Mutual funds

MUTUAL FUNDS as an INVESTMENT vehicle

MUTUAL FUNDS as an INVESTMENT vehicle

K K JINDAL

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What is a mutual fund?What is a mutual fund?

A mutual fund is a common pool of money into which investors place their contributions that are to be invested in different types of securities in accordance with the stated objective

Each investor has a right to a proportional share of the assets of the fund and any income it earns

Company sells shares to the public and invests the proceeds in a pool of securities Jointly owned by the fund’s investors Invested according to the objective of the fund

Mutual Funds Mutual Funds

Operations Flow Chart

Operations Flow Chart

(Reference: amfiindia.com)

Fund StructureFund StructureFund Sponsor

Trustees

Asset Management Company

Depository

Custodian

Agent

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Advantages of Mutual FundsAdvantages of Mutual Funds

DiversificationProfessional ManagementEase of buying and sellingSmall amount of money required to open an accountMultiple withdrawal optionsDistribution or reinvestment of income and capital gainsSwitching privileges in fund familyMultiple services

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Disadvantages of Mutual FundsDisadvantages of Mutual Funds

Purchase and withdrawal costs

Management fees

Potential poor performance

No control over capital gains distribution

Complicated tax reporting issues

Potential market risk with all investments

Aggressive or unethical sales personnel

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Computing Net Asset Value

Computing Net Asset Value

For investors, the performance of their investment depends on what happens to the fund’s per share value, or net asset value (NAV)

NAV= Market Value of Assets – Liabilities

Number of Shares Outstanding

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Mutual Fund ReturnsMutual Fund Returns

Three sources of return:

Income distributions (ID)Bond interest, stock dividends

Capital gain distributions (CGD)Realized gains/losses from selling assets

Changes in NAV (NAV)From unrealized gains/losses from assets

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Closed-end and Open-end Funds

Closed-end funds Shares are issued by an investment company only

when the fund is originally set up After all original shares are sold you can only

purchase shares from another investor

Open-end funds Shares are issued and redeemed by the

investment company at the request of investors. Investors can buy and sell shares at the net asset

value.

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Load Vs. No-load FundsLoad Vs. No-load FundsMarketing a new mutual fund scheme involves initial expenses. These expenses are charged to the investors through loads and are recovered from the investors in different ways:

Front-end or entry load is charged to the investor at the time of his entry into the scheme.SEBI has since disallowed this load

Back-end or exit load is charged to the investor at the time of his exit from the scheme.

Deferred load is charged to the investor over a period of time.

Contingent deferred sales charge: Different amount of loads are charged to the investor depending upon the time period the investor has stayed with the fund. The longer he stays with the fund, lesser the amount of exit fund he is charged.

Very often, AMC’s do not charge any initial expenses to the investor in the IPO. These are hence are no-load funds. In no-load funds, the investors get units for the complete amount invested.

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Types of Mutual FundsTypes of Mutual Funds

Funds classified according to the type of security in which they investExamples:Stock FundsTaxable Bond FundsMunicipal Bond FundsStock and Bond FundsMoney Market Funds

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Common Stock FundsCommon Stock Funds

Most popular type of fundWide variety with different objectives and levels of riskGrowth Industry or sector fundsGeographic areas International or GlobalEquity Index funds

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Bond FundsBond FundsGenerally seek to generate current income with limited riskCan vary by maturity Short-term, Intermediate-term, Long-term

Can vary by type of bond Government Corporate Municipal International/Global Bond Index funds Infrastructure funds Life style fund

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Stock and Bond FundsStock and Bond Funds

Seek to provide a combination of income and value appreciation

Different namesBalanced fundsHybrid fundsFlexible fundsAsset Allocation funds

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Money Market FundsMoney Market Funds

Provide safe, current income with high liquidity

Invest in money market securitiesT-bills, Bank CD’s, Commercial paper,

etc.

Provide an alternative to bank deposits

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Risk-Return TradeoffRisk-Return Tradeoff

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145657-43351

41322Total

45200--45200Liquid/Money Market

65396-8256

4571I

ncome

23022 -149821524Growth

5955--5955Gilt

1761-12225

39E

LSS

4323-7903533

Balanced

    N

ature

TotalAssured ReturnC

lose EndOpen EndStructure

Assets Under Management as on February29, 2004

Amount in Rs. Crores

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Mutual Fund ProspectusMutual Fund Prospectus

Must be available to and should be reviewed by investorsContains:Fund’s investment objective Investment strategyPrincipal risks faced by investorsRecent investment performanceExpenses and fees

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Mutual Fund Investment StrategiesMutual Fund Investment Strategies

Choose in funds consistent with your objectives, constraints, and tax situationConsider index funds for a large portion of your fund portfolioWhen possible, invest in no-load funds with below-average expense and turnover ratiosInvest. Don’t speculate. Be regularOwn funds in different asset classes and consider life-cycle investing

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When should you sell?When should you sell?

Personal considerationsPortfolio rebalancing

Be aware of capital gains with selling fund shares

Fund considerationsChange in portfolio managerChange in investment styleFund is growing “too large” or “too fast”Persistent bad performance

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referencesreferences

Investments, Fifth Edition, William F. Sharpe

ICRA Money and Finance

www.mutualfundsindia.com

www.amfiindia.com

www.nseindia.com

www.moneycontrol.com

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Thank you