IE and IFS

Unit 41
MUTUAL FUNDS
MUTUAL FUNDS:

• Mutual Fund: Is a mechanism for pooling funds from the public by issuing
units to them, investing these funds in securities in accordance with the
objectives as disclosed in the offer document. Investors of MFs are known as
unit holders. MFs have to be registered with SEBI, before they collect funds
from public.

• A MF is set up in the form of a Trust, which has sponsors, trustees, AMC

(Asset Management Company) and custodians. A sponsor is like a promoter of
a company.
MUTUAL FUNDS:

• Trustees of MF hold the property for the benefit of the unit holders, and
have general power & superintendence over AMC. At least two-thirds of
trustees must be independent, i.e. they should not be associated with the
sponsors.

• An AMC, approved by SEBI manages the funds by making investments.

50% of directors of AMC must be independent.

• A Custodian, who is also registered with SEBI, holds the securities of

various schemes in its custody.
MUTUAL FUNDS:

• NAV = Net Asset Value Market value of securities of the scheme less the
expenses incurred on the scheme divided by the total number of units in
such scheme. NAV of the schemes should be published on a daily or
weekly basis, depending upon the type of scheme.

• In India, Unit Trust of India was set up in 1963. The first MF Scheme
launched by UTI was Unit Scheme, 1964 (US-64). Many PSBS, GIC, LIC
and many private sector banks like ICICI, HDFC, Axis and many private
sector and foreign firms have entered the MF market after 1987 and
1993.
MUTUAL FUNDS:

SEBI has classified MFs in the following categories:

Equity schemes,

Solution Oriented Schemes

Debt schemes,

Hybrid Schemes,

Other schemes
MUTUAL FUNDS:

• An open-ended fund/scheme is available for subscription

and repurchase on a continuous basis. It has no fixed
maturity period. Its key feature is liquidity..
Open ended

• A close-ended scheme has a stipulated maturity period of

3-5 years & is open for subscription only during a
specified period (15 days) at launch. To provide an exit
route to the investors, some MFs provide an exit route
Close ended t h r o u g h p e r i o d i c r e p u r c h a s e a t N A V .
MUTUAL FUNDS:
• An interval fund is a close-ended fund that allows repurchase and redemption during
specific periods. The transaction period has to be minimum 2 days and there should be at
least15 days gap between two transaction periods.

• Sector Specific/thematic funds these funds invest in some specified sectors such as
pharmaceuticals, software, Fast Moving Consumer goods-FMCG.

• FoF- Fund of Funds Scheme- is a scheme that invests in other schemes of the same MF or
other MFs. Under equity, MFs offer Large Cap Fund, Mid Cap Fund, Small Cap Fund,
Multi Cap Fund etc.

• 'Cap' here means market capitalization and the stocks are selected based on market
capitalization. For example, in case of Large Cap Fund, minimum investment in large cap
tocks should be 80%. In most of the other funds, minimum investment to be made in small,
mid cap etc. would be 65% of total assets.
MUTUAL FUNDS:

• "Value Fund", "Contra Fund' and "Focused Fund": These funds follow
value, contrarian or focused investment strategies and invest a
minimum 65% of total assets in equities according to their investment
strategies.

• Equity Linked Savings Scheme (ELSS) schemes offer Income Tax

benefits under Sec. 80-C (presently upto Rs. 1,50,000 in a FY). Lock-in
period is 36 months (for each instalment in case of SIP), and these
invest a minimum 80% in equity.
MUTUAL FUNDS:
Under Open-ended Debt Schemes, we have

• Overnight Fund (securities having maturity of 1 day)

• Liquid Fund (debt and money market securities with maturities upto 91 days)

• Ultra Short Duration Fund (Macaulay Duration 3-6 months)

• Low Duration Fund (Macaulay Duration 6-12 months)

• Money Market Fund (maturity up to 1 year)

• Short Duration Fund (Maturity 1-3 years) etc.

• For Long Duration Fund, maturity can go beyond 7 years.

MUTUAL FUNDS:

• Hybrid Funds invest both in debt and equity in proportions depending on

whether they are conservative, balanced or aggressive funds.

• All MFs to depict the level of risk by a riskometer. The different levels
of risk are: Low, Moderately Low, Moderate, Moderately High, High and
Very High.
MUTUAL FUNDS:

TYPES OF MUTUAL FUNDS:.

• Growth Scheme/Equity Oriented scheme: The aim is to provide capital

appreciation over medium to long-term period. Such schemes invest a major
part of their corpus in equities. Investors have the dividend option or the
capital appreciation

• Income/ Debt Oriented Scheme The aim to provide regular income to the
investors. Such schemes invest in fixed income securities like bonds,
debentures, Govt. securities and money market instruments.

