Download - Mutual funds
Prepared By:
Prof.Chhaya Patel
Mutual Funds
SMT.K.K.PATEL MBA/MCA COLLEGE, MEHSANA(818)
Emergence
Because financial market become sophisticated and
complex
In USA Mutual fund industry has overtaken banking
industry
Concept of MF
Common pool of money
Joint or “mutual” ownership
Units are the representation of ownership
Advantages
Expert & Professional Mgmt.
Diversification of Portfolio.
Reduction of Transaction Cost.
Liquidity.
Convenience & Flexibility.
Tax Benefits.
History
I First phase (1964-87)
UTI MF created under the UTI Act, 1963.
UTI had Monopoly from 1963-1987.
II Second phase (1987-93)
In 1987, Public Sector was opened.
SBI MF –The 1st bank sponsored MF, Nov.1987.
Canbank MF, LIC, GIC, Indian Bank, Bank of India, PNB
III Third phase (1993-2003)
SEBI got regulatory powers in 1993.
In 1993, Private Sector was opened.
SEBI (MF) Regulations, 1996.
IV Fourth phase (since 2003)
UTI bifurcated in two separate entities:
Specified Undertaking of UTI – assured return schemes.
UTI Mutual Fund Ltd.
Types of Funds
7
Asset-allocation fund -- Balanced fund in which changes are made in the stock
and bond percentage mix, based on the outlook for each market
Balanced funds -- Mutual funds that invest in both stocks and bonds, typically in
relatively equal proportions
Types of Funds
8
Capital appreciation funds -- Mutual funds that strive for maximum growth.
Although these funds can earn the greatest gains, they also can rack up the heaviest
losses. Also known as aggressive growth funds.
Closed-end funds -- Funds whose shares are traded on an exchange, similar to
stocks. The price per share doesn't typically equal the net asset value of a share.
Types of Funds
9
Equity income funds -- Mutual funds that favor investments in stocks
that generate income over growth. As a result, they can be less risky
than other types of stock funds.
•Fixed-income fund -- Another term for a mutual
bond fund. ...
•Front-end loads -- Sales commission paid to
purchase shares of mutual funds.
Types of Funds
10
General purpose money funds -- Mutual funds that invest largely in bank CDs
and short-term corporation called commercial paper.
Global funds -- Mutual funds that invest in both the U.S. and foreign countries. Also
known as world funds.
Government-only money funds -- Mutual funds that invest in treasury bills and
short-term loans to the U.S. government. These are the least risky money funds because
their investments are backed by Uncle Sam.
Types of Funds
11
Growth funds -- Mutual funds that invest in the stocks of well-established firms
that are expected to be profitable and grow for years to come.
Growth and income funds -- Mutual funds that own primarily blue-chip
stocks of well-established companies that pay out a lot of dividends to their
shareholders. These funds generally develop stock portfolios that balance the
potential for appreciation with the potential for dividend income.
Types of Funds
12
High-quality corporate bond funds -- Mutual funds that buy bonds issued
by the nation's financially strongest companies.
High-yield bond funds -- Risky bond mutual funds that invest in high-yield
bonds of companies with poor credit ratings. The bonds are rated below triple B by
Standard ST Poor's and Moody's. Also known as junk bond funds.
Types of Funds
13
Income funds -- Mutual funds that invest in higher-yielding stocks, but may own some
bonds. You get income first along with some growth. These funds usually invest in utility,
telephone, and blue-chip stocks.
Insured municipal bond funds -- Mutual funds that invest in insured bonds issued
by cities, towns, states, toll roads, schools, water projects, and hospitals. The interest income
is tax-free, and the bonds are insured against default by large private insurance companies,
such as American Municipal Pond Assurance Corp. (AMRAC) and Municipal Bond Insurance
Association (MBIA).
Types of Funds
14
Intermediate-term bond funds -- Mutual funds that invest in bonds
that mature in about 5 to 10 years. International bonds Debt instruments issued
by foreign governments or corporations.
International funds -- Mutual funds that invest in stocks or bonds of
worldwide companies.
Junk bond funds -- Mutual funds that invest in bonds issued by companies
or governments that are rated below BBB by Standard and Poor's or Moody's.
Also know as high-yield bond funds.
Types of Funds
15
Long-term bond funds -- Mutual funds that invest in bonds that mature in more
than 10 years
Money market mutual fund -- Mutual fund that invests typically in short-term
government and company loans and CDs. These tend to be lower-yielding, but less
risky than most other types of funds. Also known as money market funds or money
funds.
Municipal bond funds -- Mutual funds that invest in tax-exempt bonds is sued
by states and local governments
Types of Funds
16
No-load mutual fund -- Mutual fund that is sold without sales commission
Open-end funds -- Funds that permit ongoing purchase and redemption of fund
shares (mutual funds are open-end funds).
