basic of mutual fund
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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
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