mutual fund (pf)

8/8/2019 Mutual Fund (PF)

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Mutual FundMutual Fund

Submitted to : Prof Edwin

Prepared: Ankit Dokania(09PG422)


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A Mutual Fund is a trust that pools the savings of anumber ofinvestors who share a common financialgoal.

Money collected and invested in the capital marketinstrument which are as follows:

Shares

Debenture

Other securities such as Govt Bonds, Gold, etc

The income earned through these investments and thecapital appreciation realised are shared by its unitholders in proportion to the number of units owned bythem.

What is Mutual FundWhat is Mutual Fund


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ADVANTAGES OF MUTUAL FUNDThe advantages of investing in a Mutual Fund are:

Professional Management

Reduced risk

Diversification

Convenient

Administration

Return Potential

Low Costs Transparency

Choice of schemes

Tax benefits

Well regulated


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Disadvantages

Fluctuating Returns

Misleading Advertisements

Evaluating Funds

Costs


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The flow chart describes the working of

mutual fund


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TAX BENIFITSTAX BENIFITS

Contribution for participating in the UNIT-LINKED

INSURANCE PLAN(ULIP) ofUNIT TRUST OF INDIA (UTI)or ULIP of LIC MUTUAL FUND U/S 10(23D) or u/s

80c(2)

Quantum of Deductions:

Aggregate of the eligible contribution ,expenditure or

investments covered under sec 80 (including Mutual

Fund)

OR Rs 1,60,000 for male, 1,90,000 for female

&

2,40,000 for senior citizens. Which ever is minimum.


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ExampleExample

Computation of total income of Mr Rajat JainTaxable salary Rs 6,00,000

Income from other sources- Rs 3,00,000

He invested Rs 1,60,000 in Mutual Fund with LIC.

Compute his total taxable income.

Solution: Salary Rs 6,00,000

Other income Rs 3,00,000

Gross income Rs 9,00,000

Less: Deduction u/s 80C(2) Rs 1,60,000

Total Taxable income RS 8,40,0000


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Common TermsCommon Terms

Net Asset Value (NAV): Net Asset Value is the market value of the assets of thescheme minus its liabilities. The per unit NAV is the net asset value of thescheme divided by the number of units outstanding on the Valuation Date.

Sale Price: Is the price you pay when you invest in a scheme. Also called OfferPrice. It may include a sales load.

Repurchase Price : Is the price at which units under open-ended schemes arerepurchased by the Mutual Fund. Such prices are NAV related.

Redemption Price: Is the price at which close-ended schemes redeem their unitson maturity. Such prices are NAV related.

Sales Load: Is a charge collected by a scheme when it sells the units. Also called,Front-end load. Schemes that do not charge a load are called No Loadschemes.


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The worldwide value of all mutual funds totals more than$US 26 trillion.

There are more than 8000 mutual fund schemes in theU.S.A. Comparatively

India has around 1000 mutual fund schemes, but thisnumber has grown exponentially in the last few years.

Total Assets under Management in India of all Mutualfunds put together touched a peak of Rs. 5,44,535 crs. at

the end of August 2008.(Source :NSE India.com)

Quick FactsQuick Facts


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Structure Of Mutual FundsStructure Of Mutual Funds

India follows 3 tier structure:

Sponsor(1st tier):He thinks of starting mutual funds.Then he approaches to SEBI.

Public Trust(2nd tier):As per the Indian Trusts Act, 1882.Trusts have no legal identity in India and cannot enter

into contracts, hence the Trustees are the peopleauthorized to act on behalf of the Trust. Contracts areentered into in the name of the Trustees. Once the Trustis created, it is registered with SEBI after which this trust

is known as the mutual fund. Asset Management Company(3rd tier): Trustee appoint

them to manage investors money. They charge fees inlieu of the services.


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Who is a CustodianWho is a Custodian

A custodians role is safe

keeping of physicalsecurities

keeping a tab on thecorporate actions like

rights, bonus and dividends

declared

The Custodian is appointed

by the Board of Trustees.


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What is NFOWhat is NFO Once the 3 tier structure is in

place, the AMC launches newschemes

Under the name of the Trust, aftergetting approval from the Trustees

and SEBI.

The launch of a new scheme isknown as a New Fund Offer (NFO)

Before investing, it is expected thatthe investor reads the OfferDocument (OD) carefully tounderstand the risks associatedwith the scheme


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Open and Close Ended FundsOpen and Close Ended Funds

Equity Funds (or any Mutual

Fund scheme for that matter)can either be

open ended or close ended.

An open ended scheme allowsthe investor to

enter and exit at hisconvenience, anytime (except

under certain conditions) A close ended scheme

restricts the freedom of entryand exit.


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Equity FundEquity Fund

Equity Funds are defined as those funds which have at

least 65% of their Average Weekly Net Assets invested

in Indian Equities.

