mutual fund types 1 final

8/13/2019 Mutual Fund Types 1 Final

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MUTUAL FUND


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CONTENTS

Meaning of Mutual Fund

History of Mutual Fund Flow chart of Mutual Fund

Types of Mutual Funds

Advantages of Mutual Fund Name of the companies who

launched various Mutual Funds


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WHATISMUTUALFUND?

A Mutual Fund is a trust that pools the savings of anumber of investors who share a common financial goal.

The money thus collected is then invested in capital

market instruments such as shares, debentures and othersecurities.

The income earned through these investments and thecapital appreciation realised are shared by its unit holdersin proportion to the number of units owned by them.

Thus a Mutual Fund is the most suitable investment forthe common man as it offers an opportunity to invest in adiversified, professionally managed basket of securities ata relatively low cost.


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History of the Indian Mutual Fund

Industry

The mutual fund industry in India started in

1963 with the formation of Unit Trust ofIndia, at the initiative of the Government of

India and Reserve Bank.

The history of mutual funds in India can bebroadly divided into three distinct phases:


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First Phase1964-87

Unit Trust of India (UTI) was established on

1963 by an Act of Parliament. It was set up

by the Reserve Bank of India andfunctioned under the Regulatory and

administrative control of the Reserve Bank

of India.

The first scheme launched by UTI was Unit

Scheme 1964. At the end of 1988 UTI had

Rs.6,700 crores of assets under

management.


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Second Phase1987-1993 (Entry of

Public Sector Funds)

1987 marked the entry of non- UTI, public sector

mutual funds set up by public sector banks andLife Insurance Corporation of India (LIC) and

General Insurance Corporation of India (GIC).

SBI Mutual Fund was the first non- UTI Mutual

Fund established in June 1987.


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Third Phase1993-2003 (Entry of Private

Sector Funds)

With the entry of private sector funds in 1993, a

new era started in the Indian mutual fund

industry, giving the Indian investors a wider

choice of fund families.

In 1993 was the year in which the first Mutual

Fund Regulations came into being, under whichall mutual funds, except UTI were to be

registered and governed.


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The flow chart below describes the working

of a mutual fund:


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TYPES OF MUTUAL FUNDs

MutualFunds

By MaturityPeriod

By InvestmentObjective

Equity

Income

Balance

fund

Money

market

Gilt fund

Index

fund

Close

ended

Open

ended


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Schemes according to Maturity Period

A mutual fund scheme can be classified into open-endedscheme or close-ended scheme depending on its maturity

period.

Open-ended

FundAn open-ended Mutual fund is one that is available for subscription and

repurchase on a continuous basis. These Funds do not have a fixed

maturity period.

close-endedFund

A close-ended Mutual fund has a stipulated maturity period e.g. 5-7

years. The fund is open for subscription only during a specified

period.


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Fund according to Investment Objective

A scheme can also be classified as growth fund, income

fund, or balanced fund considering its investment objective.

Growth / EquityOriented Scheme

The aim of growth funds is to provide capital appreciation

over the medium to long- term.Such funds have comparatively high risks.

These schemes provide different options to the investors

like dividend option, capital appreciation, etc.


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Income / Debt

Oriented Scheme

The aim of income funds is to provide regular and

steady income to investors.

Such schemes generally invest in fixed

income securities such as bonds, corporate

debentures, Government securities and

money market instruments.

Such funds are less risky compared to equity

schemes


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Balanced Fund

The aim of balanced funds is to provide both

growth and regular income as such schemesinvest both in equities and fixed income securities

in the proportion indicated in their offer

documents.

These are appropriate for investors looking for

moderate growth.


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Money Market

These funds are also income funds and their aim

is to provide easy liquidity, preservation of capital

and moderate income.

These schemes invest exclusively in safer short-

term instruments such as treasury bills,

commercial paper and government securities,

etc.These funds are appropriate for corporate and

individual investors as a means to park their

surplus funds for short periods.


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Gilt Funds

These funds invest exclusively in governmentsecurities.Government securities have no default

risk.

Index Funds

This schemes invest in the securities in thesame weightage comprising of an index.

This schemes would rise or fall in accordance

with the rise or fall in the index


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ADVANTAGESOFMUTUALFUNDS

Flexibility:The investments pertaining to the

Mutual Fund offers the public a lot of flexibility by

means of dividend reinvestment, systematic

investment plans and systematic withdrawal plans.

