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Shares and Mutual Funds More Examples

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Shares and Mutual Funds More Examples

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Shares and Mutual Funds

Dear Students,
Have you ever wondered how to make your money work for you, grow, and thrive in the world of
finance? Welcome to the third module of your Mathematical and Statistical Techniques I course, where
we explore the intriguing world of shares, mutual funds, risk, and return. This module is more than just
numbers; it’s about gaining the knowledge to make informed investment decisions.

The Significance of This Module


At the heart of this module lies the visionary economist, Harry Markowitz, and his groundbreaking
Markowitz Portfolio Theory. Our aim is to introduce you to this fascinating theory, with the hope that
some of you will dive deep into its intricacies. But first, let’s understand why this topic is so vital.

Why is it Important?
Imagine you have some money to invest. Your goal is simple: maximize returns while minimizing risk.
How do you achieve this balance? That’s precisely where Markowitz Portfolio Theory comes into play.

Harry Markowitz: A Pioneer in Modern Finance and Nobel Laureate.


In 1950, Harry Markowitz was a student much like you at the University of Chicago. Little did he
know that he would revolutionize finance. His journey began with a simple idea from John Burr
Williams’ book: a stock’s value should reflect the present value of its expected future dividends. But
Harry didn’t stop there. He realized that investors don’t just chase returns; they also consider risks. He
introduced variance as a measure of risk, showing that portfolios should maximize returns while
managing risk. This became the foundation of modern portfolio theory.

Key Concepts to Explore:


1. Shares
2. Mutual Funds and Systematic Investment Plans (SIP)
3. Risk and Return
4. Measurement of Risk

By the end of this module, you’ll be able to evaluate investment portfolios, understanding their risk and
return characteristics using appropriate measures. So, let’s embark on this exciting journey together. Our
goal is to equip you with the knowledge of quantitative finance, empowering you to make informed
financial decisions that can shape your future.
Shares
Shares, also known as stocks, are financial instruments that represent ownership in a company.
Originating from historic trading practices, shares have evolved into mathematical representations of
ownership in a company, enabling investors to participate in the growth and profitability of businesses
through quantitative analysis and investment strategies.
The concept of shares emerged from the need to quantify ownership and distribute risk among
investors. In medieval Europe, merchants utilized mathematical principles to divide their investments into
transferable units, facilitating joint ownership and spreading risk across multiple ventures. This
mathematical framework laid the foundation for the modern concept of shares, which further evolved with
the advent of quantitative financial models and analysis techniques.

A few people take the initiative to form a company. They are called promoters of the company.
The company is established under Companies Act 1956.The promoters decide to raise a certain amount of
capital to start the company. They divide this amount into small parts called shares. A share or a stock is
the smallest unit of the capital of a company. Usually, a share is of value Rs hundred or Rs 50 or Rs 10
OR Rs 5 Rs OR Rs 1. This value is called the face value of the share. These shares are sold to the public
through initial public offer of the company. The shareholders are part owners of the company in the
proportion of their Holdings. The allotment of shares is done directly into the Demat account in electronic
dematerialised form.

Face Value- The face value of a share is the nominal value assigned to it at the time of issuance. It
represents the initial value of the share and is usually a small fraction of the market value. Face value has
legal significance but does not reflect the actual worth of the share. It is also called par value.

Market Value- The market value, also known as the market price, is the current value at which a share is
traded in the stock market. It is determined by supply and demand dynamics, investor sentiment, and the
company’s performance. Market value fluctuates continuously based on market conditions and investor
perception.

Dividend- A dividend is a distribution of a company’s profits to its shareholders. It is usually paid out in
cash or additional shares. Dividends are declared by the company’s board of directors and are typically
based on the company’s profitability and dividend policy. Dividends provide an additional source of
income for shareholders.

Equity Shares- Equity shares, also known as ordinary shares or common shares, represent ownership in
a company and provide voting rights to shareholders. Equity shareholders bear the highest risk but also
have the potential to earn higher returns through capital appreciation and dividends. They participate in
the company’s management and decision-making processes.

Preferential Shares- Preferential shares, also called preferred shares, are a class of shares that have
certain preferential rights over equity shares. They often have a fixed dividend rate and are paid dividends
before equity shareholders. Preferential shares do not usually carry voting rights or have limited voting
rights. They offer investors a more stable income stream but may have limited capital appreciation
potential.
Bonus Shares- Bonus shares, also known as scrip dividends or capitalization issues, are additional shares
issued to existing shareholders without any cash consideration. Bonus shares are issued by capitalizing the
company’s reserves or accumulated profits. They are given to reward shareholders and increase the total
number of shares outstanding without affecting the proportional ownership or value of their holdings.

Splitting of shares-Stock split is done to infuse liquidity and to make shares affordable for various
investors who could not buy the shares of that company before due to high prices.
Right issue shares-It is important to note that the rights issue offer is an invitation that provides an
opportunity for existing shareholders to increase their shareholding. It is a right that a shareholder may or
may not choose to exercise and not an obligation to buy the shares.
Depending upon the vision of the company the market forces of demand and supply the share prices
fluctuate and can be traded above or below the face value. This trading takes place online and the
main market is called stock exchange. The price at which one share is traded is called the market
price.
If the market price of a share is the same as its face value then the share is said to be traded at par.

If Market price is greater than the face value then share is available at a premium or above par.

If Market price is less than the face value then shares are available at a discount or below par.

Shares can be purchased and sold only through authorized brokers. Brokerage as a percentage of
market price of share. Generally, it is less than 1%.

Shares
Purchase

1) Brokerage= Market price* % of brokerage 1) Brokerage= Market price* % of brokerage


2) Value per share= MP + brokerage 2) Value per share= MP- brokerage
3) No. of shares=
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 3) Sales= No. of shares* Value per shares
𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
4) Profit= (Sales+ dividend) -Total investment
4) Dividend on 1 share= Face value*% of 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
dividend 5) Rate of dividend= 𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 * 𝑓𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
*100
5) Total dividend=No. of shares* Dividend on 6) Rate of return=
1 share 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛
𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 * 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
*100
𝑡𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
7) Profit % or % gain= 𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 * 100

8) Total dividend paid= Total profit- Reserve fund


Problems involving Total Capital of the Company
Example 1: Vimal Industries has issued 60,000 shares of par value Rs. 10 each. The company
declared a total dividend of Rs. 72,000. Find the rate of dividend paid by the company.

Solution: Given-
Face value of 1 share = Rs. 10
No. of shares = 60,000
Total Dividend = Rs. 72,000
Now,
Face value of 60,000 shares = (Face value of 1 share) × (No. of shares)
= 60,000 × 10
= Rs. 6,00,000
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Rate of Dividend = 𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
× 100
72,000
= 6,00,000
× 100
= 12
∴ The rate of dividend paid by the company was 12%.

Example 2: Rohit had 400 preference shares and 200 ordinary shares of a company at Rs. 10 each.
The annual dividend declared was 8% on preference shares and 14% on ordinary shares.
Calculate the total dividend of Rohit.

Solution:
Dividend on Preference shares = 8% × 10 × 400 = 320
Dividend on Ordinary shares = 14% × 10 × 200 = 280
So, Total Dividend = 320 + 280 = 600.

