Mutual funds

What is a mutual fund?

A mutual fund collects the savings from small investors, invest them in Govt. and other corporate securities and earn income through interest and dividends, besides capital gains.

Features of mutual funds

Ownership of the fund lies in the hands of the investors.

Management of funds is left in the hands of investment professionals who earn a fee for their services.

The pool of funds collected is invested in a portfolio of marketable securities.

The investors share in the fund is represented by “units”.

The unit value changes just like share market values and the unit value is called Net Asset Value(NAV).

The investment portfolio of the mutual fund is created according to the objective of the fund.

Definition

SEBI (mutual funds) Regulations, 1993, “ A fund established in the form of a

trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with the regulations.”

Organization of the fund

A sponsor institution to promote the fund.

A team of trustees to oversee the operations and to provide checks for the efficient, profitable and transparent operations of the fund.

An Asset Management Company (AMC) to actually deal with the funds.

Fee structure

Annual fee -1.25% of funds managed at the maximum.

Exceeds 100 crores – only 1%. Custodial fee, cost of dividend

warrants, fee for registration, asset management fee – cannot exceed 3% of the assets in the respective schemes each year.

Net Asset Value (NAV)

The NAV is the market price of each unit of a particular scheme in relation to all the assets of the scheme.

NAV = Market value of the investments * Value of each unit

Scheme size (corpus of fund)

Fund unit vs. Share

Represents investment in a particular co.

Risk is diversified. Net asset value. Genuine investors

Tax benefits

Represents investments in the parts of shares of a large no. of cos.

Risky Market value Genuine investors

and speculators No tax benefits

Types of funds Close-ended funds- The corpus and its division into units are prefixed. The duration is fixed. Once the period is over or the corpus is reached,

the door is closed for the investors. Publicly traded through stock exchanges and

generally no repurchase facility. The whole fund is available for the entire duration. At the time of redemption, the entire scheme is

liquidated and distributed among the unit holders. Attracts more tax from investors. If the market condition is not favourable, affects

the investors.

Open ended funds

There is free entry and free exit. Not publicly traded as they are not

listed in stock exchanges. Fund is ready to repurchase and resell

them on any working day. Objective is income generation. The prices are linked to NAV. Different prices for purchases and

sales. Redemption demands from investors at

any time.

On the basis of yield and investment pattern.

Income funds Pure growth funds Balanced funds Specialized funds Money market mutual funds (MMMfs) Taxation funds

Other classification

Leveraged funds Dual funds Index funds Bond funds Aggressive growth funds Off-shore mutual funds Property funds Fund of funds

Importance of mutual funds

Channelizing savings for investments Offering wide portfolio investment Providing better yields Rendering expertise service at low cost Providing research service Offering tax benefits Introducing flexible investment schedule Providing greater affordability and liquidity Simplified record keeping Supporting capital market Promoting industrial development Acting as substitute for IPOs Reducing the marketing cost of new issues Keep the money market active

Risks

Market risks Scheme risks Investment risks Business risks Political risks

Facilities available to investors

Repurchase facilities Reissue facilities Roll over facilities Lateral shifting facilities

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