Basic Of Mutual Fund

AMFI Certification Program

Mutual Funds

Conceptual Framework

What is a Mutual Fund ?

A mutual fund is a collective investment that allows many investors, with a common objective, to pool individual investments and give to a professional manager who in turn would invest these monies in line with the common objective.

Operation flow chart

FUND MANAGER

SECURITIES

RETURNS

INVESTORS

History of Indian Mutual Funds

Phase I (1964-87)Set up by RBI, de- linked later.Act of parliament First scheme US 64, still outside SEBI

purviewPhase II (1987-93) entry of PSU Banks/ FIs

SBI in 87, LIC in 89, Indian Bank in 90Phase III (1993-95) Entry of Private playersPhase IV (1993 onwards) SEBI regulation of

Mutual Funds

Types of Mutual Funds -

Wide Range of Choice

Types of Mutual Funds Schemes

By Constitution

By Investment Objective

By Nature of Investments

By Constitution

OPEN-END No fixed maturity Variable Corpus Not Listed Buy from and sell to

the Fund Entry/Exit at NAV

related prices

CLOSE-END Fixed Maturity Fixed Corpus Generally Listed Buy and sell in the

Stock Exchanges Entry/Exit at the

market prices

By Constitution

Load or non load funds

Tax exempt or non tax exempt

Nature of InvestmentsFinancial Assets (Equity/Debt/Money Market)Physical Assets (Metal/ Real Estate)

Investment objective / patterns

Growth - Equity Income - Debt Balanced - Equity and Debt Money Market - Liquid Debt Tax Saving - Equity Specialised - Equity Assured Return - Equity and Debt

Aggressive Growth Funds

Objective - Aggressive Capital Growth

Investment Pattern

EQUITY OF Less researched CompaniesSpeculative and momentum stocksSuitable for investors who are comfortable in

taking high risk.

Diversified Growth Funds Objective - Capital Growth Investment Pattern - Weightage

EQUITY of Well researched and high market cap

companiesDebtMoney market securitiesMinimum time recommended for investment to

deliver expected returns - 5 years +Suitable for investors looking at capital growth

over a longer period of time

Other variety of equity fundsSpecialised Funds

Sector FundsOffshore FundsSmall Cap Equity FundsOption Income funds - writes options

ELSS - Indian VarietyEquity Index FundsValue FundsEquity Income Funds - invest in co. with

higher dividend yields i.e. power/utilities

Other equity oriented funds ...

Hybrid FundsBalanced FundsGrowth & Income FundsAssets Allocation Funds

Commodity Funds

Real Estate Funds

Debt Funds

Diversified Debt Funds Focussed Debt Funds

Sector / Specialised / OffshoreMunicipal bonds / infrastructure cos bond fundsMortgaged backed

High yield debt funds Assured Return Funds - Indian variety Liquid Funds

Advantages of Mutual Funds

Why Mutual funds…?

Stock markets are very sophisticated

Free pricing and integration with world markets

Time , knowledge and luck

Substantial capital for diversification

Mutual Funds: A Packaged Product

Professional Management

Convenience

Tax Benefits

Liquidity

Diversification

Convenience

Easy Way to Invest

Reduces excessive paperwork

Outsourcing of expertise

Diversification

Portfolio of investments spreads out Risk

Attempts Minimises value erosion

Potential losses are shared with other investors

Liquidity

Open-ended: Assures liquidityAs liquid as the banks.

Close-ended:Buying and selling can be done through the stock exchange

Affordability

Provides an opportunity for a small investor Invest as less as an amount of

Rs.3000/Rs.500 and in multiples of

Rs.1000/100 depending on the Scheme

Wide Choice

Offers a VARIETYOF SCHEMES

Meet the investment needs of all Investors

Your needs

Short Term

Medium Term ( 1 to 3 years)(3 to 5 years)

Long Term

Banks / Liquid Funds

Debt or Debt Related Funds

Mix of Debt/Equity or funds with an appropriate mix (Balance)

Equity or Equity Related Funds

MF’s and Tax Benefits

Capital Gain Benefits - Section 112 (1)