Affordability:The Mutual funds are available in

units. Hence they are highly affordable and due to

the very large principal sum, even the small

investors are benefited by the investment scheme.


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Liquidity:In case of Open Ended Mutual Fund

schemes, the investors have the option of

redeeming or withdrawing money at any point of

time at the current rate of net value asset.

Diversification:The risk pertaining to the Mutual

Funds is quite low as the total investment is

distributed in several industries and different stocks.

Professional Management:The Mutual Funds are

professionally managed. The experienced Fund

Managers pertaining to the Mutual Funds examine

all options based on research and experience.


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Potential of return:The Fund Managers of the

Mutual Funds gather data from leading economists

and financial analysts. So they are in a better

position to analyze the scopes of lucrative returnfrom the investments.

Low Costs:The fees pertaining to the brokerage,

and others is very low.

Regulated for investor protection:The Mutual

Funds sector is regulated by the Securities

Exchange Board of India (SEBI) to safeguard the

rights of the investor.


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Net Asset Value (NAV)

Net Asset Value is the market value of the assets ofthe scheme minus its liabilities. The per unit NAV isthe net asset value of the scheme divided by thenumber of units outstanding on the Valuation Date.

Sale PriceIs 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 a close-ended schemerepurchases its units and it may include a back-endload. This is also called Bid Price.

FREQUENTLYUSEDTERMS


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Redemption Price

Is the price at which open-ended schemes

repurchase their units and close-ended schemesredeem their units on maturity. Such prices are NAVrelated.

Sales Load

Is a charge collected by a scheme when it sells theunits. Also called, Front-end load. Schemes that donot charge a load are called No Load schemes.

Repurchase or Back-end Load

Is a charge collected by a scheme when it buysback the units from the unit holders.


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NAV:-

NAV is nothing but the total market value of allthe assets held in the mutual fund portfolio less the

liabilities, divided by all the outstanding units.

That amounts to nothing but the book value.

The NAV measures how much each share of amutual fund is worth. So essentially, the NAV of a

mutual fund is the cost of one share of the fund.


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HOWNAV ISCALCULATED?

The total assets of a mutual fund usually falls into

two categoriescash and securities. Securities

include stocks and bonds. So the total asset will

include the market value of all its cash, stocks,

bonds. Liquid assets, dividends to be received,interest accrued also need to be included in the

total assets.

At the same time, the mutual fund will have some

money that it will owe to some creditors. That is itsliabilities. There will be some expenses that has

accrued over time and yet to be paid, this also

needs to be included.


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Let us see that in a formula.

Net Asset Value (NAV) = (AssetsDebts) / (Number

of Outstanding units)

whereAssets = Market value of the funds investments +

Receivables + Accrued Income

Debts = Liabilities + Accrued Expenses


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As an example, assume there are two investors X

and Y who have invested in a mutual fund whichdecided to issue out units at Rs 1/-.

X invests Rs 100/- and Y invests Rs 200/-.

The total corpus of the mutual fund will be Rs 100 +

Rs 200 = Rs 300/- and X will get 100 units and Ywill get 200 units.

Now suppose the mutual fund manager invests

smartly over a year and makes the investment grow

and the corpus becomes Rs 800/-.


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The NAV will be calculated as :

NAV per share = (AssetsDebts) / ( Number of

Outstanding Units)

= (Rs 800/- 0) / (300)

= 2.67

The NAV is 2.67.

So Xs value of investments will be 100 units * 2.67 =Rs 267/- and

Ys value of investments will be 200 units * 2.67 = Rs

534/-.

In reality of course, there are liabilities and expenseratios to be taken care of.


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Top Mutual Funds Companies

ICICI PruUTI

SBI Mangum Emerging Fund

IDFC Premier Equity Fund

HDFCReliance Equity Opportunity Fund

Reliance Pharma Fund

SBI FMCG Fund

HDFC Balanced FundICICI Balanced Fund


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SummaryThe Mutual Fund Industry is a growth

industry

Mutual Funds cover a spectrum of InvestmentOptions

Start Investing Early & Systematically

We invest directly or through a Professional

Money Manager

mutual fund types 1 final

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