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Importance of this session.

• Mutual fund is an important financial product.

• Learning will help us sell this product in a better way.


• By the end of this module we will be able to:

Describe the History of Mutual Funds.

Describe the meaning of equity, debt &
money market.
Advise & Explain to our clients the
working of Mutual funds, the safety, risk,
advantages & working conditions.
Session 1
• Concepts of Mutual Fund

• Stages of Mutual Fund

• Types of Funds

• Charges
Mutual Fund
• A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal.

• The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities.

• The income earned through these investments and the capital

appreciation realized is shared by its unit holders in proportion to
the number of units owned by them.

• Thus a Mutual Fund is the most suitable investment for the

common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.
Mutual Fund Operation
Flow Chart
Advantages of Mutual Funds
to Investors
• Diversification
• Professional management
• Reduction in risk
• Reduction in transaction cost
• Liquidity
• Convenience and flexibility
Drawbacks of Mutual Funds

• No control over costs

• No tailor-made portfolios
Phases of
Mutual Fund
Phases in mutual fund
• Phase 1 Growth of Unit Trust of India – 1964 – 1987
– In 1963 UTI was established as an Act of
– US -64, the first open ended mf
– Largest investor base

• Phase 2 Entry of Public Sector Funds 1987- 1993

– 1st SBI MF in Nov 1987

• Phase 3 Emergence of private funds 1993-1996

– 1993-1994 five new players
– 1994-1995 six new players
• Phase 4 Growth & SEBI regulations 1996- 1999

– SEBI Mutual Fund regulation s 1996 was adopted

– UTI adopted SEBI regulations.

– Budget of 1999 exempted income tax at the hands of the


• Phase 5 Emergence of a large & uniform industry 1999- 2004

– In Feb 2003, the UTI Act was repealed, thus creating UTI MF, &
it adopted the same structure as any other MF, that of a Trust
& AMC.

– All new schemes are now SEBI approved.

– Between 1999 to 2005, the size of the industry doubled.

68000 crores to 1,50,000 crores. 6 lacs Crs in March 2009
Types of Funds
Open Ended & Close Ended Funds

Open ended funds Close ended funds

• Open ended funds are ones that • Close ended funds are one that
sell & repurchase units at all make a one time sale of units.
times. After the offer closes CEF’s do
not let the investors buy directly
from the fund.
• They might stop selling units if
the fund size becomes too big to
manage. • To provide liquidity to the

• However repurchase of units is 1. these funds are traded in

done at all times. the stock markets.
2. The fund house also
offers buy backs at
regular intervals.

SEBI regulations state that all fund houses should need to give one of the
2 exit options to the customers.
Load & No load fund
• Load Funds - Funds that charge • No load funds – Funds that
any of the below mentioned charge neither of them are
terms are load funds termed as no load funds.

• At the time of entry, by deducting

a specific amount from the
contribution. (Entry Load)

• By charging the fund a fixed

amount during the tenure of the
fund, for a specified period.
(deferred load)

• At the time, the investor is

leaving the fund, by deducting
specific amount from the
proceeds payable to him. (exit
Load charge

A load funds declared NAV does not include the load. For eg.

Investment amount Rs. 1000.

NAV – Rs. 10

Entry load – 2%

• Ideally the investor would get 1000 units ( Rs. 1000 / Rs. 10 NAV). Since
there is an entry load of 2%, the investor would get 980 units. {(Rs.
1000/ Rs 10 NAV) * 2/100}. This is the entry charge.
Other classifications.
• By nature of investments
– Equity, Bond, money market, liquid funds invest in
financial assets
– Precious metal funds, real estate funds invest in physical

– By nature of investment objective

– Growth funds invest for medium to long term capital
– Income funds invest to generate regular income, rather
than capital appreciation.
– Value funds invest in equities that are currently under
valued, & whose value might be unlocked in future.
By nature of risk profile.
Equity funds have a greater risk of capital loss, while they look for greater returns.
Debt funds seek to protect the capital while capital appreciation takes place at a
slower rate.
Liquid funds seek to be follow the policy of safety first & invest in short term



0 Returns 5
Types Of Funds
• Money Market & liquid funds.
– Considered to the safest of all investments.
– Invest in securities of short term (less than 1 year
– Major strengths – liquidity & safety of principal due to
short duration.