Equity Funds can be classified on the basis of market

capitalisation of the stocks they invest in namelyLarge Cap Funds, Mid Cap Funds or Small Cap Funds

or on the basis of investment strategy the scheme

intends to have

like Index Funds, Infrastructure Fund, Power SectorFund, Quant Fund, Arbitrage Fund, Natural Resources

Fund, etc.


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Fund of FundFund of Fund

These are funds which

do not directly invest instocks and shares

But invest in units ofother mutual fundswhich they feel willperform well and give

high returns.

In fact such funds arerelying on the judgment

of other fund manager.


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Growth SchemesGrowth Schemes

Growth schemes invest in those

stocks of those companies whose profits are expected to

grow at a higher than averagerate.

For example, telecom sector is agrowth sector.

Similarly, infrastructure; we do nothave well connected roads all overthe country, neither do we have

best of ports or airports.


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NET ASSET VALUE(NAV)NET ASSET VALUE(NAV)

Calculating NAVs - Calculating mutual fund netasset values is easy. Simply take the current

market value of the fund's net assets (securities

held by the fund minus any liabilities) and divide

by the number of shares outstanding.

If a fund had net assets of Rs.50 lakh and there

are one lakh shares of the fund, then the price

per share (or NAV) is Rs.50.00.


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Entry LoadEntry Load

Investors have to bear expenses for availing of theservices (professional management) of the mutual fund.

The first expense that an investor has to incur is by way

ofEntry Load.

Selling and distribution expenses of the scheme.

A major portion of the Entry Load is used for paying

commissions to the distributor.


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Entry load can have an impact on the number of units being allottedto an investor :

Example: Without Entry Load With Entry Load

Scheme NAV (Rs.) 10 10

Entry Load 0% 2.25%

Buying Price (Rs.) 10 + 10 * 0% = 10 10 + 10 * 2.25% =10.225

Investment (Rs.) 25,000 25,000

Units Allotted 25,000/ 10 = 2500 25,000/ 10.225 = 2444.98

Annual Returns = 12%. NAV of the scheme will rise to 10 + 10 * 12% = 11.2

Profit/ Unit 11.2 10 = Rs. 1.2 11.2 10.225 = Rs. 0.975

Total Profit 1.2 * 2500 = 3000 0.975 * 2444.98 = 2583.86

Return on Investment 3000/ 25,000 = 12% 2583.86/ 25,000 = 9.54%


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EXIT LOADEXIT LOAD

As Entry Loads increase the cost of buying, similarly ExitLoads reduce the amount received by the investor.

Not all schemes have an Exit Load.

Some schemes have Contingent Deferred Sales Charge

(CDSC).

This is nothing but a modified form of Exit Load,

wherein the investor has to pay different Exit Loads

depending upon his investment period.


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Expense RatioExpense Ratio

Among other things that an investor must lookat before finalising a scheme, Is that he must

check out the Expense Ratio.

Expense Ratio is defined as the ratio of expenses

incurred by a scheme to its Average Weekly Net

Assets.

It means how much of investors money is going

for expenses and how much is getting invested.This ratio should be as low as possible.


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Debt FundDebt Fund

Debt funds are funds which invest money in debtinstruments such as short and long term

Bonds, government securities, t-bills, corporate

paper ,commercial paper, call money etc. The fees in debt funds are lower, on average,

than equity funds because the overall

management costs are lower.

The main investing objectives of a debt fund is

usually preservation of capital and generation of

income.


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Debt Mutual fund schemeDebt Mutual fund scheme Fixed Maturity Plans: FMPs have

become very popular in the past fewyears. FMPs are essentially closeended debt schemes.

The money received by the scheme is

used by the fund managers to buydebt securities with maturitiescoinciding with the maturity of thescheme.

There is no rule which stops the fundmanager from selling these securitiesearlier, but typically fund managersavoid it

Hold the debt papers till maturity.


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Capital Protection Funds : These are close

ended funds which invest in debt as well as

equity or derivatives.

The scheme invests some portion of investors

money in debt instruments, with the objective

of capital protection. The remaining portion gets invested in

equities or derivatives instruments like

options. This component of investment provides the

higher return potent


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BalancedFunds : These are funds which invest in

debt as well as equity instruments. These are alsoknown as hybrid funds. Balanced does not necessarily

mean 50:50 ratio between debt and equity.

ChildBenefit Plans : These are debt oriented funds,

with very little component invested into equities. The

objective here is to capital protection and steady

appreciation as well. Parents can invest in these

schemes with a 5 15 year horizon, so that they have

adequate money when their children need it for

meeting expenses related to higher education.


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GiltFunds : These are thosefunds which invest only insecurities issued by theGovernment.

This can be the CentralGovt. or even State Govts .

Gilt funds are safe to theextent that they do notcarry any Credit Risk.

However interest rate isalways there.


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Some Mutual Fund Company

Reliance Mutual Fund

The DSP ML Tiger Fund

SBI Magnum Contra Fund HDFC Equity Fund

Prudential ICICI Dynamic Fund

SBI Mutual Fund


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