Example 3: A Company's capital is made up of 80,000 preference shares with 10% dividend and
60,000 ordinary shares. The par value of each share of either type is Rs. 100. In the year 2007-08,
the company had a total profit of Rs. 18,80,000 out of which Rs. 3,00,000 were kept in reserve fund
and the remaining was distributed to the shareholders. What was the rate of dividend distributed
to the ordinary shareholders?

Solution:
Total dividend paid to the shareholders = (Total Profit) - (Reserve Fund)
= 18,80,000 - 3,00,000
= Rs. 15,80,000

Dividend is first paid to the 10% preference shareholders.


𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Dividend paid to preference shareholders = 100
× (F.V/share) × (No. of shares)
10
= 100
× 100 × 80,000
= Rs. 8,00,000

∴ Dividend paid to Ordinary Shareholders


= (Total dividend) - (Dividend paid to preference shareholders)
= 15,80,000 - 8,00,000
= 7,80,000

Total F.V. of Ordinary Shareholders = (F.V. of 1 share) × (No. of Ordinary Shares)


= 100 × 60,000
= Rs. 60,00,000

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑 𝑡𝑜 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠


∴ Rate of dividend to ordinary shareholders = 𝑇𝑜𝑡𝑎𝑙 𝐹.𝑉. 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
× 100
7,80,000
= 60,00,000 × 100
= 13

∴ The rate of dividend distributed to the ordinary shareholders is 13%.

Example 4: The capital of Infoline Co. consists of Rs. 15,00,000 in 6% cumulative preference
shares of Rs. 100 each and Rs. 30,00,000 in equity shares of Rs. 10 each. The dividends on
cumulative preference shares for earlier years were not paid. This year, the company has to
distribute a profit of Rs. 3,00,000 after keeping 20% as reserve fund. Find the rate of dividend
paid to the equity shareholders.

Solution:
20
Reserve Fund = 100
× (3,00,000) × = Rs. 60,000
∴ Profit to be distributed = 3,00,000 - 60,000 = Rs. 2,40,000
Annual Dividend for 6% cumulative preference shareholders is 6% of 15,00,000 i.e.Rs. 90,000. This
needs to be given for 2 years, since the preference shares are cumulative and last year’s dividend was
not paid.
∴ Total dividend paid to Preference Shareholders = 2 × 90,0000 = Rs. 1,80,000

∴ Dividend to be distributed to the equity shareholders = 2,40,000 - 1,80,000 = Rs. 60,000


The total capital in equity shares is Rs. 30,00,000.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
∴ Rate of dividend to equity shareholders = 𝑇𝑜𝑡𝑎𝑙 𝐹.𝑉. 𝑜𝑓 𝑎𝑙𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
× 100
60,000
= 30,00,000 × 100
= 2.
The rate of dividend paid to the equity shareholders is 2%.

Example 5: Find the market price of shares at a time of purchase if an investment of Rs


109350 in 20% Rs 100 shares give a total dividend of Rs 9000.

Solution: Total investment = 109350, R.O.D= 20%, F.V./share = 100, total dividend = 9000

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
∴Total Dividend = 100
× (F.V/share) × (No. of shares)
20 × 100 × 𝑥
9000 = 100
No. of shares =X = 450.
∴Total investment = (M.V/share) × (No. of shares)
109350
∴M.V/share = 450
= 243/share
∴ The market price of per share is Rs. 243.

Problems involving Dividend of Shareholder


Example 6:A company declared an annual dividend of 8%. Find the annual dividend of Mr. Venu
Menon who owns 230 shares of the company of face value Rs. 100 each.

Solution: Given-
Face value of 1 share = Rs. 10
No. of shares = 60,000
Rate of Dividend = 8
Face value of 230 shares = (Face value of 1 share) × (No. of shares)
= 230 × 100
= Rs. 23,000

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
∴Total Dividend = 100
× (face value of 230 shares)
8
= 100
× 23000
= Rs. 1840.
Hence total dividend is Rs. 1840.
Example 7: Find the face value of a 9% share if Rs. 10,336 was invested in purchasing the shares
at a market price of Rs. 152 and a total dividend income of Rs. 61.20 was earned.

Solution:
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑠ℎ𝑎𝑟𝑒𝑠
No. of shares = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 1 𝑠ℎ𝑎𝑟𝑒
10336
= 152 = 68.
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
∴Total Dividend = 100
× (F.V/share) × (No. of shares)
9
∴ 61.20 = 100 × (F.V/share) × 68
100 1
∴ (F.V/share) = 61.20 × 9 × 68
= 10.
Thus F.V. of 1 share is Rs. 10.
Problems involving rate of investment with Dividend
Income

Example 8: Mr. Jitendra Shah bought 400 shares of par value Rs. 10 each at the market
price of Rs. 24 each. If the annual dividend distributed was at the rate of 12%, find Mr.
Shah's rate of return on investment.

Solution:
Total investment = Market value of 400 shares at Rs. 24 each.
= 400 × 24 = Rs. 9600

∴Total Dividend = 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑


100
× (F.V/share) × (No. of shares)
12
= 100
× 10 × 400
= Rs. 480.

∴Rate of Return on Investment = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑


𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
× 100
480
= 9600
× 100
= 5.

∴Rate of Return on Investment was 5%.


Example 9: Find the dividend received if Rs. 20,000 are invested in 7% Rs. 10 shares
quoted at Rs. 40. Also find the rate of return on investment.

Solution:
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑠ℎ𝑎𝑟𝑒𝑠
No. of shares = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 1 𝑠ℎ𝑎𝑟𝑒
20000
= 40
= 500.

∴Total Dividend = 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑


100
× (F.V/share) × (No. of shares)
7
= 100
× 10 × 500
= Rs. 350

∴Rate of Return on Investment = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑


𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
× 100
350
= 20000
× 100
= 1.75
Hence the total dividend is rs. 350 and the rate of return on investment is 1.75%
Problems involving comparison of Two Stocks:
Example 10: Which rate of return is better: 10% dividend on share of company M at Rs.
120 or 15% dividend on share of company N at Rs. 150?
(Face Value = Rs. 100 For both.)

Solution:
For share of Company M:
If we invest Rs. 120, we get 1 share of face value Rs. 100. On this, the dividend is 10%

∴Rate of Return on Investment = 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑜𝑛 1 𝑠ℎ𝑎𝑟𝑒


𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 1 𝑠ℎ𝑎𝑟𝑒
× 100
10
= 120
× 100 = 8.33
For share of Company N:
If we invest Rs. 150, we get 1 share of face value Rs. 100. On this, the dividend is 15%

∴Rate of Return on Investment = 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑜𝑛 1 𝑠ℎ𝑎𝑟𝑒


𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 1 𝑠ℎ𝑎𝑟𝑒
× 100
15
= 150
× 100 = 10
Thus investment in shares of company N is better.

Part-investment in Different Stocks:


Example 11: A person invested Rs. 1,47,000 partly in 8% shares at Rs. 150 each and the
remaining in 5% shares at Rs. 120 each. Her incomes from the two stocks were in the
ratio 4: 3. Find the amount she invested in from the first and the second shares
respectively.

