MUTUAL FUND COCEPT

Mutual Fund : 

Mutual Fund By Prof. Deepak Tandon IILM Gurgaon

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Concept & Role of Mutual Funds

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What is a Mutual Fund ? 3/12/2009 IILM It is a pool of money, collected from investors, and is invested according to certain investment objectives The contributors and beneficiaries are the same class of people namely the investors A mutual funds business is to invest the funds thus collected, according to the the wishes of the investors who created the pool e.g. money market mutual fund seeks investors to invest predominantly in Money Market Instruments

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Important characteristics of a Mutual Fund? 3/12/2009 IILM The ownership is in the hands of the investors who have pooled in their funds. It is managed by a team of investment professionals and other service providers. The pool of funds is invested in a portfolio of marketable investments. The investors share is denominated by ‘units’ whose value is called as Net Asset Value (NAV) which changes everyday. The investment portfolio is created according to the stated investment objectives of the fund.

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Advantages of Mutual Funds to Investors? 3/12/2009 IILM Portfolio diversification Professional Management Reduction in Risk Reduction in Transaction costs Liquidity Convenience and Flexibility

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How MF help the financial planning objectives of investors? 3/12/2009 IILM Mutual fund comprises of 29 funds, offering nearly 500 products with total AUM of over Rs.1,58,000 Cr as of April 2005 Competition in industry has led to innovative alterations to standard products Investors can choose the manner in which their returns would be distributed Investors can choose options that suit their return requirements and risk profile

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How does a MF reduce risk for the Investor? 3/12/2009 IILM Mutual Funds invest in a portfolio of securities, thus achieving diversification. By offering ready made diversified portfolio, mutual funds enable investors to hold a diversified portfolio

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What does Professional Management of the MF mean to the investor? 3/12/2009 IILM Mutual Funds are managed by investment managers who are appointed by trustees and are bound by investment management agreement AMC’s are required to be adequately capitalized and are closely regulated by SEBI AMC’s are prohibited to indulge in any other business There are a number of safeguards and prudential regulations in the interest of the investors Investment managers and funds are bound by the AMFI code of ethics

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How can MF reduce transaction Costs? 3/12/2009 IILM Mutual Funds benefit the investor because of economies of scale,which helps in reducing transaction costs Most of the funds are open – ended. Investors can buy sell units at the prevailing NAV Funds can provide liquidity even if the underlying market may not have the liquidity

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How do MF enable regular Savings? 3/12/2009 IILM Mutual funds are issued as account statements, with the facility to hold units in fraction up to 4 decimal units It is simpler for investors to make additional investments; repurchase, reinvest, convert holdings and to alter investments

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What information does the MF usually provide to the investor? 3/12/2009 IILM Daily NAV’ s Complete portfolio of the Fund Credit quality of their portfolios Behavior of NAV since inception Additional Information like: Maturity profile of their investments Commentaries of the Fund Managers

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What are the disadvantages of investing through Mutual Funds? 3/12/2009 IILM No control over the costs. Regulators therefore limit the expenses of Mutual Funds. No tailor made portfolios. Managing a portfolio of funds.

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3/12/2009 IILM What are the important phases in history of mutual funds in India?

Mutual Fund Products : 

Mutual Fund Products 3/12/2009 IILM

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How does a Mutual Fund Offer a choice of products to the investor? 3/12/2009 IILM Depending on the investment portfolio that is created, and the segments of the various markets in which the funds are invested, there is a choice of funds to the investors Nature of Participation: open or closed ended funds. Nature of Income Distribution: Dividend, growth, reinvestment. Periodicity of dividends can also be selected

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What are open-ended funds? 3/12/2009 IILM In an open ended fund, investors can buy and sell units of the fund, at NAV related prices, at any time, directly from the fund. Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, in the initial offer period. After a pre-specified period say 30 days, the fund is declared open for further sales and repurchases Investors receive account statements of their holdings

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What are closed end funds? 3/12/2009 IILM A closed -end fund is open for sale to investors for a specified period, after which further sales are closed. Any further transactions happen in the secondary market where closed-end funds are listed. The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV. Investors receive either certificates or depository receipts, for their holdings

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What is the composition of the industry between open & closed end funds? 3/12/2009 IILM As at the end of March 2001, 74% of the assets managed by the Indian Mutual Fund Industry is in open-ended funds At the broad level, the investors have two options: Dividend Option and Growth Option

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What is the dividend option? 3/12/2009 IILM Investors who choose the dividend option on their investments, will receive dividends from the mutual fund as and when such dividends are declared Dividends are paid in the form of warrants, or are directly credited to the investors bank accounts Normal dividend plan : Timing of payout is decided by the fund Pre-Specified Distribution schedules: Option of daily, weekly, monthly, quarterly, half-yearly or annually

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What is the growth option? 3/12/2009 IILM Investors with longer-term investment horizons, and limited requirements for, income choose this option. The return to this investor is the rate at which his initial investments has grown over the period for which he has invested in the fund. Investors re-invest the dividends that are declared by the mutual fund, back to into the fund itself, at NAV that is prevalent at the time of re-investment.

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What are the Mutual Fund types? 3/12/2009 IILM Fund Types Based on nature of Investments- Equity, Bond and Money Market Funds. Fund Types by Investment Objective – Growth Funds, Value Funds, Income Funds. Fund types based on Risk Profile.

