Mutual Funds

Business Overview

Mutual Fund Business Overview

Mutual Fund Business Overview
Mutual Fund
A Mutual Fund company is an investment company that pools money from shareholders
and invests in a diversified portfolio of securities. The unit of ownership of a Mutual Fund
is called a share.
Four basic types of Mutual Funds

Stocks (or Equities)

Where the money is invested primarily in Equity instruments. Also called Growth
Funds as focus is on capital appreciation.

Bonds (or Debt)

Where the money is invested primarily in Debt instruments. Also called Income Funds
as focus is on income generation.

Hybrid (Mix of Stocks and Bonds)

Where the money is invested in both Equity and Debt instruments. Also called
Balance Funds as focus is to minimize risk with capital appreciation.

Money Market (Short term Funds or Cash Investments)

Where the money is invested in interest bearing instruments with short term (90 days
or less) maturity as focus is to maintain stable share price and to earn current income.
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Mutual Fund Business Overview

Mutual Fund (Cont.)
Three categories of Mutual Funds

Open-End Fund
Shares are initially floated through IPO and are also available for purchase
anytime. Shareholder can purchase or redeem at any point of time.

Close-End Fund
Fixed number of shares are floated only once through IPO. Later a shareholder
can join the fund only through secondary market transfers.These may have a
fixed maturity date.

Interval Fund
After initial offer, purchase and redemption transactions are allowed only in a
specified time duration during a period (e.g. first week of every month).

Mutual Fund Business Overview

Who Invests and Why?
An investor in a Mutual Fund is a shareholder who buys shares of the fund, either through
initial offer (IPO) or through secondary market or rights issues. The shareholder has the
right to elect directors at meetings, must approve material change in terms of funds
contract with its investment advisor and approve changes in funds investment objectives or
policies originally laid down in the prospectus.

Before buying

Determine your investment objectives

Childrens education, Retirement finance planning, Buy a house etc. These may change
as your age or income changes.

Determine your risk comfort level

You can loose money as the underlying securities in the portfolio rise and fall in value.
Mutual Funds are not guaranteed.

Know the risk reward trade-off

The greater the risk, the higher the potential financial reward in terms of return on your
investment.
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Mutual Fund Business Overview

Structure of a Mutual Fund
AMC

Savings
Trust

Investments

Units
Unitholders

Registrar
SEBI
Trust
AMC

Custodian

Mutual Fund Business Overview

Key Features of Mutual Funds
Professional Management

Money accumulated in a Mutual Fund is managed by professional Fund Managers, who

decide (on behalf of the shareholders) on investment strategy that best matches the
funds objective as described in the prospectus.

Decisions are based on extensive knowledge and market research.

Depending on economic conditions, fund may adjust mix of its investment to adopt a
more aggressive or more defensive posture.

Diversification

Fund Managers typically invest in a variety of securities seeking portfolio diversification.

It helps reducing risk by offsetting losses from some securities with gains in others.

Thus provide an economical way to average investors to obtain professional money

management and diversification of investments, which otherwise would be expensive
and difficult for them.

Mutual Fund Business Overview

Key Features of Mutual Funds (Cont.)
Variety

The Mutual Funds represent vide variety of investment objectives, from conservative to
aggressive, and investing in a wide range of securities.

A fund can be targeted to a specific segment of population (for females or children or

handicapped) or may be investing primarily in a specialized segment of securities market
(technology, pharmaceuticals, social criteria funds etc).

Daily Pricing

Mutual Funds calculate price of their shares every business day. The shareholders can
redeem their shares on this price anytime.

This share price is called the Net Asset Value (NAV) of the fund. It is the Market value
of all funds securities Minus Liabilities (expenses), Divided by Number of outstanding
shares.

The NAV changes with the values of underlying securities and also as a result of
portfolio change.

Mutual Fund Business Overview

Key Features of Mutual Funds (Cont.)
Regulation and Disclosure

All US funds are subject to strict regulation and oversight by Securities and Exchange
Commission (SEC).

