chapter 19 mutual funds

7/27/2019 Chapter 19 Mutual Funds

1/20

Chapter 19

MUTUAL FUNDS

I ndirect Investing


2/20

OUTLINE

Entities in a Mutual Fund Operation

Equity Schemes

Hybrid Schemes

Debt Schemes

Open-ended Schemes versus Closed-ended Schemes

Regulation of the Investments of a Mutual Fund

Key Financial Numbers

Rating of Mutual Fund Schemes

Costs of Investing in a Mutual Fund

Options and Value-added Services

Pros, Cons, and the Choice


3/20

Entities In A Mutual Fund Operation

A mutual fund represents a vehicle for collective

investment. In India, the following entities are involved ina mutual fund operation.

Sponsor The sponsor of a mutual fund is like the promoter

of a company.Mutual Fund The mutual fund is typically constituted as a

trust under the Indian Trust Act.

Trustees Trustees are the internal regulators of the mutualfund entrusted with the job of protecting the interest of

unitholders. Appointed by the sponsor, the trustees are

typically a corporate body (a trustee company)


4/20

Entities In A Mutual Fund Operation

Asset Management Company (AMC) The AMC, referredto also as the Investment Manager, is a separate company

appointed by the trustees to run the mutual fund. The

AMC is compensated in the form of investment

management and advisory fees.

Custodian The custodian handles the investment back

office operation of a mutual fund.

Registrars and Transfer Agents The registrars and

transfer agents handle investor-related services.


5/20

Investment-Orientation Of Mutual Fund

Schemes

Mutual funds invest in three broad categories of financial

assets:

Stocks : Equity and equity-related schemes

Bonds : Debt instruments that have a maturity of more

than one year

Cash : Debt-instruments that have a maturity of less than

one year and bank deposits


6/20

Equity Schemes

Equity schemes (all called growth schemes) invest the bulk

of their corpus (8595 percent) in equity shares or equity-

related instruments and the balance in cash: Equity

schemes may be classified into the following sub-types:

Diversified Equity Schemes

Index Schemes

Sectoral Schemes

Mid-cap Schemes

Tax Planning Schemes


7/20

Hybrid Schemes

Hybrid schemes, also referred to as balanced schemes,invest in a mix of equity and debt instruments. Hybrid

schemes may be classified into the following sub-types

Equity-oriented Schemes

Debt-oriented Schemes

Variable Asset Allocation Schemes


8/20

Debt Schemes

Debt schemes also called income schemes invest in debt

instruments viz., bonds and cash. They may be divided

into the following sub-categories.

Gilt Schemes

Mixed Debt Schemes

Floating Rate Debt Schemes

Fixed Maturity Plans

Cash Schemes


9/20

Open-Ended Schemes vs. Closed-Ended

The subscription to a closed-ended scheme is kept open only

for a limited period whereas an open-ended scheme acceptsoffers units on a continuing basis.

A closed-ended scheme does not allow investors to withdraw

funds as and when they like, whereas an open-ended schemespermits withdrawal on a continuing basis.

A closed-ended scheme has a fixed maturity period whereas

an open-ended scheme has no maturity period.

Closed-ended schemes are listed on the secondary market

whereas open-ended schemes are ordinarily not listed.


10/20

Regulation Of The Investments Of A Mutual Fund

The investments of a mutual fund are subject to a set of regulations prescribed

by SEBI. The important ones are

A mutual fund, under all its schemes taken together, will not own more than

10 percent of any companys paid up capital carrying voting rights.

A scheme shall not invest more than 15 percent of its NAV in debt

instruments issued by a single issuer which are rated not below investment

grade by an authorised credit rating agency. Barring certain exceptions, a scheme shall not invest more than 10 percent

of its NAV in the equity shares or equity related instruments of any onecompany.

A scheme shall not invest more than 5 percent of its NAV in unlisted equity

shares or equity related instruments in case of an open ended scheme and 10percent of its NAV in case of a close ended scheme.

Mutual funds shall mark all investments to market.