Solution:
Suppose, the amount invested in the 8% share is x. Then the remaining amount (147000 - x)
was invested in the 5% share.
Now for the first shares,
When the market value is Rs. 150, the dividend is Rs. 8.

∴ When the market value is x, the dividend is 𝑥


150
×8=
4𝑥
75
4𝑥
Thus the income from the first share is Rs. 75
For the second share,
When the market value is Rs. 120, the dividend is Rs. 5.

∴ When the market value is (147000 - x), the dividend is (147000 − 𝑥)


120
×5=
(147000 − 𝑥)
24
This is the income from the second share.
Now the two incomes are in the ratio 4:3.
4𝑥 (147000 − 𝑥)
75
: 24
= 4:3
4𝑥 (147000 − 𝑥)
75
×3=4× 24
𝑥
∴ 75
×3=
(147000 − 𝑥)
24

𝑥
∴ 25
=
(147000 − 𝑥)
24

∴ 24x = 25 × 147000 - 25x


∴ 49x = 3675000
∴ x= 3675000
= Rs. 75000
49

∴147000 - x = 147000 - 75000 = Rs. 72000


∴She invested Rs. 75000 in the first shares and Rs. 72000 in the second shares.
Gain or Loss out of buying and selling of shares and
dividend income.
Example 12: A broker purchased 200 shares of a company for himself each of face value
Rs. 100, quoted at the market value of Rs. 185. She then sold them at a premium of Rs. 95
per share. Find the broker's total cost, the total amount received and the total gain..

Solution: There is no brokerage involved.

Total Cost = Market value of 200 shares at Rs 185 each


= 200 × 185
= Rs. 37,000

Now the broker sold the shares at a premium of Rs. 95 per share on the face value of Rs. 100.
That is, she sold the shares of Rs. 195 per share

∴ Total amount received by the Broker = Market Value of 200 shares at Rs. 195 each
= 200 × 195
= Rs. 39,000

Example 12: A broker purchased 200 shares of a company for himself each of face value
Rs. 100, quoted at the market value of Rs. 185. She then sold them at a premium of Rs. 95
per share. Find the broker's total cost, the total amount received and the total gain..

Solution: There is no brokerage involved.

Total Cost = Market value of 200 shares at Rs 185 each

= 200 × 185

= Rs. 37,000

Now the broker sold the shares at a premium of Rs. 95 per share on the face value of Rs. 100.
That is, she sold the shares of Rs. 195 per share

∴ Total amount received by the Broker = Market Value of 200 shares at Rs. 195 each
= 200 × 195
= Rs. 39,000

∴Total Gain = Total Amount Received - Total Cost


=39,000-37,000 = Rs. 2,000

Thus the total cost is Rs. 37,000, total amount received is Rs. 39,000 and the total gain is
Rs. 2,000.

Example 13: Ms. Hetal Mehta bought 300 shares of a company of face value Rs. 100 each
at a market value of Rs. 240 each. After receiving a dividend at 8%, she sold the shares at
Rs. 256 each. Find her rate of return on investment. There was no brokerage involved.

Solution:
Change of Market Price per share = 256 - 240 = 16
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Dividend on 1 share = 100
× (F.V/share)
8
= 100
× 100
= 8.

∴ Rate of Return on investment = (𝑃𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑟𝑔𝑒) + (𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑜𝑛 1 𝑠ℎ𝑎𝑟𝑒)


𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 1 𝑠ℎ𝑎𝑟𝑒
×100
16 + 8
= 240
×100
= 10.
The rate of return on investment was 10%.
Problems involving Brokerage:
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐵𝑟𝑜𝑘𝑒𝑟𝑎𝑔𝑒
Brokerage per share = 100
× (M.V/share)
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐵𝑟𝑜𝑘𝑒𝑟𝑎𝑔𝑒
Brokerage of All Shares = 100
× (M.V of all shares)
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐵𝑟𝑜𝑘𝑒𝑟𝑎𝑔𝑒
= 100
× (M.V/share) × (No. of shares)
Purchase cost of 1 share = (Market Price of 1 share) + (Brokerage per share)
Purchase cost of all share =(Purchase cost of 1 share) × (No. of shares)
Amount received on the sale of 1 share = (Market Price of 1 share) - (Brokerage per share)
Gain on 1 share = (Amount received on the sale of 1 share) -(Purchase cost of 1 share )
𝐺𝑎𝑖𝑛 𝑜𝑛 1 𝑠ℎ𝑎𝑟𝑒
Rate of Return on Investment = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 1 𝑠ℎ𝑎𝑟𝑒 × 100

Example 14: Mr. Bhim Kamble paid a broker Rs. 7,53,000 to purchase 3000 shares of
Rumal Industries available at Rs. 250 each. Find the brokerage rate.

Solution:
Let the brokerage be r%.
𝑟
Brokerage per share = 100
× 250 = 2.5r

∴Purchase cost of 1 share = (Market Price of 1 share) + (Brokerage per share)


= 250 + 2.5r

∴Purchase cost of all share =(Purchase cost of 1 share) × (No. of shares)


7,53,000 = (250 + 2.5r) × 3000
251 = 250 + 2.5r
1 = 2.5r
1
2.5
=r
r = 0.4

∴The brokerage rate was 0.4%


Example 15: Mr. B. R. Rehman purchased shares of HULCO at Rs. 420 and sold them on
the same day at Rs. 500. The broker charged 0.1% only on the sale. If Mr, Rehman gained
a net amount of Rs. 31,800 through the two transactions, find out how many shares were
traded.

Solution:

0.1
Brokerage on sale of 1 share = 100
×500 = 0.50
∴Amount received on the sale of 1 share = (Market Price of 1 share) - (Brokerage per share)
= 500 - 0.50

= Rs. 499.50
∴ Gain on 1 share = 499.50 - 420 = 79.50
Now,
Total Gain = (Gain on 1 share) × (No. of shares)
𝑇𝑜𝑡𝑎𝑙 𝐺𝑎𝑖𝑛
∴ No. of shares = 𝐺𝑎𝑖𝑛 𝑜𝑛 1 𝑠ℎ𝑎𝑟𝑒
31800
= 79.50
= 400
These 400 shares were bought and sold on that day.

Example 16: A sum of Rs. 51,102 was invested in 4% stock at 85. After the dividend was
received, the stock was sold at Rs. 80. The brokerage was 0.2% for purchase and 0.3% for
the sale. What is the net loss or gain? What was the percentage loss or gain?

Solution:
Purchase cost of 1 share = (Market Price of 1 share) + (Brokerage per share)
0.2
= 8.5 + 100 × 85 = 8.5 + 0.17 = 85.17

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑙𝑙 𝑠ℎ𝑎𝑟𝑒𝑠


No. of shares = 𝑐𝑜𝑠𝑡 𝑜𝑓 1 𝑠ℎ𝑎𝑟𝑒
51102
= 85.17
= 600

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Total Dividend = 100
× (F.V/share) × (No. of shares)
4
= 100
× 100 × 600
= Rs. 2,400

For the sale:


Amount received on the sale of 1 share = (Market Price of 1 share) - (Brokerage per share)
0.3
= 80 - 100 × 80 = 80 - 0.24
= Rs. 79.76

Amount received from the sale of 600 shares = 600 × 79.76


= Rs. 47,856

Thus,
Net Income = Dividend + Amount received from sale of 600 shares
= 2,400 + 47,856
= Rs. 50,256
Net loss = Total Investment - Net Income
= 51,102 - 50,256
= Rs. 846

Thus there was a loss of Rs. 846.

𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑠𝑠
Percentage loss =𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
× 100
846
= 51,102 × 100
=1.66

The total loss was Rs. 846 and the percentage loss was 1.66%.
Problems involving Bonus Shares:
Example 17: Ms. Kiran Murthy, a share broker, invested Rs. 33,000 to buy Rs. 100 shares
of BANANA Industries at Rs. 550. Six months later, the company declared bonus shares to
its existing shareholders in the ratio 3 bonus shares for every 5 existing shares. Post-bonus,
Ms. Murthy sold the shares at the market price which was down to Rs. 450. Find the
percentage gain or loss.

Solution: There was no Brokerage involved.


𝑇𝑜𝑡𝑎𝑙 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑙𝑙 𝑆ℎ𝑎𝑟𝑒𝑠
No. of shares purchased = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 1 𝑠ℎ𝑎𝑟𝑒
33000
= 550
= 60

For every 5 existing shares, she received 3 bonus shares.


60
For 60 existing shares, she received 5 × 3 = 36 bonus shares
Post-bonus, the no. of shares was 60 + 36 = 96.
Amount received by selling 96 shares @ Rs. 450.
= 96 × 450 = Rs. 43200.

Total Gain = Amount received on sale al shares - Total Investment


= 432000 - 33000
= Rs. 10200

𝑇𝑜𝑡𝑎𝑙 𝐺𝑎𝑖𝑛
Percentage gain = 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
× 100
10200
= 33000
× 100
= 30.91

Example 18: 32. Mr. Nakul Sachdev purchased 200 of Rs. 100 shares of a company at Rs.
250 on 15th April, 2006. On 20th July 2006, he received a dividend of 25%. On 25th July
2007, he received a bonus in the ratio 1:4. On 1st September 2007, he sold all the shares he
had for Rs. 260. Find his percentage gain if the brokerage charged was 20 paise per 100 Rs.
on both purchase and sale.

Solution:
On 15th April 2006,
0.20
Brokerage on purchase of 1 share = 100
× 250.
= Rs. 0.50.
∴ Purchase cost of 1 share = (Market Price of 1 share) + (Brokerage per share)
= 250 + 0.50
= Rs. 250.50

∴ Purchase cost of 200 shares = 200 × 250.50 = Rs. 50,100.


Now, on 20th July 2006,
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Total Dividend = 100
× (F.V/share) × (No. of shares)
25
= 100
× 100 × 200
= Rs. 5,000.

On 25th July 2007,


On every 4 shares he received 1 bonus share.
200
∴ on 200 shares, he received 4
× 1 = 50 bonus shares.
∴ His total no. of shares = 200 + 50 = 250.
On 1st September, 2007,
0.20
Brokerage on sale of 1 share = 100
× 260 = Rs. 0.52.
∴ Amount received on the sale of 1 share = Market pRICE - bROKERAGE
= 260 - 0.52
= rS. 259.48.
∴ Amount received on the sale of 250 share = 250 × 259.48
= rS. 64,870.

∴ Total Gain = 64870 - 50100 = Rs. 14,770.


𝑇𝑜𝑡𝑎𝑙 𝐺𝑎𝑖𝑛
∴ Percentage Gain = 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
× 100
14770
= 50100
× 100
= 29.48
∴ The net gain was 29.48%
Splitting of Shares:
Sometimes companies split the face value of a share and break it up into smaller units. For
example, a Rs. 100 share can be split into 10 shares each of face value Rs. 10 or, a Rs. 10 share
can be split into two shares of face value Rs. 5 each. Usually this does not affect a shareholder's
wealth. However, it can make selling of a part of the holdings easier.
Earlier, having Rs. 100 share was more of a norm. Now-a-days, the tendency is to keep the
face value of newly floated shares small and also split earlier shares of large face value into
smaller shares of smaller face value.

Example 19: Mr. Lal Krishna Basu purchased 30 shares of Rs. 10 each of Medi Pharma Ltd. on
20th January, 2007, at Rs. 36 per share. On 3rd April, 2007, the company decided to split their
shares from the face value of Rs. 10 per share to Rs. 2 per share. On 4th April, 2007, the market
value of each share was Rs. 8 per share. Find Mr. Basu's gain or loss, if he was to sell the shares on
4th April, 2007. Take brokerage as 0.5% on purchase as well as sale.

Solution:
On 20th January, 2007,
Brokerage per share = 0.5% on Market Price
0.5
= 100 × 36
= Rs. 0.18

∴ Purchase Cost of 1 share = (Market Price of 1 share) + (Brokerage per share)


= 36 + 0.18
= Rs. 36.18
∴ Total investment on 30 shares = 36.18 × 30
= Rs. 1085.40.

On 3rd April, 2007, each Rs. 10 share became 5 shares of Rs. 2 each.
Hence the number of shares increased five- fold.
∴ No. of Rs. 2 shares = 30 × 5 = 150
On 4th April, 2007,
Brokerage per share = 0.5% on Market Price
0.5
= 100 × 8
= Rs. 0.04.
∴ Total Amount Received on the sale of 1 share
= (Market Price of 1 share) - (Brokerage per share)
= 8 - 0.04
= Rs. 7.96
∴ Total amount Received on the sale of 150 shares = 7.96 × 150
= Rs. 1194
∴ Mr. Basu’s Gain = 1194 - 1085.40 = Rs. 108.60
∴ Mr. Basu’s gain would be Rs. 108.60, if he dad decided to cell share on 4th
April, 2007
Mutual Fund
A mutual fund is a professionally managed investment vehicle that pools money from multiple
investors and uses that capital to purchase a diversified portfolio of stocks, bonds, or other securities
in accordance with the fund’s investment objectives. These funds are operated by asset management
companies(AMC). Investors in a mutual fund buy units of the fund, and the value of these units i.e.
net asset value(NAV) is determined by the overall performance of the fund’s underlying investments.
An asset management company (AMC), is a financial institution or firm that specializes in managing
and overseeing the investment portfolios of individuals, institutional investors, or entities. The
primary function of an AMC is to make investment decisions on behalf of its clients, aiming to
maximize returns while managing risk within the framework of the client’s investment goals and risk
tolerance. Basically there are two types - close ended funds and open ended funds.

Close Ended M. Funds - These are offered with a fixed date of maturity and can be purchased
from Mutual Fund companies during a specific period. The units are redeemed by the fund when
the scheme expires i.e. the investor can get the amount after the expiry date of the fund. The no.
of units and the unit capital remains constant. If an investor wants to exit before the maturity
date, he can sell the units on the stock exchange at a discount or through a buy-back option by
the fund.

Open Ended Funds - These have no fixed date of maturity and the units can be sold or
repurchased at any time. The no. of units and its capital changes daily.