All funds must provide investors with complete disclosure about the fund in a written
prospectus having investment objectives, methods, entry and exit criteria and loads,
expenses and risk level.

All funds are required to provide their shareholders with annual and semi-annual reports
containing latest information about funds portfolio, performance and investment goals /
policies.

Shareholders Services

Shareholder requested services including consolidated account statement, toll-free 24

hours telephone access, tax information, exchange among funds, automatic investments
and withdrawals.

Fund initiated services including distribution of earnings to the shareholders in the form of
dividend or capital gains. The shareholders may opt for reinvestment of their dividend
and also purchase of additional fund shares against the capital gains.

Funds also provide extensive investor education and shareholder communications,

including websites, newsletters, brochures and retirement and other planning guides.
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Mutual Fund Business Overview

Key Features of Mutual Funds (Cont.)
Fees and Expenses

To be paid by the shareholders.

Over the period it may affect the return on investment.

Shareholder fees - include any commission paid to the broker for buy / sell of shares.
These commissions are often described as

Front End Loads - Sales charges when you buy-in

Back End Loads - Sales charges when you sell-off or exit

No load - No sales charges, either on entry or on exit

Annual operating fee - cost of running fund including charges for services of fund
manager, record-keeping, printing and mailing. These may also include 12B-1 fees
which is deducted from fund assets to pay for marketing and distribution expenses.

Taxes

Income Tax to be paid by the shareholders on the dividends and capital gains distributed
by the fund.

By selling shares of a fund, a shareholder may realize a taxable gain.

Mutual Fund Business Overview

Business Key Terms
Fund - Signifies a single investment management company or a single managed portfolio of
securities
Fund Group- is a collection of individual investment companies managed by a common
management company.
Assets - of a Mutual Fund are calculated every day and consist of the current value of the
securities it holds Plus un-invested cash Plus accrued revenue and any other receivable .
Liabilities - of a Mutual Fund are mainly expenses associated with operating the fund.Mostly
these are the fees paid to various service providers.
Fund Identifiers

FUND Group / Family

Fund Name

CUSIP - an industry-wide 9 character (AN) identifier assigned by Committee on Uniform

Security Identification Procedures.

Symbol - an industry-wide 5 character (A) identifier assigned by NASDAQ once a fund

reaches certain minimum thresholds.

Security Number - a 5 character (AN) identifier used internally for ML systems

Fund Code - an identifier of any length assigned and used by Fund Groups Transfer
agents to distinguish between their various funds.
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Mutual Fund Business Overview

Business Key Terms
Fund Distributor - is also the principal underwriter, and is usually an affiliate company of the
fund.

It markets shares of the Mutual Fund to the investors acting either as a wholesaler (selling
shares to security dealers) or a retailer (selling shares directly to public).

It purchases shares from the fund at NAV and the distributes them to investors for a fee.

It also promotes the fund and provide feedback and prospective client enquiry data to the
customer service department.

Broker-Dealer - is a company that may act as a securities broker or as securities dealer or

both.In Mutual Funds it only plays the role of a dealer and sells Mutual Funds received from
its distributors. It does not buy and sell from its own inventory as a security dealer does.
Custodian - is an organization, usually a bank, which holds and protects a funds portfolio
assets, such as cash, physical certificates, notes, etc.
Transfer Agents - is a company contracted by the fund to maintain the records of its
shareholders, to pay dividends and distributions, to resolve any questions or problems with the
records and to prepare account statements, tax information and other shareholder notices.

