Basics of Mutual Fund

By Santosh & Deepa

Flow of Presentation :
What is Mutual Fund?

Structure of Mutual Fund

Parties to Mutual Fund Advantages of Mutual Fund Disadvantages of Mutual Fund NAV Types of Fund SIP

What is Mutual Fund?

A mutual fund is a company that pools money taken from many investors & invests the money in stock, bonds & other securities. The returns earned through these investments are shared by its investor in ratio to the units owned.

AUM Asset under Management :

The total value of all the investments which are currently being managed by the fund. Depending upon the market conditions, it keeps on changing.

Regulatory Body :
India SEBI UK FSA US - SEC

Structure of Mutual Fund :

Investors

Returns

MUTUAL FUND
Securities

Fund Manager

Parties to Mutual Fund :

Sponsors Trust/Board of Trustees AMC Asset Mgmt Company Fund Manager Investor Transfer Agent Regulatory Body

Advantages of Mutual Fund :

Professional Management

Portfolio Diversification
Diversification of Risk Liquidity Choice of schemes Tax benefits Well regulated Transparency

Disadvantages of Mutual Fund :

High Cost

Dependent on Fund Manager

Less predictable income

What is NAV, how is it calculated?

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
Total Assets Total Liabilities Net Asset Value = ---------------------------------------Number of Outstanding Shares NAV = (Market Value of All Securities Held by Fund + Cash and Equivalent Holdings Fund Liabilities) / Total Fund shares Outstanding

Let's assume at the close of trading yesterday that a particular mutual fund held Rs.10,50,000 worth of securities, Rs. 2,00,000 of cash, and Rs. 5,00,000 of liabilities. If the fund had 1,00,000 shares outstanding, then yesterday's NAV would be: NAV = (10,50,000 + 2,00,000 5,00,000) / 1,00,000 = 7.5 Rs.

Types of Funds :
Money Market Funds: Invest in short-term (less than one year to maturity) corporate and government debt securities such as treasury bills, bankers acceptances and corporate notes. Debt Funds : Debt funds are those funds that invest a huge portion in debt papers issued by Government Authorities, Private Companies, Banks & Financial Institution. These funds carry low risk & provide stable income to the investors. Fixed Income Funds: Invest in debt securities like bonds, debentures and mortgages that pay regular interest, or in corporate preferred shares that pay regular dividends. The goal, typically, is to provide investors with a regular income stream with low risk. Growth or Equity Funds: Invest primarily in common shares (equities), but may hold other assets as well. The goal is typically long-term growth because the value of the assets held increases over time. Some growth funds focus on large blue-chip companies, while others invest in smaller or riskier companies.

Balanced Funds: Invest in a balanced portfolio of equities, debt securities and money market instruments with the objective of providing reasonable returns with low to moderate risk
Specialty Funds: May invest primarily in a specific geographical area (e.g., Asia) or a specific industry (e.g., high technology companies). Index Funds: Invest in a portfolio of securities selected to represent a specified target.

SIP Systematic Investment Plan

It is a method of investing in Mutual Fund. A Systematic Investment Plan is a periodic investment in Mutual Fund.
Date Jan 1 NAV 10 Approx units you will get at Rs.1000 100

Feb 1
Mar 1 Apr 1 May 1 Jun 1

10.5
11 9.5 9 11.5

95.23
90.90 105.26 111.11 86.95

Within six months, you would have 5,89.45 units by investing just 1,000 every month. If the NAV for this particular fund is Rs.11 on Jul 1 then the value of fund would be, Total Investment = 1000 * 6 months = 6000 Rs. Total Units owned = 589.45 (as mentioned above) As on Jul = 589.45 * 11 = 6483.95 Rs.