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3/12/2009 IILM What are equity funds? Predominantly invest in equity shares of the company Choices in equity funds Aggressive Growth Funds Growth Funds Specialty Funds Sector Funds Offshore Funds Small Cap Equity Funds Option Income Funds Diversified Equity Funds ELSS Index funds Value Funds Equity Income Funds

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3/12/2009 IILM What is aggressive growth fund? They target maximum capital appreciation, invest in less researched or speculative stocks and may adopt speculative investment strategy to attain their objective of high returns for the investor Investment in companies whose earnings are expected to rise at an above average rate. Primary objective is to have capital appreciation in 3-5 Year span. Less volatile than aggressive growth funds.

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3/12/2009 IILM What are specialty funds? Funds having narrow portfolio orientation that meet pre-defined criteria. Sectoral funds choose to invest in one or more chosen sectors of the equity market. They are not as well diversified as simple equity funds as they tend to focus on fewer sectors. They can exhibit volatile returns

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3/12/2009 IILM What are offshore funds? These funds invest in equities in one or more foreign countries thereby achieving diversification across the country’s borders Small stock funds: Invest in equity shares of small companies

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3/12/2009 IILM What are option Income funds? These Funds do not exist in India They write options on a significant part of their portfolio

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3/12/2009 IILM What are Diversified Equity funds? A fund that seeks to invest only in equities, except for a very small portion in liquid money market securities, but is not focused on any one or a few sectors or shares. ELSS- (Equity Linked Saving Schemes) Formed under a special scheme notified by GOI in 1990 A product that invests at least 90% of its funds in equity and equity linked instruments is eligible for a tax rebate, upto a maximum investment of Rs.100000 u/s 80cce* of the IT Act. Investors have to hold units for a minimum lock in period of 3 years, in order to avail of the tax rebate. *To be approved.

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3/12/2009 IILM What are Index funds? Focus on creating a diversified portfolio, that simply replicates the existing market index. The strategy is also called as passive fund management. The costs of this strategy are lower. Value Funds try to seek out fundamentally sound companies whose shares are currently under priced in the market. They will add only those stocks that are selling at low P/E ratios, low market to book value ratios.

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3/12/2009 IILM What are Equity Income funds? Usually income funds are in the Debt Market category as they target fixed income investments. Equity funds can be designed to give investor a high level of current income along with some steady capital appreciation. As an example they would invest in power / utility Companies of established companies that pay higher dividends

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3/12/2009 IILM What are Hybrid funds? Mutual Funds mix these different types of securities in their portfolios. These funds seek to hold a relatively balanced holding of debt and equity securities in their portfolios Funds that invest both in debt and equity markets are called as balanced funds. Typical balanced fund would have equal investment in both markets.

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3/12/2009 IILM What are Growth and Income funds? These funds try to create a balance between capital appreciation and income for the investor. Their portfolios are a mix between companies with good dividend paying records and those with potential for capital appreciation. These funds follow variable asset allocation policies and move in and out of asset class depending on the outlook for specific markets

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3/12/2009 IILM What are Debt funds? Those funds that invest predominantly in Debt Securities. They are also known as Income funds as they pay periodic interest to investors. Universe of Debt Securities include

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3/12/2009 IILM What are liquid and money market funds? These debt funds invest only in instruments with maturities less than a year. The investment portfolio is very liquid and enables investors to hold their investments for very short horizons of a day or more. It invests only in securities that are issued by the Government and therefore do not carry any credit risk It invests in both long-term and short-term paper. Ideal for institutional investors who have to invest in Govt. Securities Enables retail Participation

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3/12/2009 IILM What are simple debt funds ? These funds invest in a portfolio of debt securities chosen from the universe of debt securities They invest in a pre-specified subset of the debt markets. E.g. Funds investing only in AAA rated paper

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3/12/2009 IILM What are serial plans or fixed term plans? Objective is to match the holding period horizon of the investor with the maturity of the investment. Variety of serial plans that enable investors to choose ranging from 14 days to 5 years. Investment can be made up of either purely government securities or a combination of debt securities

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3/12/2009 IILM What are Assured Return Funds ? Historically UTI has offered assured return schemes. Returns are indicated in advance for all the future years of these closed end schemes. If there is a shortfall, it is borne by the sponsors. SEBI permits only those funds whose sponsors have adequate net worth to offer assurance of returns

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3/12/2009 IILM How does MF combine the generic features and investment objectives in creating products? Consider an example liquid fund ,objective to invest in short term instruments of good credit.Open ended fund. It has the following options

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3/12/2009 IILM How are funds different in terms of their risk profile? Investors have to face the risk- return trade off

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3/12/2009 IILM What are Load and No-Load Funds ? Marketing of a new mutual fund scheme involves initial expenses . These expenses can be recovered from the investors at different times. At the time of investors entry into the fund/scheme by deducting a certain portion of the initial contribution. By charging the fund with a fixed amount each year, during the stated number of years. At the time of investors exit from the fund. If the initial expenses are borne by the investment manager then the fund is said to be a no- load fund

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3/12/2009 IILM Risk Hierarchy of Mutual Funds