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Mutual Fund Business Overview

Asset Manager

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Mutual Fund Business Overview

Sales Pitch
Direct/distributor

Activity Flow

Client decision

Fund Subscription
Portfolio Management
Market trade
through Broker

Risk Management
Compliance

Back office
Trade processing
Custodian

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Mutual Fund Business Overview

Asset Management
Portfolio
Accounting &
Reconciliation

Portfolio
Mgmt
SALES

Portfolio Mgmt

Order
Management

Back Office

Sales Pitch

Strategy
definition

Pre Trade
compliance

Trade
Processing

Tax
Accounting

Distributor
Administration

Portfolio
Construction

Pre Trade Risk

Management

Interface with
Custodian

Positions
Keeping

Performance
Reports

Portfolio
Analysis

Orders
execution and
processing

Interface with
Accounts

Management
Reporting
Commission
Processing

Interface with
Market data
Rebalancing
ag. models

Allocation

NAV
Calculation

Interfaces with
market data

MIS

G/L; P/L
accounting
Interfaces to
Back office
Reconciliation
Audit

Trade
Reporting

Reporting

Compliance- Pre Trade, Post Trade, Constraint Definition, Deviation Reports, Compliance reporting
Risk Management- Valuation, VaR, Stress testing, Limit/exposure monitoring, Reporting
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Mutual Fund Business Overview

Activity Break-up
SALES

Sales Pitch

Promotions, New
schemes launch
Direct Sales force
Distributors

Distributor
Administration

Commissions
Slab system
Promotion expenses

Performance
Reports

Scheme wise
Sales person
Branch wise
Region/Geography

Management
Reporting

Scheme
Sales Performance reports
Comparison

Commission
Processing

Commissions
Slab system

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Mutual Fund Business Overview

Activity Break-up
Portfolio Mgmt

Strategy
definition

Portfolio
Construction

Portfolio
Analysis

Overall Investment Policy

Fund wise Investment Policy
Model portfolio
Simulation over time
What-if analysis
Interface to historical data
Sectors wise
Asset Classes
Specific Securities
Country wise/Global
Analyse Complex Portfolios
Manage Portfolio is real-time
Query Holdings / Cash Positions / Transactions any time
Compare portfolios / sub-portfolios to models / reference benchmarks / historical holdings
What-if scenarios / Sensitivity Analysis
Personalise the DSS ( trades, holdings, prices / data)

Interface with
Market data

Interfaces with Market Vendors / Data

Picks up data real-time

Rebalancing
ag. models

Buy
Sell
Switch
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Mutual Fund Business Overview

Order
Management

Check Limits
Asset, Maturity, Counter-party, Dealer,
Deal size, Broker
VaR

Pre Trade
compliance
Pre Trade Risk
Management
Orders
execution and
processing

Allocation

Interfaces with
market data

Trade
Reporting

L
i
m
i
t
s

Activity Break-up

Order Entry and Order Routing

Order Management (Monitors status of the order, tracks results)
Complete orders with multiple brokers and calculate average prices for multiple fills.
Pricing/Corporate Actions
Trade Entry
Trade Execution Processing
Transaction Processing
Cash Processing, Commission Processing / Tracking
Mortgage Processing
Position Update and Maintenance
Rebalancing Against Models
Rebalance account or group of accounts against criteria
Interface with front office (PMS)
Interface with Brokers/ECNs etc.
Support for FIX
Interface with back office
Commission Analysis, Duration and Maturity Analysis Reporting
Exception Reporting
Multi-Currency Reporting, Multi-Language Reporting
Order Listing,
Realized Gain/Losses
Risk Management Reports
Security Cross Reference
Standard Reporting Package/Third-Party Report-Writer/ Trade Execution Listing
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Mutual Fund Business Overview

