTUAL FUND  5. Registered Transfer Agents  RTAs act as the bridge between Fund Managers and Investors. RTAs are SEBI-registered entities that process mutual fund applications, assist with investor KYC, manage and deliver periodic investment statements or reports, update records of investors, and process investor requests.  6. Other Participants  Some other typical participants in the mutual fund structure are bankers, auditors, brokers, mutual fund distributors, etc. Brokers and distributors usually sell mutual fund units to prospective investors.  Systematic Investment Systematic Transfer Systematic Withdrawal Plan Plan Plan (SIP) (STP) (SWP) A systematic investment An STP is a plan that An SWP (Systematic plan (SIP) is an option allows investors to give Withdrawal Plan) allows where you invest a fixed consent to a mutual fund an investor to withdraw amount in a mutual fund at to periodically transfer a designated sum of money pre-defined regular certain amount / switch and units from the fund intervals. (redeem) certain units account at pre-defined from one scheme and regular intervals. invest in another scheme of the same mutual fund house. It is a disciplined Thus at regular intervals The investor can reinvest investment plan and rupee an amount/number of the redeemed cash in cost averaging helps reduce units you choose is another portfolio or use it impact of market volatility. transferred from one as a source of regular mutual fund scheme to income. another of your choice. Investing through SIP helps This facility thus helps in It is suitable for those who you create significant deploying funds at regular want fixed flow of income. wealth in the long-run with intervals. SWP help investors who small sums of money. require liquidity as it permits them to access  ASSETS UNDER MANAGEMENT (AUM)  It is the market value of assets which are managed by a mutual fund on behalf of investors. BOOKS  Modern Banking of India – Himalaya Publishing  Digital Banking – IIBF  Indian Financial System – Bharati Pathak  Modern Banking in India – Dr. Meena Goyal – Vidya Publishers