• Gilt Funds
– Medium to long term maturity.
– Little risk of default as issued by government.
– Face interest rate risk.
– Gilt securities prices fall when interest rates go up &
rise when interest rates go down
Types Of Funds
• DEBT Funds (income funds)
– Invest in debt instruments issued by the government,
private companies, banks, financial instruments & other
entities like infrastructure companies, utilities etc.
– Target low risk – stable income.
– Invest in long term securities.

• Equity Funds
– Offer greater risk than debt funds, as well as offer
higher potential for growth.
– Subject to equity price fluctuation in the markets.
– Price movements are caused by many factors like
political, social as well as economic.
Types of Equity Funds
• Diversified Equity Funds
– Invest majority portion of their funds in the
equity market & a small portion in liquid
money market securities.
– Invest in equity across sectors, definitely more
than one sector.
– Have lower risk than growth funds because
they are diversified in nature.
Types of Equity funds.
• Mid-Cap or Small- Cap funds:
– Invest in companies that have a lower market capitalization
compared to blue chip companies.
– More volatile as the scripts are not freely traded.

– Sector Funds:
• Invest in a particular sector, like pharma, power, IT etc.
• Since they are not diversified in nature, they carry a higher risk
than growth funds.
• Equity linked saving schemes

– Offer tax benefits under section 80 C

– Lock in period of 3 years.
Hybrid funds
Funds seeking to balance equity & debt securities are termed
as hybrid.
Balanced funds

– Has a portfolio comprising of debt instruments,

convertible securities, preference & equity
– Aim is to attain the objectives of income,
moderate capital appreciation, & preservation
of capital & are ideal for investors with a
conservative & long term orientation.
Entry & Exit load.

Open ended funds

• Sale price = NAV + entry load (cannot be more than 7%)

Close ended funds

• Sale price = NAV + entry load (cannot be more than 5%)
Offer Document
• Offer document: - the document that contains details of a new
fund offer that the AMC or the sponsor prepares & circulates to
prospective customers. It has to be registered with SEBI.

• It is issued once at the time of launch, in case of close ended


• It is revised every 2 years , in case of open ended funds.

Importance of Offer
• The most important source of information from the perspective of the
prospective investor.

• Fundamental attributes of the scheme, which cannot be altered without

the knowledge of the investor.

• Operating document & describes the product, i.e. that scheme on offer.

• All relevant information to the investor is disclosed in the offer document.

• Buyer Beware

• Primary vehicle for investment decisions, a legal document that protects

& governs the rights of the investor. It also serves as a reference
document for the investor to look for relevant information at all times.
Who can invest in mutual funds?
• Residents
– Resident Indian individuals/ HUF
– Indian companies / Partnership companies
– Indian trusts / charitable organizations
– Banks / Financial institutions
– Non banking financial companies
– Insurance companies
– Provident funds
– Mutual funds
– Non resident Indians / persons of Indian origin

– Foreign institutional investors

• Foreign citizens/ entities are not allowed to invest in India
Distribution Channels
• Individuals –An agent acts on behalf of a principal – (mutual
fund). An agent is essentially a broker between the fund & the
investor. A broker can have a large number of sub brokers
working under him. Passing the AMFI examinations is mandatory
to become an agent. All agents are required to obtain an ARN card
from AMFI.
• Distribution companies – A large administrative mechanism
which supports a large direct sales force. The AMC deals with the
distribution company directly instead of dealing with separate
sales force. Employees who engage in sales & marketing of
distribution companies, banks or other corporate entities are
required to pass the AMFI certification test & obtain an ARN card.
Distribution Channels
• Banks & NBFC’s – in developed countries banks play a major

role in distributing mutual funds. In the last 5 years banks in India

have been a major distributing factor of mutual funds.

• Post offices – Mutual funds have entered into tie ups with post

offices, thus giving themselves a very wide geographical area.