Load on Mutual Funds - It is a charge paid by the investor while dealing in Mutual Funds, and
represents the initial expenses like marketing. brokerage, advertising etc. Sometimes the charges
are to be paid while purchasing the units i.e. entering a Mutual Fund Scheme. It is called Entry
load or Front-end-load. If the charges are to be paid while selling the units, it is Exit load or
Back-End Load. In some cases, there can be both loads or Contingent Deferred Sales Charges
[CDSC] which is charged within a specific period of entry and it decreases with the holding
period, i.e. if the units are sold at a later date, the charges are less. Sometimes there are no
charges while purchasing or selling units and these funds are called No Load Funds.

Example 1: Growth fund had year-end assets of ₹86,20,00000 and liabilities of ₹1,20,00000.
There were 32675254 shares in the fund at the year end. What was Growth fund’s Net
Asset Value?

Solution:
Given-
Asset- ₹86,20,00,000
Liabilities- ₹1,20,00,000
No. Of units- 3,26,75,254
𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
N.A.V = 𝑇𝑜𝑡𝑎𝑙 𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠
862000000 − 12000000
= 32675254
= 26.01

Example 2: A Mutual fund had year-end assets of ₹465000000 and liabilities of ₹37000000.
If the MF NAV was ₹ 56.12, how many units must have been held in the fund?

Solution:
Given-
Asset- ₹46,50,00,000
Liabilities- ₹3,70,00,000
N.A.V- 56.12
𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 = 𝑁.𝐴.𝑉
465000000 − 37000000
= 56.12
= 7,626,514.611

Example 3: MS Archana invested ₹10000 in HDFC liquid fund growth on 13 February


2007 at a NAV of ₹14.7228 and redeemed all the units on 1st August 2008 when the net
asset value was ₹15.2640 find the total gain and the rate of return

Solution:
𝐴𝑚𝑜𝑢𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑
𝑇𝑜𝑡𝑎𝑙 𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 = 𝑁.𝐴.𝑉
1000
= 14.7228
= 679.21
Amount received
after Redemption = Redemption Price × No. of units
= 15.2640 × 679.21
= 10,367.46

Gain = Amount Received - Amount Invested


= 10,367.46 - 10000
= 367.46

𝑅𝑒𝑑𝑒𝑚𝑝𝑡𝑖𝑜𝑛 𝑁𝐴𝑉 − 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑁𝐴𝑉


Rate of Return = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑁𝐴𝑉
× 100
15.2640 − 14.7228
= 14.7228
× 100
=3.675%
∴ Total Gain was ₹367.46 and Rate of Return is 3.675%

Example 4: A person invested ₹6500 in SBI Magnum, growth at a net asset value of ₹22.72
and an entry load of 2.25% on 5th May 2008 how many units did the person? What was the
value of those units at the end of the day?

Solution:
Purchase price = NAV + Entry Load
= 22.72 + 2.25% of 22.72
= 22.72 + 0.5112
=23.23

𝐴𝑚𝑜𝑢𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑
No. of unit purchased = 𝑁.𝐴.𝑉
6500
= 23.23
= 279.81

Value of those investment on the same day = NAV on 5th May 2008 × No. of Units
= 22.72 × 279.81
= 6357.28

Example 5: ₹12000 invested in ICICI Prudential power growth on 28 January 2008 when
the net asset value was ₹ 105.59 given a number of units whose value At the end of the day,
it was ₹11735.48. find the number of units and entry load in %

Solution:
𝐴𝑚𝑜𝑢𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑
𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 = 𝑁.𝐴.𝑉
12000
= 105.59
= 113.64

Entry load = 12000 - 11735.48


= 264.52

∴ % Entry Load =
𝐸𝑛𝑡𝑟𝑦 𝐿𝑜𝑎𝑑 𝑖𝑛 ₹
𝑣𝑎𝑙𝑢𝑒𝑠 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠
× 100
264.52
= 11735.48
× 100
= 2.25%
Example 6: On 29 March 2005 Mr Murti invested ₹5000 in Reliance equity opportunity
Fund Growth plan, at a net asset value of ₹10. He redeemed all the units on 22nd
September 2005 with 1% exit load and hence gained ₹1116.65.find the net asset value at
which he redeemed his unit.

Solution:
𝐴𝑚𝑜𝑢𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑
𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 = 𝑁.𝐴.𝑉
5000
= 10
= 113.64

Let NAV on 22nd September be ‘x’.

∴ % Exit Load per unit = 1% of x


= 0.01x

So, Redemption price per unit = x - 0.01x = 0.99x

∴ Amount received after Redemption = 0.99x × 500 = 495x

Gain = Amount Received - Amount Invested


116.65 = 495x - 5000
∴x =
116.65 + 5000
495
∴x = 12.35

So, NAV on 22nd September is ₹12.35.

Example7. Mr Singh invested ₹18000 in Richmond IGP debt fund dividend on 14thApril
2005 when the net asset value was ₹ 56.6218. On 6th July 2005 he received a dividend at the
rate of ₹6 per unit. On eleventh October 2005 he redeemed the units and made a total gain
of ₹2028.78. The fund has no loads. What was the net asset value at which he redeemed the
units?

Solution:
𝐴𝑚𝑜𝑢𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑
𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 = 𝑁.𝐴.𝑉
18000
= 56.6216
= 317.89
Dividend Amount = Rate of Dividend × No. of Units
= 6 × 317.89
= 1907.34

𝑇𝑜𝑡𝑎𝑙 𝐺𝑎𝑖𝑛 × 100


Rate of return = 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
2028.78 × 100
= 18000
= 11.271
(Note- above formula can also be used to calculate Rate of Return)

Let ‘x’ be the NAV at which he redeemed the units


𝑅𝑒𝑑𝑒𝑚𝑝𝑡𝑖𝑜𝑛 𝑁𝐴𝑉 − 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑁𝐴𝑉
Rate of Return = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑁𝐴𝑉
× 100
(𝑥 − 56.6218 + 6)
11.271 = 56.6218
× 100

∴x =
11.271 × 56.6218 +56.6218 − 6
100

∴x = 361.857

∴ Redemption NAV is ₹361.857.

Example8:- On 26th August 2003 Mr Pinto invested ₹10000 in P and K bonds fund
dividend plan which has neither an entry load nor an exit load.The net asset value as on
26th August 2003 was ₹42.2895. On 15th December 2003, he received a dividend at ₹1.5 per
unit on 5th January 2004. Mr Pinto redeemed the units at Net Asset Value of ₹42.8314. find
his total gain and rate of return.

Solution:
Purchase Price = NAV on 26th August 2003
= 42.2895

𝐴𝑚𝑜𝑢𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑
𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 = 𝑁.𝐴.𝑉 𝑜𝑟 (𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒)
10000
= 42.2895
= 236.4653

Dividend Amount = Rate of Dividend × No. of units


= 1.5 × 236.4653
= 354.697
∴ Redemption price Per unit = NAV on 15th December
= 42.8314

∴ Amount received = 42.8314 × 236.4653


= 10,128.139

Capital Gain = Amount Received - Amount Invested


= 10,128.139 - 10000
= 128.139

Total Gain = Capital Gain + Dividend Amount


= 128.139 + 354.697
= 482.836

𝑅𝑒𝑑𝑒𝑚𝑝𝑡𝑖𝑜𝑛 𝑁𝐴𝑉 − 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑁𝐴𝑉 + 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡


Rate of Return = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑁𝐴𝑉
× 100
42.8314 − 42.2895 + 1.5
= 42.2895
× 100
= 4.82%
∴ Rate of return is 4.82%

Example 9. A person invested ₹20000 in HDFC prudence fund on the dividend


reinvestment option on 25th November 2007 when the net asset value was₹35.741 and the
entry load was 2.25%. The fund declared a dividend at ₹5 per unit on 22 February 2008
and the ex-dividend net asset. The value was ₹28.503. find the number of units re-invested.
Find the total number of units after the dividend is reinvested.