Long term capital gain tax of 10% without indexation,or

Long term capital tax of 20% with indexation

Well regulated

Governed by Multiple agencies

MOF/ CLB/ ROC

SEBI

RBI

Trustees

Auditors

Board of Directors

SEBI

All Mutual Funds / AMC/ Trustee Companies to be registered with SEBI

Responsible for protecting investors interest and promote orderly growth of Mutual Fund Industry

Formulates regulations,monitors performance and conduct of Mutual funds and enforces compliance to regulations through reviewing reports and regular inspections

Reserve Bank of India & SE

RBI Dual supervision for bank sponsored

AMCsIssue concerning ownership bank

promoted AMC falls with RBI Stock Exchange (SE)

Close ended MF listed of SE. Needs to comply with listing guidelines.

Office of public Trustee

MF being public trustee - governed by Indian Trust Act , 1882

Trustee Co or Board of Trustee accountable to office of Public Trustee

Public trustees reports to Charity Comm.

Trustee and AMC to comply with Cos Act 1956

M in is try o f L a w & Ju s tice

C o m pa n y La w B o a rd (C L B )

D e p artm en t o f C om p an y A ffa irs

R e g is tra rs o f C om p a n ies (R O C )

Ministry of Finance

Supervises both SEBI and RBI

Ultimate policy making & supervising body

Appellate Authority for any disputes over SEBI guidelines

Investor’s rightsProportionate ownership in scheme’s assetsRights of information from TrusteeTo received dividend warrants, inspect major docs

(Trust deed, investment management agreement, R&T A Agreement, custodian services agreement

with 75% voting rights and approval of SEBI can close the scheme, change the AMC.

Rights of info for fundamental change in the scheme features and also an opportunity to redeem units without any load.

Receive annual report and a/c statement

Investor’s rights & ObligationsRights - Legal Limitations

Unit holder’s are not distinct from trust, they cannot sue trust.

Sponsor do not have any legal obligations (Limited to initial contribution)

No rights to prospective investorsObligations

Must read offer doc & AODBeware of risk factorsMust monitor investments regularly

Investor’s complaint redressal mechanism

Client Servicing

Compliance Officer

Investors cannot be protected by companies Act.

Mutual Fund - The Top Scorer

FDs FI Bonds MutualFunds

Accessibility Low Low High

Tenor Fixed (Medium) Fixed (Long) No Lock-in

Min. Invest. Rs. 10000 Rs. 5000 Rs. 500

Tax Benefits None 80L,88 None

Liquidity Low Very Low Very High

Convenience Medium Tedious Very High

Transparency None None Very High

The Offer Document

What is offer documents

Contains the details of scheme.

Filed with SEBI

Like Prospectus of an IPO

Close ended scheme - One Time

Open ended Scheme - Perpetual - kept updated from time to time.

Significance

Legal document that protects and governs the right of the investor to information

Is the primary vehicle for the investment decision

Is the operating document and describes the fundamental attributes of schemes.

One of the most important sources of information for the prospective investor

Is a reference document for the investor to look for relevant information at any time.

Mandatory Information• Details of the Sponsor• Description of the scheme and investment

objective/strategy• Terms of issue • Historical statistics• Investors’ Rights and Services

Key Information Memorandum that is distributed with the application form is an abridged version of the offer document.

Investment Options & Features • Options

•Growth

•Dividend and Dividend Reinvestment

•Plans

•Systematic Investment Plan - SIP

• Value Averaging Plan - VAP

• Systematic Withdrawal Plan - SWP

•Systematic Transfer Plan - STP

• Other

• Nomination facility

Who can invest ?

• Resident Indian Individuals

• Indian Companies

• Trusts / charitable institutions / PFs

• Banks/ FIs / NBFCs

• Insurance Companies

• NRIs/ OCBs/ FIIs

• Partnership firms etc.

