MUTUAL FUND

SEBI (Mutual Fund) Regulations, 1996 defines MF as a A fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments or gold or gold related instruments or real estate assets.

Benefits of MF
Professional Management Portfolio Diversification Reduction in transaction cost Liquidity Flexibility Tax benefit Stability in money and capital market

NAV
It is the amount which the shareholders will collectively get if the fund is dissolved or liquidated. (Market value of investments + Receivables + Other Accrues Income + Other Assets Accrued Exp. Other payables other Liabilities) / No. of Units Outstanding as at the NAV date

Liabilities
Unit Capital Reserves & Surplus Accrued Expenditure Other Current Liabilities

Rs. Cr.

Assets
Shares
Debentures Money Market Instruments Accrued Income Other Current Assets Deferred Revenue Expenditure

Rs. Cr

300
85.7 1.5 0.5

345
23 12 2.3 1.2 4.2

387.7
Units Issued (Cr.) Face Value (Rs.) Net Assets (Rs.) Return to investor 30 10 ?? ??

387.7

NAV (Rs.)

??

Recurring Expenses
Charged to scheme & affects NAV Marketing & selling expenses (distributors commission) Cost of advertisement Audit fees Exp. on investors communication Registration , brokerage charges

Recurring Expenses
Not charged to any scheme & not affect NAV Penalties, fines for violation of law Dept. on fixed assets & software development exp. Interest on late payment to unit holders Legal, marketing, publication, general exp. not attributed to any scheme

Expense Ratio
It represents the proportion of funds assets that go towards the expense of running the fund. Expense Ratio is defined as the ratio of annual expenses incurred by a scheme to its Average Weekly Net Assets.

This ratio should be as low as possible.

SEBI Regulation on expense ratio Equity funds to charge a maximum of 2.5% Debt funds to charge a maximum of 2.25%

Entry Load
Entry load is a charge collected at the time when an investor enters into the scheme. Sale price= Applicable NAV(1+ sale load, if any)
SEBI abolished entry load for all MF schemes launched on or after 1st August, 2009

Exit Load
Exit load is charged to Discourage investors from exiting a fund within a short span Cover advertising & other expenses of the scheme

Repurchase Price= Applicable NAV(1- Exit Load, if any) Contingent Deferred Sales Charge The investor has to pay different Exit Loads depending upon his investment period.

Asset Under Management (AUM)

MF Co. mobilizes funds by offering scheme/s which are deployed in various assets/securities. Market value of these assets is AUM. AUM of a scheme = (NAV x No. of units under that scheme)

PORTFOLIO TURNOVER
Portfolio Turnover is the ratio which helps to find out how aggressively the portfolio is being churned. A scheme with Rs. 100 cr. as net assets sells Rs 25 cr. of its investments. Thus its Portfolio Turnover Rate would be 25/ 100 = 25%. If the fund manager revised the entire portfolio twice in a single year then the Portfolio Turnover rate is 200% or that the portfolio is revised once every 6 months. Liquid funds have very high portfolio turnover due to less maturity of the paper.

CASH LEVEL IN PORTFOLIOS

The Cash level is the amount not invested in stocks and bonds but lying in cash. In a falling market, it is this higher cash level that protects investor wealth from depleting. High cash levels can also be seen as a cushion for sudden redemptions and in large amounts.

SYSTEMATIC INVESTMENT PLAN (SIP)

An investor commits to invest in a scheme at regular intervals
Month 1st Jan 1st Feb 1st Mar 1st Apr Amount Invested (Rs.) 1000 1000 1000 1000 Unit Price (Rs) 24 21 25 16 No. of units purchased 41.67 47.62 40.00 62.50

1st May
1st June

1000
1000

20
21

50.00
47.62

Total

6000

Avg. 20.73

Total 289.41

SYSTEMATIC TRANSFER PLAN (STP)

An STP enables an investor to switch or transfer a fixed amount of money at regular intervals from his fixed income scheme investments to designated equity and balanced schemes. In SIP the investment flows from a bank a/c into the fund & in STP fund flows from one scheme to another.

Types of MF Schemes
Functional Open ended Close ended Investment Pattern Equity Funds 1.Diversified Large Cap, Mid- cap, Small- Cap (HDFC Equity, HDFC Top 200, HSBC Eq.) 2. Value (ICICI Prudential Discovery, Templeton India Growth) 3. Special (ICICI Child Care Plan, TATA Young Citizen Plan) 4. Sectoral (Reliance Pharma, Media Entertainment) 5. ELSS (SBI Magnum Taxgain, Franklin India Taxshield) 6. Index (Franklin India Index, Principal Index) 7. Derivatives Arbitrage (JM Advantage Arbitrage, UTI Spread)

Types of MF Schemes
8. Fund-of-funds Debt Funds 1. MMMF/ Liquid 2. Short term bond 3. Long term bond 4. Gilt 5. Floating rate 6. Fixed Maturity plans 7. Capital protection schemes Portfolio- Objectives Income Growth Balanced

Types of MF Schemes
Geographical Domestic Off shore Other Exchange Traded Fund Gold exchange Traded Fund Other exchange Traded Fund

Risk vs. Return

Sector Diversified Return Income Liquid Risk Balanced

Holding physical Gold can have its disadvantages: 1. Fear of theft 2. Payment Wealth Tax 3. No surety of quality 4. Changes in fashion and trends 5. Locker costs 6. Lesser realization on remolding of ornaments If 1 G-ETF = 1 gm of 99.5% pure Gold, then buying 1 G-ETF unit every month for 20 years provides a holding of 240 gm of Gold. After 20 years the investor can convert the G-ETFs into 240 gm of physical gold by approaching the mutual fund or sell the G-ETFs in the market at the current price and buy 240 gm of gold.