Solution:
Purchase Price = NAV on 26-11-2007 + 2.25% entry load
= 35.741 + 2.25% 0f 35.741
= 36.5451

𝐴𝑚𝑜𝑢𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑
𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 = (𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒)
20000
= 36.5451
= 547.2689

Dividend Calculation for 22-02-2008

Dividend Amount = Rate of Dividend × No. of units


= 5 × 547.2689
= 2736.3445

Now, ex dividend
NAV = Pre dividend NAV - rate of dividend
= 28.503 - 5
= 23.503

Now the dividend amount of 2736.3445 is reinvested with this ex-dividend NAV of ₹ 23.503.

∴ No of units Reinvested =
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐴𝑚𝑜𝑢𝑛𝑡
𝐸𝑥− 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐴𝑚𝑜𝑢𝑛𝑡
2736.3445
= 23.503
= 116.42

∴ Total no of units = Pre dividend units + Reinvested units


= 547.2689 + 114.42
= 663.6889
SYSTEMATIC INVESTMENT PLAN (SIP)

Mutual Funds were formed to face the ups and downs in the share-market so that a common
person can invest in the market through the Mutual Funds, Mutual Fund schemes are managed
by qualified professionals having the expertise of investment techniques. The Asset Management
Companies (AMC) are backed by dedicated and experienced research teams. They have many
schemes like Open Ended Funds; Close Ended Funds; Equity Linked Saving Schemes (ELSS);
New Fund Offer (NFO): Fixed Maturity Plan (FMP), Liquid Fund etc. one such scheme is
Systematic Investment Plan (SIP).

SIP is like a recurring deposit in a bank or a post office where you put fixed small amount every
month. A specific amount is invested at regular time intervals in a Mutual Fund. The investor can
decide the date and the type of scheme of the Mutual Fund. In general the minimum amount is
1,000 per month, in diversified equity schemes. It can be even 2500 as well, in ELSS Schemes.
The investor can give either post-dated cheques or Electronic Clearing System (ECS)
instructions to invest in the desired scheme. Sometimes, there is no entry load so that the whole
investment can be used to purchase units, but there is Contingent Deferred Sales Charge (CDSC)
as exit load if the units are redeemed in less than a specific period.

Every month, the investor invests a fixed sum, say 1,000, 2.000, 5,000 etc. in SIP on a fixed date
in the scheme. The no. of units purchased by him are calculated by dividing the fixed amount by
the N.A.V. on that date of the month. If N.A.V. increases, the no, of units decreases and if N.A.V.
decreases, the no. of units purchased, increases. Thus, on the whole, it lowers the average cost of
units because indirectly, the investor buys more units when N.A.V. prices are low and he buys
less units, when N.A.V. prices are high. It is called Rupee-Cost-Averaging.

Example1: Mr. Bhat invested ₹5,000, on 1st of every month for 5 months in a-SIP of a
Mutual Fund, with N.A.V. 's as 48.15, 52.83, 41.28, 35.44 and 32.65 respectively. There was
no entry load charged. Find the average price, Mr. Bhat paid, using the Rupee - Averaging
Method. After 6 months, he sold all his units when N.A.V. was ₹51.64 with contingent
deferred sales charge (CDSC) as 2.25%. Find his net gain.

Solution:
Consider the following table:

Month Amount in ₹ NAV No. of units

1 5,000 48.15 5000


= 103.84
48.15
2 5,000 52.83 5000
= 94.64
52.83

3 5,000 41.28 5000


= 121.12
41.28

4 5,000 35.44 5000


= 141.08
35.44

5 5,000 32.65 5000


= 153.14
32.65

Total 25,000 613.82

Using Rupee - Averaging Method, for purchase,


The average price
𝑇𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡
Of units = 𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠
25000
= 613.82
= 40.73

For selling, Selling price


of 1 unit = 51.64 - 2.25% of 51.64
= 50.48

Total sales = 50.48 × 613.82


= 30,991.77

∴ His Net gain = 30,991.77 - 25,000


= 5,991.77

Example 2:Mr. Kothari invested in a systematic investment plan of a M.F., a fixed sum of
10,000 on 5th of every month, for 4 months. The N.A.V. on these dates were 34.26, 46, 12,
39.34 and 41.85. The entry load was 2.25% throughout the period. Find the average price,
including the entry load, using the Rupee-Cost Averaging Method, How does it compare
with the A.M. of the prices?

Solution:
Consider the following table:
Month NAV Entry Load= 2.25% Total Price= NAV+ Entry No. of Units =
10000
𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑖𝑐𝑒
load

1 34.26 0.77085 35.030 285.462


2 46.12 1.0377 47.157 212.054

3 39.34 0.88515 40.225 248.600

4 41.85 0.9141 42.791 233.690

Total 165.205 979.808

Using Rupee - Averaging Method, for purchase,


The average price
𝑇𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡
Of units = 𝑇𝑜𝑡𝑎𝑙 𝑁𝑜. 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠
40000
= 979.808
= 40.824

𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑖𝑐𝑒
A.M. of Prices = 4
165.205
= 4
= 41.301

Thus, the average price using Rupee Cost Averaging method is less than A.M. of prices.

Some solved sums


Rs.600 each with 2 % dividend. After certain months he decided to sell those shares at a market
price Rs 550. Find a) total dividend paid b)Gain or loss

Solution:-Given
No. of shares=200
Face value= Rs. 150
Market price= Rs.600
Rate of dividend= 2%
Total investment= No. of shares *M.P +brokerage = 200*600 + 0= Rs. 1,20,000
a)Total dividend= No. of shares* face value*% of dividend
=200*150*2/100 = 600
Total dividend given by the company is Rs.600.
b)Gain or loss
Selling price of each share = Rs.550
Total sale= S.P* No. of shares + total dividend
= 550*200 + 600
= 1,10,000+600
= 1,10,600
Here Selling price < total investment. Hence there is loss in this transaction
Loss= Total investment – Total sell
= 120000-110600= 9400
* 100= 7.83%
𝑙𝑜𝑠𝑠 9400
% of loss= 𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
* 100 = 120000
Hence there is loss of 7.83 %