NAV - COMPUTATION

NAV = Net assets of scheme / No of units Outstanding

i.e. Market value of investments+ Receivables+

Other accrued income+ Other assets- accrued

expenses- Other Payables- Other liabilities

No. of units outstanding as at the NAV date

Imp :

Day of NAV Calculation is known as valuation day

HOW NAV IS COMPUTED

• Market value of Equities - Rs.100 crore - Asset

• Market value of Debentures - Rs.50 crore - Asset

• Dividends Accrued - Rs.1 crore -Income

• Interest Accrued - Rs.2 crore - Income

• Ongoing Fee payable - Rs.0.5 crore - Liability

• Amt..payable on shares purchased -Rs.4.5 crore - Liability

• No. of units held in the Fund : 10 crore units

• NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10

= [153-5]/10

= Rs. 14.80

NAV - Other information•Open end funds to declare NAV daily

•NAV to be published at least weekly

•Close end Schemes (which are not listed) may publish NAV monthly/qt with prior approval from SEBI (MIP)

•NAV has to consider up to date transactions

•Non - recorded transactions not to affect NAV calculation by more than 2%

NAV

• Nav is influenced by

– Purchase and sale of Investment– Valuation of Investment– Other assets and Liabilities– Units sold or redeemed.

CHANGE IN NAV

FORMULA :

For NAV change in absolute terms =(NAV at end of period - NAV at beginning of period) * 100 NAV at beginning of period

For NAV change in annualised terms =( NAV change in % in absolute terms) * (365 / No. of days )

Loads

• Entry Load or front ended load

Paid at the time of purchase Sale Price = NAV / (1- Sales Load, if

any)

• Exit Load or back ended load

Paid at the time of exitRedemption Price = NAV/(1+ Exit Load)

• Contingent Deferred Sales Load (CDSL)– Deferred exit load depending on the period– Also known as deferred load

PRICING OF UNITS

•Sale price not greater than 107% of the NAV

•Re-purchase price to be not lower than 93% (95% for close-end funds) of the NAV

•Difference between the repurchase & sale price can not be more than 7% of the sale price

Sale Price

• Sale Price is the price at which units are sold to investors.

• Sale Price = NAV + Entry load• Formula for computation of Sale Price =

NAV/(1-Load)

Assuming an entry load of 2% in the earlier

NAV computation example

Sale Price = 14.80/(1- 0.02)

= 15.10

MUTUAL FUND ACCOUNTING & MATHEMATICS

Initial Issue ExpensesTransaction

CostEntry / Exit load

CDSC for no-load

schemes

FEES & EXPENSES

Annual Recurring ExpensesAMC Fee

Custodian Fee

Registry Exp.

Trustee Fee

Audit Fee

Mktg. & Selling Exp.

Brokerage Exp.

Others

Fees & Expenses• Initial Issue expenses

– For launching of the scheme– Can charge up to 6%

• Recurring Expenses – Mkt & selling exp including brokerage– Transaction cost– R&T cost– Custodian Fees– Audit fees etc – Investor Communication’s cost

Fees & Expenses

• Amc can charge Investment management fee to the fund on weekly avg. net assets.

• The limits are: (Subject to overall limit of 6%)– 1.25% for up to Rs.100 cr Of weekly avg net assets– 1% in excess of Rs.100 cr.– No Load schemes can charge an additional fee of 1%

Fees & Expenses

• Total Expenses that can be charged to the Fund ( excluding entry and exit loads):

Equity Debt– On the first Rs.100 cr 2.50% 2.25%– On the next Rs.300 cr 2.25% 2.00%– On the next Rs.300 cr 2.00 % 1.75%– On the balance assets 1.75% 1.50%

Based on average weekly net assets

MUTUAL FUNDS - FEES • Initial issue expenses

Charge to the scheme capped at 6% of the initial resources

raised under that scheme

• Entry/Exit Loads - Transaction costs

Sale price not greater than 107% / Re-purchase price not lower

than 93% (95% for close-ended schemes) of the NAV

• Contingent Deferred Sales Charge ( For No-Load Schemes)

Ceiling For redemption within 1year 4%

For redemption within 2years 3%

For redemption within 3years 2%

For redemption within 4years 1%

AMORTISATION

Initial Expenses amortisation for load schemes -• for close-ended schemes - on a weekly basis over the

period of the scheme • for open-ended schemes - annually over a period not

greater than 5 years • Un-amortised portion to be added to other assets for

computation of NAV• Amortisation not part of normal recurring expenses