Back Office

Trade
Processing

Interface with
Custodian

Interface with
Accounts

NAV
Calculation

MIS

Electronic counterparty confirmation generation and reconciliation

Calculate margin payable on futures positions as well as on repos and reverse repos, including
initial margin
Cancel/amend deal details, creation of audit trail and posting of accounting entries to reflect the
change
Factor and rate resets on all applicable products through live feeds (with the option of manual
overrides)
Intra-day / EOD revalue all transactions and take into account any netting agreements in the
calculation
Exception reports for unconfirmed counterparties as well as limit exceptions
Monitoring of overdrawn bank accounts
Payment authorization monitoring and controls for all payment services
Payments generations - SWIFT, CHIPS, FED etc...
Reconciliation of currencies in Nostro account
Sending settlement instructions to custodian
Reconciliation of Cash, trades, portfolio position
Updating of portfolios based on data received from custodian
Corporate Actions
Handling exceptions for failed trades
Exposure monitoring
Violation reports
Calculate and post interest/discount accruals on a daily, weekly or monthly basis
Post trade details-outright/repo, settlement details and updated portfolio positions
Update records for interest received, maturity proceeds, call/put exercised, auction bids
primary/secondary market deals
Update records for brokerage, commissions paid
Marked to market reporting
Market Value of Investments + Receivables + Other Accrued Income + Other Assets - Accrued
Expenses-Other Payables-Other Liabilities
------------------------------------------------------------------------------------------------------------------------No. of outstanding units as of the NAV date
Create blended benchmarks, and Compare performance against the indices
Calculate time-weighted or internal rates of returnbefore or after management fees.
Display performanceby portfolios, asset classes, sectors, countries, or regions.
Details of trade, portfolio positions, profit & loss, marked to market position, NAV,
exception reports, broker limits

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Mutual Fund Business Overview

Portfolio
Accounting &
Reconciliation

Activity Break-up

Tax
Accounting
Positions
Keeping
G/L; P/L
accounting

Interfaces to
Back office
Reconciliation

Audit
Reporting

Portfolio and Cash

Calculate and post interest/discount accruals on a daily/ weekly/monthly basis
Generate accounting entries based on trades executed
Post entries for back-dated and forward-dated transactions
Account treatment and rules for various activities and related products including appropriate
postings to P&L and B/S
Accounting reports
Entries for brokerage
Adjustments for traders with forward settlements
Convert traders P&L into US$
Daily/month to date P&L
Updation of portfolio positions
Traders P/L
Reconciliation of Bank/Nostro account
Reconciliation with Back office for trades and P&L
Reconciliation with Custodian
Internal, External, Concurrent, Tax
Balance Sheet, P&L, MIS
Adherence to: US GAAP rules
Adherence to: FASB 133
Adherence to: French GAAP rules
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Mutual Fund Business Overview

Activity Break-up
Compliance

Constraint
Definition

Compliance with respect to :

Regulatory requirements
Pre defined rules (specific to countries)
Internal Management Restrictions & Guidelines
Mutual Fund Prospectus

Pre-Trade
Post Trade

Reporting

Monitoring (credit /currency / earnings at risk limit/

maturity / position / Counterparty/trader / Losses)
Checking violations
Providing extensions, approvals for same
Limit Utilization
Compliance testing at time of order, execution &
allocation
Violation resolution and supervisory override
Alerts for Violations
Category wise Reporting

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Mutual Fund Business Overview

Risk
Management

Constraint
Definition

Measurement

Pre-Trade
Post Trade

Position
keeping
Valuation

Activity Break-up
Define risks / risk groups (e.g. counter parties
/groups of counter parties, traders,...)
Setup Limits- Counterparty, organisation wise,
dealer wise, deal size, security wise, stop loss,
maturity bucket etc.
VaR, Stress Testing, Extreme Value theory, Sensitivity/Scenario analysis
Monitoring (credit /currency / earnings at risk limit/
maturity / position / Counterparty/trader / Losses)
Checking violations
Providing extensions, approvals for same
Limit Utilization
Compliance testing at time of order, execution &
allocation
Violation resolution and supervisory override
Across Entities / Portfolio / Product / Strategy / Trader / Account Structure

Mark to Market (automatic price feeds)

Analysis

Sensitivity / Scenario Analysis- Change curve / Duration calculations

Net carry analytics
P&L analytics

Reporting

Alerts for Violations

Category wise Reporting
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Thank you !

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