11/20


Asset Mix Allocation of the corpus of a scheme across three broad

asset categories viz., stocks, bonds, and cash.Example : 60 : 30 : 10

Net Asset Value (NAV) The actual value of a share / unit on any

business day.

Market value of the funds investments + Receivables +Accrued incomeLiabilitiesAccrued expenses

NAV =Number of shares or units outstanding

Repurchase and Reissue Price The repurchase and reissue price ofan open-ended scheme are closely linked to its NAV

Discount Closed-ended schemes typically trade at a discount over

their NAV


12/20


Rate of Return The periodic rate of return on a mutual fund scheme is:

NAV at the end NAV at the beginning Dividend paid during

of the period of the period the period

NAV at the beginning of the period

Ex-Mark The extent to which the return of a mutual fund is Explained by aparticular financial Market.

Beta Beta of a fund measures its price volatility relative to a particular Stock

market index.

Portfolio Turnover Ratio The churn in the portfolio:

Lower of purchase or sales during a given period

Portfolio turnover ratio =

Average daily net assets

Expense Ratio The annual recurring costs as a percentage of the net assets of the

scheme

+


13/20

Costs Of Investing

There are four costs associated with mutual fundinvesting:

Initial Issue Expenses

Entry Load

Exit Load

Annual Recurring Expenses


14/20

Rating Of Mutual Fund Schemes

CRISIL CRISIL ranks schemes in five categories, viz., Equity

Schemes, Debt Schemes, Gilt Schemes, Balanced Schemes, and

Liquid Schemes. The ranking is based on four criteria, viz., risk-

adjusted return of the schemes NAV, diversification of the portfolio,

liquidity, and asset size.

Value Research India Value Research India rates schemes in

different categories. Each scheme is assigned a risk grade and a

return grade and a composite measure of performance is calculated

by subtracting the risk grade from the return grade.

Economic Times Lipper The Economic Times, powered by Lipper,

evaluates mutual fund schemes using a return-risk ratio defined as

average return divided by standard deviation of return.


15/20

Options

With respect to a number of schemes, mutual funds offer the

following:

Dividend and Growth Options

Systematic Investment Plan

Systematic Withdrawal Plan

Value-Added Services

Redemption Over Phone

Triggers and Alerts

Cheque Book Facility

New Points of Purchase


16/20

Pros & Cons

Pros

Diversification

Professional Management

Liquidity

Assured Allotment Small Investment

Tax Advantages

Transparency

Cons

Cost

Lack of Thrill


17/20

Choice

Invest on your own if you:

Have fairly strong speculative instincts

Find the game of investing enjoyable

Have the time to manage your investments

Can earn superior returns

Invest through a mutual fund if you:

Have a small amount to invest

Hold fewer than five stocks Think that you need better advice on investing

Have difficulty in deciding when to sell

Find the paperwork relating to investments cumbersome.


18/20

SUMMING UP

A mutual fund represents a vehicle for collective investment.

In India, the following entitles are involved in a mutual fund

operation the sponsor, the mutual fund, the trustees, the AMC,

the custodian, and the registrars and transfer agents.

A mutual fund scheme may be a close-ended or an open-ended

scheme.

Mutual funds invests in three broad categories of financial

assets: stocks, bonds, and cash.

Depending on the asset mix, mutual fund schemes are classified

into three broad categories: equity schemes, hybrid schemes,

and debt schemes.


19/20

The investments of a mutual fund are subject to certain

regulations.

The key financial numbers of mutual fund schemes are:

asset mix, net asset value, repurchase price, reissue price,

rate of return, standard deviation, Ex-Mark, beta, gross

yield, portfolio turnover ratio, and expense ratio.

Mutual fund schemes are periodically evaluated by

independent institutions.

There are visible and invisible costs associated with mutual

fund investing.


20/20

Mutual funds offers various options and value-added

services to attract and retain customers.

Mutual funds offer the advantages of diversification,

professional management, liquidity, assured allotment,

tax savings, and transparency.

chapter 19 mutual funds

Documents