Regional funds -- of Mutual funds that invest in one specific region the globe
Short-term bond funds -- Mutual funds that generally invest in bonds that mature
in less than three years.
Types of Funds
17
Single-country funds -- Mutual funds or closed-end funds that invest in
one country.
Single-estate municipal bond funds -- Mutual funds that invest in the
bonds of a single state so that investors avoid paying both state and federal taxes
on their interest income.
Small company stock funds -- Volatile mutual funds that invest in
younger companies whose stocks are frequently traded on the over-the-counter
stock market.
Types of Funds
18
Socially responsible funds -- Mutual funds that invest in companies that
don't pollute the environment or sell arms. They will not own tobacco or alcohol
stocks, nor invest in companies with poor employee relations.
Specialty funds -- Funds that invest in one specific industry or industry
sector.
Taxable bond funds -- Bond mutual fund in which interest income is taxed
by Uncle Sam
Types of Funds
19
Tax-deferred investment -- An investment that is not taxed until money is
withdrawn, usually at retirement.
Tax-free bond funds -- Tax-free mutual funds that invest in municipal bonds issued
by states, cities, and towns.
Uninsured high-quality municipal bond funds -- Mutual funds that invest in
the least risky municipal bonds. These bonds are rated single A to triple A, but they are
not insured.
Types of Funds
20
Uninsured high-yield municipal bond funds -- Mutual funds that
pay the highest tax-free yields but invest in states or municipalities with lower
credit ratings.
U.S. government agency bonds -- Debt instruments issued by
federally sponsored agencies of the U.S. government.
U.S. Treasury bond funds -- Mutual funds that invest in U.S. Treasury
bonds and notes
Types of Funds
21
U.S. Treasury-only money funds -- Funds that invest in Treasury bills,
or T-bills, which are short-term I.O.U.s to the U.S. Treasury. These funds
typically pay the lowest yields but are considered the least risky money funds
World funds -- Mutual funds that invest in both the U.S. and foreign
countries. Also known as global funds.
Types of Mutual Fund Schemes
Functional Classification
Open-ended schemes
Closed-ended schemes
Interval scheme
Portfolio Classification
Income funds
Growth funds
Balanced funds
Money market mutual funds
Types of Mutual Fund Schemes… Geographical Classification
Domestic funds
Offshore funds
Others
Sectoral
Tax saving schemes
Equity-linked savings scheme (ELSS)
Pension Schemes
Special Schemes
Gilt funds
Load funds
Index funds
P/E ratio fund
Exchange traded funds
Mutual Fund Investors Residents including
Resident Indian Individuals
Indian Companies
Indian Trusts/ Charitable Institutions
Banks
Non-Banking Finance Companies
Insurance Companies
Provident Funds
Non-Residents including
Non-Resident Indians
Other Corporate Bodies
Foreign entities namely FIIs registered with SEBI
Foreign citizens/entities not allowed
Organization and Procedures
26
Organization
Sponsor
Trust
Asset Management Company
Custodian
Procedures
Sponsoring Organization
Forming Trust
Organization and Procedures
27
Procedures (Contd…)
Appointing Asset Management Company
Registration of Scheme with SEBI
Releasing Advertisement
Pooling Funds
Investment in Portfolios
Calculation of NAV
Distribution of Dividend (in the case of income funds)
Repurchase formalities
Asset Management Company
28
AMC is formed to manage the fund
Responsible to file documents with SEBI
Should have good track record
Board of Directors consists of representatives of sponsor also
Should prepare annual accounts in respect of each fund and publish
Compliance of SEBI guidelines
US-64
1st scheme of UTI Unit Scheme 1964.
LIC, SBI, other Scheduled banks, Foreign as well
Around 2 cr. investors.
Returns as high as 18% in 93-94
In 1992, debt based fund to one linked to equity
In 1997, Chidambaram pushed liberalisation
US-64 does not come under SEBI Regulations
In 1998, UTI crashed: new BJP-led government organised
Rs. 3500 crore bail-out
US-64…..
New Chairman P. S. Subramanyam appointed
Huge investments in K-10 scrips
UTI continued to buy shares even when prices crashed in
mid-2000
Rs. 34 crores investment in Cyberspace Infosys Ltd. at a huge
price of Rs. 930 per share
US-64….. Also invested in junk bonds like Pritish Nandy
Communications (Rs. 1.5 crores), Jain Studios (Rs. 5 crore),
Sanjay Khan’s Numero Uno International (Rs. 7.5 crores),
Malavika Spindles (Rs. 188 crores)
Chairman organised high profile propaganda campaign
promoting UTI at the same time leaking information to
large corporates
So, two month prior to freezing of dealings, Rs. 4,141
crores was redeemed (97% corporate investments:
repurchased at Rs. 14.20 when NAV was not more than Rs.
8)
US-64…..
