Concept Of 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

Mutual Fund Operation Flow Chart

History Of Mutual Fund

Phase 1- 1964-87 : growth of UTI Phase 2- 1987-93: entry of public sector funds (SBI) Phase 3- 1993-96: emergence of private fund(Kothari Pioneer) Phase 4- 1996-99: growth & SEBI regulations

Organisation of a Mutual Fund

 In USA Mutual Funds are investment companies In UK, its unit trust or investment trusts In India, there is only unit trust (i.e. trust form) Sponsor Person or a body who sets up or form the trust
Appoints board of trustees, AMC, custodian, Qualification: They are all under SEBI regulations

of record

- Contribution 40 % net worth AMC -Should have (financial) track for 5 years

 Trustees There can be a trustee company (comes under companies act, too) or board of trustees (comes under Indian Trust Act only) The role of the Trustees is to safeguard the interest of the investor/unit-holder of the fund The trustees make sure that the funds are invested according to the investors mandate and objective. Trustees of one mutual fund cannot be trustee of another mutual fund The board of trustees are required to meet at least 4 times in a year to review the AMC Trust created through a document called the Trust Deed, executed by the Fund Sponsor in favor of the Trustees.

AMCs are fund managers Registered with SEBI The AMC is also formed as a private limited company Responsible for operational aspects of the MF The AMC gets fee for managing the funds according to the mandate of the investors Appoints other constituents - Custodian , Registrar & Transfer Agent Cannot have any other business interest AMC of one MF cannot be trustee/AMC of another MF An AMC cannot engage in any business other than portfolio advisory and

 Custodian Appointed by board of trustees for safe keeping of securities as independent entity of sponsors Transfer Agents Issue and redeem units and other related services such as preparation of transfer documents and updating investor records Distributors Are appointed by AMC and may act on behalf of different funds Independent individuals are

Terminologies
Asset Allocation Diversifying investments in different assets such as stocks, bonds, real estate, cash in order to optimize risk. Fund Manager The individual responsible for making portfolio decision for a mutual fund, in line with funds objective. Fund Offer Document Document with investment objectives, expenses summary, how to invest etc.

risk

factors,

Systematic Investment Plan (SIP) Invest a fixed sum every month. (6 months to 10 yearsthrough post-dated cheques or Direct Debit facilities)

 Dividend Profits given to the investor from time to time. Growth Profits ploughed back into scheme. This causes the NAV to rise.

NAV Market value of assets of scheme minus its liabilities. Per unit NAV
= Net Asset Value No. of Units Outstanding onValuation date

 Entry Load/Front-End Load (0-2.25%) The commission charged at the time of buying the fund. To cover costs for selling, processing Exit Load/Back- End Load (0.65%-1%) The commission or charge paid when an investor exits from a mutual fund. Imposed to discourage withdrawals May reduce to zero as holding period increases. Sale Price/ Offer Price Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher than NAV) Re-Purchase Price/ Bid Price Price at which close-ended scheme repurchases its units

2.3 ADVANTAGES OF MUTUAL FUNDS

Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

No control over cost No tailor-made portfolio Managing a portfolio of fund No guarantee of return

Classification Of Mutual Funds By Structure

Open-Ended anytime enter/exit Close-Ended Schemes listed on exchange, redemption after period of scheme is over.

By Investment Objective
Equity (Growth) only in Stocks Long Term (3 years or more) Debt (Income) only in Fixed Income Securities (3-10 months) Liquid/Money Market (including gilt) Short-term Money Market (Govt.) Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years)

Other Schemes
Tax Saving Schemes Special Schemes

GROWTH AGGRESSIVE INCOME BALANCED BOND INDEX SECTOR PUBLIC SECTOR PRIVATE SECTOR FOREIGN

HDFC Growth fund Franklin Internet opportunities Temploton India Income Builder HDFC Prudence DSP Merryl Lynch Bond fund Birla Index Fund Allaince Buy India Fund SBI Mutual Sundram Mutual Morgan Stanely Mutual

Evaluating Performance
The NAV of a mutual fund is the amount which a unit holder would receive if mutual fund were wound today. NAV of a fund represents the market value of total assets of fund minus total liabilities attributable to those assets. eg: total assets of a scheme are Rs.100lacs and liabilities of Rs.10lacs, the NAV is Rs.90lacs NAV is computed per unit holding. If there are 10lac unit holder, the NAV per unit is Rs.9.

Before declaration of dividend / bonus Growth NAV Units Value (Rs) NAV Units Value (Rs) Dividend received in cash Additional units 20 100 2,000 20 100 2000 Dividend payout 20 100 Rs 2,000 19 100 1900 Rs 100 Dividend reinvestment 20 100 Rs 2,000 19 105.2631 2000 Bonus 20 100 Rs 2,000 18.1818 110 2000 -

After declaration of dividend / bonus

5.2631

10

Invest properly..