MUTUAL FUNDS

Concept
A Mutual Fund is a trust that pools the 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 securities.
The income earned through these investments and the
capital appreciation realized are shared by its unit
holders in proportion to the number of units owned by
them.
Mutual Fund Operation
Flow Chart
Investors
Fund
Securities
Return
Pool their money in
Which is invested
in
That generates
Given back to
Advantages of Mutual Funds
Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Choice of schemes
Tax benefits
Well regulated
Mutual funds can be classified on three parameters:
1) On the basis of structure.
2) On the basis of investment objective.
3) On the basis of special schemes.
TYPES OF MUTUAL FUNDS
Type of
Mutual Fund
Schemes
Structure
Investment
Objective
Special
Schemes
Open Ended
Funds
Close Ended
Funds
Growth Funds
Income Funds
Balanced Funds
Money Market
Funds
Industry Specific
Schemes
Index
Schemes
Sectoral
Schemes
On the basis of Structure
Open ended Schemes
Closed ended Schemes.
OPEN ENDED SCHEMES
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
CLOSED ENDED SCHEMES
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.
Open-Ended anytime enter/exit
Close-Ended Schemes redemption after
period of scheme is over, listed
On the basis of growth objective
Growth funds
Income funds
Balanced Funds
Money Market funds
GROWTH FUNDS
Provide capital appreciation over the medium to
long- term.
Such schemes normally invest a major part of
their corpus in equities.
Such funds have comparatively high risks
INCOME FUNDS
Funds that invest in medium to long-term
debt instruments
Issued by private companies, banks,
financial institutions, governments and
other entities belonging to various sectors
(like infrastructure companies etc.)
Known as Debt / Income Funds
BALANCED FUND
These funds provide both growth and
regular income as these schemes invest in
debt and equity.
The NAV of these schemes is less volatile
as compared pure equity funds.
MONEY MARKET FUNDS
Money market / liquid funds invest in short-term
(maturing within one year) interest bearing debt
instruments.
These securities are highly liquid and provide safety
of investment, thus making money market / liquid
funds the safest investment option when compared
with other mutual fund types.
On the basis of Special Schemes
Industry Specific Schemes
Index Schemes
OTHER SCHEMES
Gilt Security Schemes
Funds of Funds
Domestic Funds
Tax Saving Schemes.
INDUSTRY SPECIFIC SCHEMES
Industry Specific Schemes invest only in the
industries specified in the offer document.
The investment of these funds is limited to
specific industries like Infotech, FMCG,
Pharmaceuticals etc.
INDEX SCHEMES
In this schemes, the funds collected by
mutual funds are invested in shares forming
the Stock Exchange Index.
Example- Nifty Index Scheme of UTI Mutual
Fund and Sensex Index Scheme of Tata
Mutual Fund.
Difference between Bank and Mutual Fund
Mutual Fund Balance
Sheet
Liabilities Assets
Unit Capital Investment in
Financial
Securities
Bank Balance Sheet
Liabilities Assets
Share Capital
Deposits
Loans and
Advances
Difference b/w Balance Sheets of MF and Bank
Organizational Structure of Mutual Fund
Fund Sponsor
Any person or corporate body that establishes the Fund
and registers it with SEBI.
Forms a Trust and appoints a Board of Trustees.
Appoints a Custodian and Asset Management
Company either directly or through Trust, in
accordance with SEBI regulations.
SEBI regulations also define that a sponsor must
contribute at least 40% to the net worth of the asset
management company.
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Trustees:
The Trust i.e. the mutual fund may be managed by a Board
of Trustees i.e. a body of individuals or a Trust Company i.e.
a corporate body.
Protector of unit holders interests.
2/3 of the trustees shall be independent persons and shall
not be associated with the sponsors.
AMC- Asset management Company or
Fund Manager-Functions
Taking investment decisions and invest in primary markets
and Secondary Markets
Corporate actions involving declaration of dividends, etc.
to compensate investors for their investments in units.
Information for pricing the units and arriving at net asset
value (NAV), the information about the listed schemes and
the transactions of units in the secondary market.
An AMC has to give feedback to the trustees about its fund
management operations and has to maintain a perfect
information system.
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The Trustee, as the Investment Manager of the
Mutual Fund, appoints the AMC.
The AMC is required to be approved by the
Securities and Exchange Board of India (SEBI)
to act as an asset management company of the
Mutual Fund.
At least 50% of the directors of the AMC is an
independent director who is not associated
with the Sponsor in any manner.
The AMC must have a net worth of at least 10
Crore at all times.
Custodian
The Custodian is appointed by the Board of Trustees.
Mutual funds run by the subsidiaries of the nationalized banks
have their respective sponsor banks as custodians like Canara
bank, SBI, PNB, etc.
Foreign banks with higher degree of automation in handling the
securities have assumed the role of custodians for mutual
funds.
RESPONSIBILITY OF CUSTODIANS:-
Receipt and delivery of securities, Holding of securities.
Collecting income, Holding and processing cost
Corporate actions etc
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Banker
Facilitates financial transactions,
Provides remittance facilities.
Registrar & Transfer Agent
Maintains records of unit holders accounts & transactions
Disburses & receives funds from unit holder transactions,
Prepares & distributes a/c settlements, Tax information,
handles unit holder communication, Provides unit holder
transaction services.
FREQUENTLY USED TERMS
Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme
minus its liabilities. The per unit NAV is the net asset value of the
scheme divided by the number of units outstanding on the
Valuation Date.
Sale Price
Is the price you pay when you invest in a scheme. Also called
Offer Price. It may include a sales load.
Repurchase Price
Is the price at which units under open-ended schemes are
repurchased by the Mutual Fund. Such prices are NAV related.
Redemption Price
Is the price at which close-ended schemes redeem their units
on maturity. Such prices are NAV related.
Sales Load
Is a charge collected by a scheme when it sells the units. Also
called, Front-end load. Schemes that do not charge a load
are called No Load schemes.
Repurchase or Back-end Load
Is a charge collected by a scheme when it buys back the units
from the unit holders.
Net Assets Value Calculation
Net Asset Value (NAV) = (Assets Debts) / (Number of
Outstanding units)
where
Assets = Market value of the funds investments +
Receivables + Accrued Income.
Debts = Liabilities + Accrued Expenses
The market value of stocks and debentures is taken as the
closing price on the major stock exchange where it is listed.