WHAT IS A MUTUAL FUND?

A Mutual Fund is a trust that pools the savings of a number of investors who share a common investment objective What is Mutual Fund? A Mutual Fund is an investment vehicle that pools the money of several investors and invests it in different securities. Mutual Fund : A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). It gives the market returns and not assured returns.

Working of a Mutual Fund

INVESTORS Passed back to INVESTORS GET A BLEND OF LIQUIDITY RETURNS & SAFETY
MUTUAL FUND LARGE CORPORATE SPECIALISTS MANAGE

Pool their money with

RETURNS

FUND MANAGEMENT

Generate PORTFOLIO YIELDS HIGH RETURN TO MFs

Invest in

SECURITIES

INVEST IN BALANCED PORTFOLIO

BENEFITS OF MUTUAL FUNDS

Professional Management & Analysis Diversification & Divisibility Across Companies & Sectors Liquidity Entry & Exit at NAV Transparencys Regular disclosures Convenient Administration (Record Keeping) Low Costs of operations (Lower transaction cost) Choice of schemes. Well Regulated. (By SEBI)

Brief History
1964-UTI 1987- Public Sector banks, Insurance Companies SBI, Canbank, PNB LIC, GIC

1993- Private Sector Kothari Pioneer ( later merged with Franklin Templeton), J P Morgan, Morgan Stanley, George Soros and Capital International Still the largest is UTI- UTI Liquid Cash Plan has 8863 Cr Asset Size. Next is Birla Cash Plus at 8372. Standard Chartered Liquidity Manager Plus at 7910 Cr.

Organization of a Mutual Fund

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Notes
Sponsor: Establishes a MF, obtains Certificate of Registration from SEBI, forms a trust, appoints board of trustees & AMC, appoints Custodian Trustees: MF managed by body of individuals or a trust company (corporate body). Guardians of assets of Unitholders. Responsible. AMC: Investment Manager of Trust. Under the supervision of Board of Directors, Trustees, SEBI. Floates & manages different schemes. Mutual Fund: Formed under Indian Trusts Act, 1982. Invites subscriptions to units. Transfer agents: Issue and Redemption of units Custodian: For safekeeping of securities, participating in clearing system

Regulations
Governed by SEBI (Mutual Fund) Regulation 1996 All MFs registered with it, constituted as trusts ( under Indian Trusts Act, 1882) Bank operated MFs supervised by RBI too AMC registered as Companies registered under Companies Act, 1956 SEBI- Very detailed guidelines for disclosures in offer document, offer period, investment guidelines etc. NAV to be declared everyday for open-ended, every week for closed ended Disclose on website, AMFI, newspapers Half-yearly results, annual reports Select Benchmark depending on scheme and compare AMFI: a forum where mutual funds have been able to present their views, debate and participate in creating their own regulatory framework. the body that is consulted on matters long before regulations are framed, and it often initiates many regulatory changes that prevent malpractices that emerge from time to time. Receive Unit certificates within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. Receive dividend within 42 days of their declaration

Terminologies Demystified
Asset Allocation
Diversifying investments in different assets such as stocks, bonds, real estate, cash in order to optimize risk.

Fund Manager
The individual responsible for making portfolio decision for a mutual fund, in line with funds objective.

Fund Offer Document

Document with investment objectives, risk factors, expenses summary, how to invest etc.

Dividend Profits given to the investor from time to time.

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Growth Profits ploughed back into scheme. This causes the NAV to rise.

Terminologies Contd
NAV
Market value of assets of scheme minus its liabilities. = Net Asset Value No. of Units Outstanding on Valuation date

Per unit NAV

Entry Load/Front-End Load (0-2.25%)

The commission charged at the time of buying the fund. To cover costs for selling, processing

Exit Load/Back- End Load (0.25-2.25%)

The commission or charge paid when an investor exits from a mutual fund. Imposed to discourage withdrawals May reduce to zero as holding period increases.

Sale Price/ Offer Price

Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher than NAV)

Re-Purchase Price/ Bid Price

Price at which close-ended scheme repurchases its units

Redemption Price
Price at which open-ended scheme

Types of Mutual Fund Schemes

By Structure
Open-Ended anytime enter/exit Close-Ended Schemes listed on exchange, redemption after period of scheme is over.