GOLD ETFS

WORKING of G-ETF
During NFO AMC decides of launching G-ETF Investors give money to AMC and AMC gives units to investors in return AMC buys Gold of specified quality at the prevailing rates from investors money

WORKING of G-ETF
On an on going basis Authorized Participants (typically large institutional investors) give money/ Gold to AMC AMC gives equivalent number of units bundled together to these AP APs split these bundled units into individual units and offer for sale in the secondary market Investors can buy G-ETF units from the secondary markets either from the quantity being sold by the APs or by other retail investors Retail investors can also sell their units in the market

Working of G-ETFs
The Gold which the AP deposits for buying the bundled ETF units is known as Portfolio Deposit.

The money which the AP deposits for buying the bundled ETF units is known as Cash Component. This Cash Component is paid to the AMC. The Cash Component is not mandatory and is paid to adjust for the difference between the applicable NAV and the market value of the Portfolio Deposit.
Authorized Participants pay Portfolio Deposit and/ or Cash Component and get Creation Units in return.

Creation Units

AP

Cash Component

AMC

ETF Units Retail Investors

AP

Portfolio Deposit (Gold)

Custodian

Custodian maintains record of all the Gold that comes into and goes out of the schemes Portfolio Deposit

EXAMPLE of CREATION UNITS, PORTFOLIO DEPOSIT AND CASH COMPONENT

1 ETF unit = 1 gm of Gold = Rs. 1,000 Amount Invested (Rs.): 5000 Units Allotted: 5 1 Creation Unit = 100 ETF units Portfolio Deposit (Rs.) = 1000 x 100 = 1,00,000 Cost of 100 Units (Rs.) = 1050 x 100 = 1,05,000 Cash Component (Rs.) = 1,05,000 1,00,000 = 5,000

DEBT FUNDS
Bond Valuation The price of a bond is the present value of the future cash flows. Yield To Maturity (YTM) is that rate which the investor will receive in case he holds a bond till maturity

Relationship between interest rates and debt mutual fund schemes

As interest rates fall, the NAV of debt mutual funds rise As interest rates rise, the NAV of debt mutual funds fall Since Bond prices and interest rates move in opposite directions.

LIQUID FUNDS
Money Market refers to that part of the debt market where papers with maturities less than 1 year is traded. Commercial Papers, Certificate of Deposits, Treasury Bills, Collateralized Borrowing & Lending Obligations (CBLOs), are the instruments which comprise this market. Liquid Funds (also known as Money Market Mutual Funds) have portfolios having average maturities of less than or equal to 1 year.

LIQUID FUNDS
Liquid Funds do not carry Exit Loads. Other recurring expenses associated with Liquid Schemes are also kept to a bare minimum. Liquid Funds, by regulation cannot invest more than 10% of their net assets in papers having maturities more than 182 days. Liquid Funds will have an extremely high portfolio turnover. Liquid Funds do not carry any interest rate risk.

Cost plus Interest Accrued Method

Liquid paper having maturity less than 182 days is valued by using the Cost plus Interest Accrued Method. Suppose a 90 Day Commercial Paper is issued by a corporate at Rs. 91. The paper will redeem at Rs. 100 on maturity; i.e. after 90 days. This means that the investor will earn 100 91 = Rs. 9 as interest over the 90 day period. This translates into a daily earning of 9/ 90 = Rs. 0.10 per day.

Cost Plus Interest Accrued Method

Now if the investor wishes to sell this paper after 35 days in the secondary market, what should be the price at which he should sell? Here we add the total accrued interest to the cost of buying and calculate the current book value of the CP. Since we are adding interest accrued to the cost, this method is known as Cost Plus Interest Accrued Method. I

Mark To Market
Mark To Market is that activity where a portfolios (a holding of shares or bonds etc.) profit/ loss in calculated on a daily basis. Debt papers with lesser maturities (less than 182 days) do not have to be marked to market since Interest rate movements do not affect debt papers with maturities less than or equal to 182 days. ,

As per SEBI Regulations, any scheme which has minimum 65% of its average weekly net assets invested in Indian equities, is an equity scheme.
No Long Term Capital Gains tax on equity scheme

TAXATION ON EQUITY SCHEME

While exiting the scheme, Securities Transaction Tax (STT) @ 0.25% of the value of selling price.
Short Term Capital Gains tax on equity scheme @ 15% of the profits on equity scheme

TAXATION ON NON EQUITY SCHEME

Short term capital gains for non-equity schemes, the capital gains are added to their income long-term capital gains @ 10% or @ 20%, depending upon whether investors opt for indexation benefit or not.

Fixed Maturity Plans (FMPs)

FMPs are essentially close ended debt schemes. The money received by the scheme is used by the fund managers to buy debt securities with maturities coinciding with the maturity of the scheme. Indicative yield is the return which investors can expect from the FMP. Indicative yields are pre-tax. Investors will get lesser returns after they include the tax liability.

Returns on FDs are assured, returns on FMPs are indicative. That means, on maturity there is a possibility of actual returns deviating from indicative returns Given the fact that returns from a FMP are not assured, FMPs are generally considered riskier than a FD Income from FDs is categorized as Income from other sources under the income tax laws In case of FMPs, tax implication depends on the investment option Dividend or Growth

FMP vs. FD