Q2)In the given problem above ,after certain months he decided to sell those shares at markets
price Rs 550. Find a)if the company is giving 3 bonus shares for every 5 shares i.e.(3:5) as a
dividend. find the rate of return. b)if the brokerage 0.5% paid for both transactions(Considering
purchase price Rs.600) when the market price at the time of sale goes up to Rs 800. find % of profit
or loss
Solution :-
a)if the company is giving 3 bonus shares for every 5 shares as a dividend
200
Extra shares= 5
* 3= 120
Hence to total shares he had= 200+120=320
Total sale = S.P* No. of shares+ dividend - brokerage= 320* 550+0-0=Rs. 176000
Here Selling price > total investment. Hence there is profit in this transaction
Return= Total sell- total investment= 176000-120000 = 56000
* 100= 46.67%
𝑟𝑒𝑡𝑢𝑟𝑛 56000
Rate of return= 𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
* 100 = 120000

b) brokerage= 0.5%
Market price= Rs.600
Total Brokerage paid at the time of purchase=0.5%* 600 *200= 3*200= 600
Hence total amount paid while purchasing the shares = 1,20,000+ 600=Rs. 1,20,600
MP at the time of sell= Rs. 800
Total Brokerage paid at the time of sell=0.5%* 800 *200= 4*200= 800
Total selling price= M.P*No. of shares + dividend -brokerage= 1,60,000+600-800=Rs. 1,59,800
Here Selling price > total investment. Hence there is profit in this transaction
Profit= Total sell – Total investment= 159800-120600= Rs. 39200.

Q3) An investor holds 400 shares of ABC Corporation, which he bought at the market price of
Rs.8,500 each. The face value of each share is 50. The company decided to split each share so that
the new face value would be 5 per share. If the market price of the shares after the split is 1,500,
find the number of shares held by the investor after the split and his gain or loss
Solution:- Total purchase (TP) = 400×8500 =3400000
Number of shares purchased = 400
Given split ratio = 1: 10
Thus, after the splitting of shares, the new number of shares = 400×10 = 4000.
Total Sell Value after Split (TS) = 1500×4000 = 6000000
As TS > TP, there is a gain and the gain = 6000000−3400000 = 2600000.
Practice problem to be solved (Shares)
1. A company has 80,000 equity shares outstanding, consisting of 20,000 preference shares with
a dividend rate of 8% and 60,000 ordinary shares with face value Rs.100 each. If the company’s
total profit for the year is Rs.15,00,000 and Rs.3,00,000 is kept in reserve, what is the rate of
dividend distributed to the ordinary shareholders?

2. A company has 200,000 equity shares outstanding, consisting of 80,000 preference shares
with a dividend rate of 9% and 120,000 ordinary shares. If the company’s total profit for the year
is Rs.40,00,000 and Rs.8,00,000 is kept in reserve, what is the rate of dividend distributed to the
ordinary shareholders?

3. An investor purchases Rs.15,000 worth of 9% Rs.25 shares quoted at Rs.70 each. Calculate
the dividend received by the investor, and find the rate of return on investment.

4. You invest Rs.40,000 in 7.2% Rs.50 shares quoted at Rs.45. Calculate the dividend received,
and find the rate of return on investment.

5. A person invested Rs.1,80,000 partly in 8% shares at Rs.200 each and the remaining in 5%
shares at Rs.150 each. Her incomes from the two stocks were in the ratio 3:2. Find the amount
she invested in the first and the second shares respectively.

6. A person invested Rs.3,00,000 partly in 9% shares at Rs.250 each and the remaining in 4%
shares at Rs.300 each. Her incomes from the two stocks were in the ratio 7:5. Find the amount
she invested in the first and the second shares respectively.

7. An investor purchased 800 shares of face value Rs.100 of a company at a market price of
Rs.180 per share. The company declared a dividend of 20% on shares. After receiving the
dividend, he sold the shares at Rs.220 per share. Calculate his overall gain and hence, the
percentage gain in the entire deal, considering the broker rate to be 0.25%.

8. An investor purchased 300 shares of face value Rs.10 of a company at a market price of Rs.50
per share. The company declared a dividend of 12% on shares. After receiving the dividend, he
sold the shares at Rs.60 per share. Calculate his overall gain and hence, the percentage gain in
the entire deal, considering the broker rate to be 0.15%.

9. An investor owns 150 shares of a company, which he purchased at the market price of Rs.400
each. The company declared a bonus of 1 share for every 5 shares held. Calculate how many
shares the investor will have after availing of the bonus scheme. Also, find the investor’s gain
and percentage gain if the market price of shares after the bonus is Rs.350 per share.
10. An investor owns 200 shares of a company, which he purchased at the market price of
Rs.1,200 each. The company declared a bonus of 1 share for every 3 shares held. Calculate how
many shares the investor will have after availing of the bonus scheme. Also, find the investor’s
gain and percentage gain if the market price of shares after the bonus is Rs.1,000 per share.

11. An investor holds 400 shares of ABC Corporation, which he bought at the market price of
8,500 each. The face value of each share is Rs.50. The company decided to split each share so
that the new face value would be Rs.5 per share. If the market price of the shares after the split is
Rs.1,500, find the number of shares held by the investor after the split and his gain or loss.

12. An investor holds 200 shares of PQR Inc., which he bought at the market price of Rs.12,000
each. The face value of each share is Rs.200. The company decided to split each share so that the
new face value would be Rs.20 per share. If the market price of the shares after the split is
Rs.2,400, find the number of shares held by the investor after the split and his gain or loss.

Practice problem to be solved (Mutual fund)


1.Calculate the NAV given the following information: Value of stocks: Rs.230 crore. Value of
bonds: Rs.5 crore, Value of money market instruments: Rs.2.39 crore, Dividend accrued but not
received: Rs.7.5 crore, Interest accrued but not received: Rs.2.34 crore, Fees payable: Rs.0.41
crore and No. of outstanding units: 2.65 crore.

2. Mr Singh invested Rs.18000 in Richmond IGP debt fund dividend on 14th April 2005 when
the net asset value was Rs.56.6218. On 6th July 2005 he received a dividend at the rate of Rs.6
per unit. On eleventh October 2005 he redeemed the units and made a total gain of Rs.2028.78.
The fund has no loads. What was the net asset value at which he redeemed the units?

3. A person invested 6500 Rs.in SBI Magnum, growth at a net asset value of Rs.22.72 and an
entry load of 2.25% on 5th May 2008 how many units did the person get? What was the value of
those units at the end of the day?

4. On 26th August 2003 Mr Pinto invested Rs.10000 in P and K bonds fund dividend plan which
has neither an entry load nor an exit load. The net asset value as on 26th August 2003 was
Rs.42.2895.On 15th December 2003, he received a dividend at Rs.1.5 per unit on 5th January
2004. Mr Pinto redeemed the units at Net Asset Value of Rs.42.8314. Find his total gain and rate
of return.

5. A person invested rupees 20000 in HDFC prudence fund on the dividend reinvestment option
on 25th November 2007 when the net asset value was Rs.35.741 and the entry load was rupees
was 2.25%. The fund declared a dividend at Rs.5 per unit on 22 February 2008 and the
ex-dividend net asset value was Rs.28.503. find the number of units re-invested. Find the total
number of units after the dividend is reinvested.
6. Mr Shyamal invested Rs.10000 at a net asset value of Rs.60.74 with a 2.25% entry load in the
dividend reinvestment plan of the Reliance Growth Fund . On 20th August 2007 ,the then
prevailing NAV price was Rs.55.54 and the fund declared a dividend at 35% on the original Net
Asset Value of Rs.10 per unit. Find the ex-dividend NAV. find the number of units accumulated
in Shyamal’s account after declaration of dividend.