By Investment Objective
Equity (Growth) only in Stocks Long Term (3 years or more) Debt (Income) only in Fixed Income Securities (3-10 months) Liquid/Money Market (including gilt) Short-term Money Market (Govt.) Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years)

Other Schemes
Tax Saving Schemes Special Schemes
ULIP
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Risks
Historical analysis
Return is remembered, Risk forgotten

Risk = Potential for Harm Market Risk Non-Market Risk Credit Rate Risk MF Risk = Volatility (fluctuation of NAV)
Standard Deviation Websites give star rating ( basis = risk-adjusted return)

Investment strategies
Systematic Investment Plan (SIP)
Invest a fixed sum every month. (6 months to 10 yearsthrough post-dated cheques or Direct Debit facilities) Fewer units when the share prices are high, and more units when the share prices are low. Average cost price tends to fall below the average NAV.

Systematic Transfer Plan (STP)

Invest in debt oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.

Systematic Withdrawal Plan (SWP)

TYPES OF MUTUAL FUNDS

Type of Mutual Fund Schemes Investment Objective Special Schemes

Structure Open Ended Funds

Growth Funds Income Funds

Industry Specific Schemes

Close Ended Funds Interval Funds

Index Schemes
Sectoral Schemes

Balanced Funds
Money Market Funds

Net asset value (NAV) is the value of the assets held by a mutual fund, divided by the number of shares. The performance of a particular mutual fund scheme is denoted by the Net Asset Value. since the market value of the securities changes everyday, NAV of the scheme also varies on a day to day basis. NAV= Market value of securities - liabilities ____________________________ Total Number of units outstanding

Example
An amount of Rs. 5000000 has been collected by a mutual fund by the issue of 500000 units of Rs. 10 each. The amount has been invested in different securities. The market value of the securities at present is Rs. 56 lakhs and the mutual fund has a liability of Rs. 4,50,000 in respect of expenses, etc. the Net Asset Value of the fund is: NAV = Rs. 56,00,000 Rs. 4,50,000 ______________________ 5,00,000 = Rs. 10.30

Mutual Funds in India

Growth of Mutual Funds : Growth of Mutual Funds Mutual funds are opened in India 1963 by Unit Trust of India. U.T.I is Monopoly in MF up to 1986-87 In July 1987 SBI MF was stared followed by Canara Bank in 1987 and other Major banks also. 1987- Public Sector banks, Insurance Companies SBI, Canbank, PNB LIC, GIC 1993- Private Sector Kothari Pioneer ( later merged with Franklin Templeton), J P Morgan, Morgan Stanley, George Soros and Capital International Phases of Mutual Fund : Phases of Mutual Fund First phase- 1964-87 Second Phase - 1987-1993 Third Phase - 19932003 Fourth Phase - since Feb 2003 Growth of Mutual Funds in India : Growth of Mutual Funds in India The size of Indian mutual fund industry has grown in recent few years. The total AUM has increased from Rs.1, 01, 565 crores in January 2000 to Rs.5, 67, 601.98 crores in April 2008. As on august end 2000, there were 33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores. There are 34 Mutual Fund organizations in India managing 1,02,000 crores.

Growth of this industry : Growth of this industry According to the AMFI, the growth of this industry has been exceptional. One of the major factors contributing to the growth of this industry has been the booming stock market with an optimistic domestic economy. Second most important reason for this growth is a favorable regulatory regime which has been enforced by SEBI. This regulatory board has improved the market surveillance to protect the investors interest. Mutual Fund Companies in India : Mutual Fund Companies in India Kotak Mahindra Mutual Fund Unit Trust of India Mutual Fund Reliance Mutual Fund Standard Chartered Mutual Fund Franklin Templeton India Mutual Fund Morgan Stanley Mutual Fund India Canbank Mutual Fund LIC Mutual Fund GIC Mutual Fund ICICI Mutual Fund Future of Mutual Funds in India : Future of Mutual Funds in India By end of 2010, the mutual fund industry of India will reach Rs 40,90,000 crore. It was based on the December 2004 asset value of Rs 1,50,537 crore. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9% annually

Facts for the Growth of MF : Facts for the Growth of MF Several asset management companies which are foreign based are now entering the Indian markets, with over US$1trillion assets under management worldwide. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

Growth Of It., : Growth Of It., In the future, there lies a big scope for the Indian Mutual Funds industry to expand. A number of commodity Mutual Funds will be introduced in the future. The SEBI has granted the permission for the same. There is also enough scope for the Indian Mutual funds to enter into the semi-urban and rural areas. Financial planners will play a major role in the Mutual Funds market by providing people with proper financial planning.