MUTUAL FUNDS

K K JINDAL

What is a mutual fund?

A mutual fund is a common pool of money into which investors place their contributions that are to be invested in different types of securities in accordance with the stated objective Each investor has a right to a proportional share of the assets of the fund and any income it earns Company sells shares to the public and invests the proceeds in a pool of securities

Jointly owned by the funds investors Invested according to the objective of the fund

Mutual Funds
Operations Flow Chart

(Reference: amfiindia.com)

Fund Structure
Fund Sponsor

Trustees

Asset Management Company

Depository

Agent Custodian

Advantages of Mutual Funds

Diversification Professional Management Ease of buying and selling Small amount of money required to open an account Multiple withdrawal options Distribution or reinvestment of income and capital gains Switching privileges in fund family Multiple services
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Disadvantages of Mutual Funds

Purchase and withdrawal costs Management fees Potential poor performance No control over capital gains distribution Complicated tax reporting issues Potential market risk with all investments Aggressive or unethical sales personnel

Computing Net Asset Value

For investors, the performance of their investment depends on what happens to the funds per share value, or net asset value (NAV) NAV= Market Value of Assets Liabilities Number of Shares Outstanding
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Mutual Fund Returns

Three sources of return: Income distributions (ID)

Bond interest, stock dividends

Capital gain distributions (CGD)

Realized gains/losses from selling assets

From unrealized gains/losses from assets
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Changes in NAV (NAV)

Closed-end and Open-end Funds

Closed-end funds Shares are issued by an investment company only when the fund is originally set up After all original shares are sold you can only purchase shares from another investor Open-end funds Shares are issued and redeemed by the investment company at the request of investors. Investors can buy and sell shares at the net asset value.
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Load Vs. No-load Funds

Marketing a new mutual fund scheme involves initial expenses. These expenses are charged to the investors through loads and are recovered from the investors in different ways:
Front-end or entry load is charged to the investor at the time of his entry into the scheme.SEBI has since disallowed this load Back-end or exit load is charged to the investor at the time of his exit from the scheme. Deferred load is charged to the investor over a period of time. Contingent deferred sales charge: Different amount of loads are charged to the investor depending upon the time period the investor has stayed with the fund. The longer he stays with the fund, lesser the amount of exit fund he is charged. Very often, AMCs do not charge any initial expenses to the investor in the IPO. These are hence are no-load funds. In no-load funds, the investors get units for the complete amount invested.

Types of Mutual Funds

Funds classified according to the type of security in which they invest Examples:
Stock Funds Taxable Bond Funds Municipal Bond Funds Stock and Bond Funds Money Market Funds

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Common Stock Funds

Most popular type of fund Wide variety with different objectives and levels of risk
Growth Industry or sector funds Geographic areas International or Global Equity Index funds

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Bond Funds income Generally seek to generate current

with limited risk Can vary by maturity

Short-term, Intermediate-term, Long-term Government Corporate Municipal International/Global Bond Index funds Infrastructure funds Life style fund
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Can vary by type of bond

Stock and Bond Funds

Seek to provide a combination of income and value appreciation Different names
Balanced funds Hybrid funds Flexible funds Asset Allocation funds

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Money Market Funds

Provide safe, current income with high liquidity Invest in money market securities T-bills, Bank CDs, Commercial paper, etc. Provide an alternative to bank deposits

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Aim is to create savings pools to meet future expenses relating to various goals like higher education, housing marriage and retirement Goal series fund typically invest in multi-asset class such as equities, gold and debt Fund marketers expect such funds to attract inflows as it is easy to push solution based product to retail investors Fidelity recently launched Children Fund Commission expected by distributors 1-1.25%
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Goal series Funds

Risk-Return Tradeoff

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Assets Under Management as on 31st March, 2010

Structure Mature Balanced LSS 39

Open End lose End N 3533 5955

C Assured Return B

Total

7902004323 5 E 1222 1 825 -

1761 5955 I 6 65396 45200 750000

Gilt
Growth ncome 4571 Liquid/Money Market

21524 2302 1498

45200

Total Total

Amount in Rs. Crores

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Mutual Fund Prospectus

Must be available to and should be reviewed by investors Contains:
Funds investment objective Investment strategy Principal risks faced by investors Recent investment performance Expenses and fees

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NFOs
Equity MFs through 24 NFOs collected just about Rs 3000 crores down by over 57% from 2009 and lowest in last 4 years

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Mutual Fund Investment Strategies

Choose in funds consistent with your objectives, constraints, and tax situation Consider index funds for a large portion of your fund portfolio When possible, invest in no-load funds with below-average expense and turnover ratios Invest. Dont speculate. Be regular Own funds in different asset classes and consider life-cycle investing
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When should you sell?

Personal considerations

Portfolio rebalancing

Be aware of capital gains with selling fund shares

Fund considerations
Change in portfolio manager Change in investment style Fund is growing too large or too fast Persistent bad performance

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references
Investments, Fifth Edition, William F. Sharpe ICRA Money and Finance www.mutualfundsindia.com www.amfiindia.com www.nseindia.com www.moneycontrol.com
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Thank you
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