7. A SIP in Reliance liquid fund TPRG, was started by a person on 7th August 2007. Five
monthly installments of Rs.1,000 each were invested on the 7th of every month up to 7th
December 2007.The net asset values were 18.5268, 18.6389, 18.7575, 18.8682 and 18.9945,
respectively. Find the average acquisition cost per unit up to four decimal places.

8. Find the average acquisition cost per unit of the SIP of Rs.1000 invested in HDFC fund
dividend plan on the 10th of July, August and September 2007 with the net asset value 44.40,
43.716 and 45.268 with an entry load of 2.25%
Risk and Return
In finance, it is often assumed that the key factors influencing the investor’s investment decisions are
‘risk’ and ‘return’. Risk refers to the possibility of deviation between the actual outcome and the desired
or expected outcome. In practice, return is almost always interpreted as the expected investment return.
There is generally a positive correlation between the level of risk an investment carries and the potential
return it offers. In other words, investments that have higher levels of risk tend to provide the potential for
higher returns, while investments with lower risk typically offer lower potential returns. For example:
Government bonds are less risky as compared to Equity shares. So, the expected return on Equity shares
will be higher than Government bonds

Types of Risks
• Credit Risk: Credit risk is the risk of loss resulting from the failure of a borrower or issuer to meet their
financial obligations. It applies to loans, bonds, and other credit instruments. Investors or lenders face
credit risk when borrowers default on their payments or become unable to repay their debts.

• Liquidity Risk: Liquidity risk is the risk of not being able to buy or sell an asset quickly without
significantly impacting its price. It applies to both individual investors and financial institutions. Assets
with low liquidity may be challenging to sell quickly at fair prices during volatile or stressed market
conditions.

• Interest Rate Risk: Interest rate risk refers to the potential impact of changes in interest rates on the
value of fixed-income investments, such as bonds. When interest rates rise, the value of existing bonds
tends to decrease, and vice versa.

• Inflation Risk: Inflation risk is the potential for a decline in the purchasing power of money over time
due to rising prices. It affects the real value of assets and returns, especially those with fixed income or
cash flows.

• Currency Risk (Foreign Exchange Risk): Currency risk arises from investments or transactions
denominated in foreign currencies. Changes in exchange rates can impact the value of these investments
when converted back to the investor’s home currency.

Preliminaries: Investors’ attitudes toward risk


Investors’ attitudes toward risk refer to their individual preferences and willingness to take on different
levels of risk when making investment decisions.
Attitude toward risk is a crucial factor in determining an investor’s investment strategy. It can
vary significantly from one investor to another based on their financial goals, time horizon, financial
situation, and personal temperament. There are generally three main categories of investors based on their
attitude toward risk:
Risk-Averse Investors.- Risk-averse investors have a low tolerance for risk and prioritize the
preservation of capital over potential returns. They are more concerned about the possibility of losing
money than missing out on higher returns. Risk-averse investors typically prefer safer, more stable
investments, such as government bonds or high-quality corporate bonds.They are willing to accept lower
returns in exchange for reduced volatility and a higher likelihood of capital preservation

Risk-Neutral Investors. Risk-neutral investors are indifferent to risk and focus on maximizing their
expected returns. They are not overly concerned about fluctuations in the value of their investments and
are willing to take on moderate levels of risk. Risk-neutral investors may have a balanced portfolio with a
mix of assets that offer a combination of potential growth and stability.

Risk-Seeking Investors. Risk-Seeking investors have a high tolerance for risk and are willing to take on
higher levels of uncertainty in pursuit of potentially higher returns. They are comfortable with the idea of
experiencing significant fluctuations in the value of their investments and are more willing to invest in
riskier assets, such as small-cap stocks, emerging markets, and alternative investments. Risk-tolerant
investors believe that the potential for greater rewards justifies the increased risk.

Historical Returns and Risk


Prior to making any investment decision, it is crucial to estimate the distributions of the expected returns
in future. Before we work with prospective returns, let us understand how to compute historical returns.

Total Return
The total return on an investment in a given period can be split into two components viz., current yield
and capital gains/loss yield.
𝐶𝑎𝑠ℎ 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑃𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑣𝑒𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
Total Return= 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑎𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 + 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑎𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔

which can be simply expressed as:


𝐶𝑎𝑠ℎ 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 + 𝑃𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑣𝑒𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
Total Return = 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑎𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔
In formal terms:
𝐶+(𝑃𝐸 −𝑃𝐵)
R= 𝑃𝐵

where R is the total return over the period, C is the cash payment received during the period, PE is
the ending price of the investment, and PB is the beginning price.
Risk and Return of a Single Asset

So far we looked at past returns. Now we discuss prospective (future) returns. The return from a
a financial instrument can take various possible values, each attached with a probability. For example,
if the return on a share is 11 then in immediate future, it will have either of the following effects:

State of the Economy Effect on Share Price Probability of Return on Share


Occurrence

Boom Rise 0.3 16

Normal Stays same 0.5 11

Recession Fall 0.2 6

Expected Rate of Return


The expected rate of return is the weighted average of all possible returns multiplied by their
respective probabilities. It can be mathematically represented as:
𝑛
E(R) = ∑ 𝑝𝑖𝑅𝑖
𝑖=1

where E(R) is the expected return, Ri is the return for the ith possible outcome, pi is the probability
associated with Ri and n is the number of possible outcomes.

Standard Deviation of Return


Risk refers to the dispersion of a variable. It is commonly measured by the variance or the standard
deviation. The variance of a probability distribution is the sum of the squares of the deviations of
actual returns from the expected return, weighted by the associated probabilities. In symbols,
𝑛
2 2 2 2
σ = ∑ 𝑝𝑖(𝑅𝑖 − 𝐸(𝑅)) = E( 𝑅𝑖 ) - [𝐸(𝑅𝑖)]
𝑖=1
2
where σ is the variance, Ri is the return for the ith possible outcome, pi is the probability associated
𝑡ℎ
with the 𝑖 possible outcome, and E(R) is the expected return. Since variance is expressed as squared
returns, it is somewhat difficult to grasp. So its square root, the standard deviation, is employed as an
equivalent measure.
2
σ= σ

where σ is the standard deviation.


Ex:- Using the data given above, calculate the expected rate of return and standard deviation of return of
the share price
Solution:-

State of the Economy pi Ri pi*Ri (Ri-E(R)) (Ri-E(R))2 pi(Ri-E(R))2

Boom 0.3 16 4.8 4.5 20.25 6.075

Normal 0.5 11 5.5 -0.5 0.25 0.125

Recession 0.2 6 1.2 -5.5 30.25 6.05

𝑛
E(R) = ∑ 𝑝𝑖𝑅𝑖 =0.3-16+0.5*11+0.2*6 =11.5
𝑖=1

𝑛
2 2
σ = ∑ 𝑝𝑖(𝑅𝑖 − 11. 25) = 12.25
𝑖=1

σ = 12. 25 =3.5

Therefore, the expected rate of return is 11.5% and the standard deviation of return is 3.5

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