Thus, small investors further lost Rs. 1300 crores
July 4, 2001, sales and purchase freezed for 6 months
BSE Sensex falls 114 points the next day
Declared dividend of 7%
M. Damodaran, joint secretary in banking division of finance
ministry declared as new UTI chief
US-64…..
Finance ministry rolls out Rs 300 crore rescue package
Investors can offer upto 3, 000 units for repurchase between
August 2001 and May 2003 at Rs. 10 (to be increased by 10
paise every month)
Govt. apoints 3 member committee headed by RBI deputy
governor S S Tarapore
US-64…..
Revamp the portfolio of various UTI schemes with three-
pronged strategy-avoid further losses, prevent market from
getting hit, make value of holdings go up
Exit scrips with marginal holdings and also those with heavy
weightage in sectors UTI is not so bullish on
Plan to set up more than one asset management companies to
handle different schemes
US-64…..
Three-tier structure
Malegam committee recommends strategic partner for UTI,
disposing off equity investments in assured return schemes
Requirement for UTI of $ 500 mn to $ 1 bn to stay solvent
Malegam committee report recommends RBI & LIC to convert
their holdings and form a sponsoring company
US-64…..
Government decides to provide cash assstance upto Rs. 5 billion
to UTI
Restructure equity-debt composition
UTI raises minimum units from 3, 000 to 5, 000 at repurchase
price or NAV, whichever is higher.
On 1st January 2002, US-64’s first NAV Rs 5. 81
2nd January, NAV drops to Rs 6
US-64….. As cost-cutting exercise, delist all schemes and sale and repurchase
through repurchase window
In June 2002, govt. gave guarantee for Rs 1, 000 crore in two
tranches. UTI reduce equity exposure by Rs 915 crore
Centre announces Rs 500 crore support to meet shortfall
In August 2002, another bail-out package of Rs 6, 000 crore for
US-64 and Rs 8561 crore for other assured return schemes
Tax concessions and 7-7.5% 10 year tax free bonds
In Sept. 2002, bifurcation of Trust into UTI-I and UTI-II
US-64…..
UTI-I: US-64 & assured return schemes with asset base of Rs 25, 000
cr (UTI Trustee Co.)
UTI-II: NAV-based schemes in excess of Rs 17, 000 cr (In Jan 2003,
handed to SBI, PNB, BOB & LIC) (UTI Asset Mgmt. Co.)
Splitting of US-64: Old US-64 and US-2002
M. Damodaran: CEO of UTI-II and admnistrator of UTI-I
US-64 issued on or before 3oth June 01, after trading on 28th January
2003, will be treated as tax-free, tradeable bonds with effect from 1st
June 2003 (Bonds maturing in May 2008: interest)
Secondary market trading in US 64 commences from 28th January
2003
Major Fund Houses Fortis
Birla Sunlife
Bank of Baroda
HDFC
ING Vysya
ICICI Prudential
SBI Mutual Fund
Tata
Kotak Mahindra
Unit Trust of India
Reliance
IDFC
Franklin Templeton
Sundaram Mutual Fund
Religare Mutual Fund
Principal Mutual Fund
Portfolio Management Services (PMS)
It is a hybrid service provided by portfolio managers, which
includes personalized stock and mutual fund investing
Discretionary & Non-discretionary Portfolio Managers
Eligibility Criteria
Appointment of Custodian
Application fees
Registration
Restriction as to placement of funds
Difference Between PMS & Mutual Fund
Degree of Customisation
Minimum Investment
Concept of Profit Sharing
Benefits of PMS
Professional Management
Risk Control
Convenience
Constant Portfolio Tracking
Transparency
The following portfolio reports are accessible online :
Performance Statements
Portfolio Holding Reports
Transactions Statements
Capital Gain / Loss Statements
Dedicated Relationship Manager
Choosing a PMS
Investment Philosophy: HSBC Strategic, Angel Bluechip
Scheme Benchmarks
Minimum Investment: Asia BNP Paribas-1cr.
Cost Structure
Frequency of Disclosure
Broking House
Real Estate Investment Trusts (REITs)/Real Estate Mutual Funds
(REMF)
A trust that uses investors’ money to purchase and manage
real estate
Trusts that are publicly traded companies that own, develop
and operate commercial properties. An association of
investors formed under trust agreement for the purpose of
real estate investment, which derive 90% of income for the
trust from real estate.
Characteristics of mutual fund structure for real
Estate Investment:
A highly desirable structured form to introduce real estate investing in
India.
Suggestion of a close ended or interval fund. (Can be open ended once
liquidity picks up)
NAV’s can be calculated on a quarterly basis.
Eligible Investments
Directly in real estate properties within India where lease rental
revenues are expected
Mortgage (housing lease) backed securities
Equity shares/ bonds/ debentures of listed/ unlisted companies
which deal in properties and also undertake property development
Buying & selling of real estate projects
Major Players
ICICI
HDFC
Kotak Mahindra
Kshitij
Tishman Speyer Properties, a US real estate company in
association with ICICI