• Direct marketing – Fund houses sell their products directly to

investors. This is a very small % & caters mainly to HNI’s or

institutional investors.
Accounting NAV – important

Total net assets = assets – liability

NAV= market value of investments + receivables + other

accrued income + other assets – accrued expenses –other
payables –other liabilities / no of units outstanding on the

• NAV have be calculated & uploaded on the AMFI site by 8

pm for OEF’s & every Wednesday for close ended funds

• Applications received before the cut off time will carry the
same days NAV & ones received after that will carry the
next days NAV. Cut off time is 15:00.
Different performance measures
• Change in NAV
• Total return – takes into consideration the dividends issued by the
fund. Formula
– Total return = distribution + change in NAV/ NAV at the
beginning * 100
– Purchased NAV at 20, dividend paid Rs. 4. end of year NAV is
• = 4 + (22-20) / 20 *100
Percentage Change in NAV
Assume that change in NAV is the only source of return.
– NAV of a fund was Rs. 23.45 at the beginning of a year
– Rs. 27.65 at the end of the year.
%age change in NAV = (27.65 – 23.45)/23.45 *100 = 17.91%

Annualizing the Rate of Return

If NAV on Jan 1, 2001 was Rs. 12.75 and the NAV on June 30, 2001
was Rs. 14.35,
% age change in NAV = (14.35 – 12.75)/12.75 x 100 = 12.55%
Annualised return = 12.55 x 12/6 = 25.10%
Total Return or ROI Method
• (Value of holdings at the end of the period - value of
holdings at the beginning of the period)/ value of holdings
at the beginning of the period x 100
• Value of holdings at the beginning of the period = number
of units at the beginning x begin NAV.
• Value of holdings end of the period = (number of units held
at the beginning + number of units re-invested) x end NAV.
• Number of units re-invested = dividends/ex dividend NAV.
Total Returns
Investor bought units of a mutual fund scheme at a price of Rs.12.45
per unit. He redeems the investment a year later, at Rs. 15.475
per unit.
During the year, he also receives dividend at 7%.
The rate of return on his investment can be computed as
=((15.475 – 12.45) + 0.70)/12.45 x 100
= (3.725/12.45) x 100
= 29.92%
ROI Method: Example
An investor buys 100 units of a fund at Rs. 10.5 on January 1, 2001.
On June 30, 2001 he receives dividends at the rate of 10%. The
ex-dividend NAV was Rs. 10.25. On December 31, 2001, the
fund’s NAV was Rs. 12.25.
What is the total return on investment with dividends re-invested?

The begin period value of the investment =10.5x100= Rs.

Number of units reinvested
= 100/10.25 = 9.756 units
End period value of investment
= 109.756 x 12.25 = Rs. 1344.51
The ROI =(1344.51-1050)/1050 x 100 = 28.05%
CAGR: Example
An investor buys 100 units of a fund at Rs. 10.5 on January 6, 2001. On June
30, 2001 he receives dividends at the rate of 10%. The ex-dividend NAV
was Rs. 10.25. On March 12, 2002, the fund’s NAV was Rs. 12.25.
Compute the CAGR.

The initial value of the investment= 10.5 x 100 = Rs. 1050

Number of units reinvested = 100/10.25 = 9.756 units
Final value of investment = 109.756 x 12.25 = Rs. 1344.51
Holding period = 6/01/01 - 12/3/02 = 431 days
The CAGR is =(1344.51/1050)365/431 - 1 x 100 = 23.29%
• Rupee Cost Averaging
– Invest regularly a predetermined amount

– Invests in more units when the market is low; less when the
markets are high.

– Reduces the average cost of purchase

• Value Averaging
– Invest regularly to achieve a predetermined value

– Books profits at a high, and adds units at the low, and

enables meeting financial goals.

– Reduces the average cost of purchase

Rupee Cost Averaging

Amount NAV per Number of Cumulative Value of

I nvested unit units bought number of holding
(Rs) units
1000 12.5 80.00 80.00 1000.00
1000 11.25 88.89 168.89 1900.00
1000 10.75 93.02 261.91 2815.56
1000 11 90.91 352.82 3881.03
1000 12.75 78.43 431.25 5498.47
1000 13.35 74.91 506.16 6757.22
1000 13.85 72.20 578.36 8010.30
1000 14.45 69.20 647.57 9357.32
1000 13.85 72.20 719.77 9968.78
1000 13.5 74.07 793.84 10716.86
Average cost 12.60
Value Averaging

Target NAV Per Value Of Units Cumulative

Value Unit Holding To Balance
I nvest
1000 12.5 0.00 80 80
2000 11.25 900.00 97.78 177.78
3000 10.75 1911.11 101.29 279.07
4000 11 3069.77 84.57 363.64
5000 12.75 4636.36 28.52 392.16
6000 13.35 5235.29 57.28 449.44
7000 13.85 6224.72 55.98 505.42
8000 14.45 7303.25 48.22 553.63
9000 13.85 7667.82 96.19 649.82
10000 13.5 8772.56 90.92 740.74