• Balance fund/ scheme- aimed at providing both growth and regular income.
 MUTUAL FUNDS:
• Liquid fund/ money market fund These are also income funds and aimed to
provide easy liquidity.

• Gilt Fund- These funds invest exclusively in Govt. securities and have no
risks.

• Index Funds- The funds are invested in the index-based schemes.

• Active Fund is one in which fund managers are actively involved in investing
the fund's money, based on their perception. Passive Funds are those which
mimic the portfolio of a particular index like NIFTY-50.
MUTUAL FUNDS:
SUPERVISION OF MUTUAL FUNDS:

• SEBI is the regulator of all the MFs in India.

• AMFI (Association of Mutual Funds of India) is a Self-Regulatory Organization

(SRO), which plays the role of facilitator & upholder of industry best practices;
maintaining high professional& ethical standards to interact with SEBI, RBI,
GOI and other regulatory bodies on matters relating to MF industry; to
disseminate information about MF industry etc.

• New Fund Offer (NFO); In case of open ended & close ended schemes, except
ELSS, NFO should be open for up to 15 days. For RGESS, it is 30 days. Minimum
subscription amount :Rs.20 cr. for debt-oriented and balanced schemes & for
other schemes Rs.10 cr.

• An average Assets Under Management (AUM) of Rs. 20 cr. on half-yearly rolling

basis should be maintained for open-ended debt-oriented schemes. The scheme, for
which there was NFO, should be available for ongoing re-purchase, sale or
trading within 5 business days of allotment.
 MUTUAL FUNDS:
Risks associated with MFs:.
Market •It is the risk of adverse movement in values due to
environ factors like inflation, recession, political unrest etc. It
ment is also called systematic risk as it affects all the MFs.
risk:

Concent •Focusing on one sector, one company or one MF.

ration
Risk:

•It is more in debt funds, as the value of bonds and debentures have an inverse
Interest relationship with bond yields.
Rate Risk:

•A number of MFs like tax saving and ELSS funds have lock -in periods of 3-5 years.
This results in liquidity risk to the investor, as he will not be able to dispose off
Liquidity
Risk: his units without loss of tax benefits.
MUTUAL FUNDS:
Calculating Return on MF Investment:.

• Absolute Return Method: Simple increase or decrease in investment in terms of percentage,

without considering the time taken for change.

• Annualized Return Method: This is ideal for investments exceeding 1 year.

Compounded Annual Growth Rate (CAGR)

 = [Current value / Beginning Value]^ (1/number of years) - 1

• This can also be measured using XIRR function in Excel.

• Total Expense Ratio: Annual operating expenses (administrative, management, advertising

related expenses) of the fund, expressed as a percentage of the fund's daily net assets.

• Load and no load funds: A load fund charges a % of NAV for entry/exit.
MUTUAL FUNDS:
MUTUAL FUNDS:
STRATEGIES FOR INVESTMENT IN MFS:

• Systematic Investment Plan (SIP): allows an investor to invest a fixed sum (as low
as Rs. 500) monthly or quarterly for a predetermined period. This has advantages such
as power of compounding, rupee cost averaging & disciplined savings habit.

• Systematic Transfer Plan (STP): It is a technique through which an individual gives

consent to a MF to systematically transfer money from one scheme to another of the
same MF.

• Systematic Withdrawal Plan (SWP): It is the opposite of SIP. In SWP, individuals

redeem money from MF schemes in small amounts in frequencies of week, month or
quarter. This can be used as a source of regular income for individuals, especially
retirees.
MUTUAL FUNDS:
Alternative Investment Funds (AIF):

• These are funds established or incorporated in India in the form of a trust or a company or
LLP, or a body corporate.

• Which is a privately pooled investment vehicle which collects funds from investors, whether
Indian or foreign for investing in accordance with a defined investment policy for the
benefit of its investors, and.

• Is not covered under SEBI (MF) Regulations, 1996, SEBI (Collective Investment Schemes)
Regulations, 1999, or any other regulation of SEBI.

• Family Trusts, ESOP Trusts, Employee Welfare Trusts, Holding companies, other SPVS
regulated under specific regulatory framework, funds managed by Securitization Company or
Reconstruction Company and funds directly regulated by other regulators are NOT
considered as AIF.
 MUTUAL FUNDS:
• Popular CAT III Long Only AIFs open for subscription are:

• 1. ICICI Equity opportunities AIF

• 2. IIFL Equity opportunities AIF

• 3. Quest Smart Alpha - Rising Leaders AIF &

• 4. Carnelian SHIFT

• 5. Buoyant multicap AIF

• Popular CAT III Long Short AIFs open for subscription are:

• 1. Tata Equity Plus Absolute Return Fund

• 2. ITI Long Short Equity Fund

• 3. Avendus Enhanced Return Fund-II

• 4. Edelweiss Alternative Equity

• 5. True Beacon AIF