MUTUAL FUND

Presented By
Priya Arora
In March2010, the Indian mutual fund
industry has 40 players. The number of
public sector players has reduced from 11
to 5. The public sector has gradually
receded into the background, passing on a
large chunk of market share to private
sector players.

Mutual fund industry and structure

The Indian mutual fund industry
follows structure
Fund Sponsor

Trustees

Asset Management
Company

Agent

Custodian
Any person or corporate body that
establishes the Fund and registers it with
SEBI.
SEBI will grant a permission to start a
mutual fund only to a person of integrity,
with significant experience in the financial
sector and a certain minimum net worth

Fund Sponsor
Once SEBI is satisfied with the credentials
and eligibility of the proposed Sponsors, the
Sponsors then establish a Trust under the
Indian Trust Act 1882.
Trustees are the individuals authorized to act
on behalf of the Trust. Contracts are entered
into in the name of the Trustees.
 Once the Trust is created, it is registered
with SEBI, after which point, this Trust is
known as the mutual fund.

Trust and Trustees

 Asset Management Company

• Acts as an invest manager of the Trust

under the Board Supervision and direction
of the Trustees.
• Has to be approved and registered with
SEBI.
• Will float and manage the different
investment schemes in the name of Trust
and in accordance with SEBI regulations.
• Acts in interest of the unit-holders and
reports to the trustees.
• At least 50% of directors on the board
are independent of the sponsor or the
trustees.
Registrar and Transfer Agents (RTAs)
maintain the investor’s (unit holder’s)
records, reducing the burden on the
AMCs.

Transfer Agents
Has the responsibility of physical handling
and safe keeping of the securities.
• Should be independent of the sponsors
and registered with SEBI.

Custodian
Mutual fund is a investment tool that allows
to invest in the equities, bonds and other
securities
It pools the money of several investors and
invests this in stocks, bonds, money market
instruments and other types of securities.
owner of a mutual fund unit gets a
proportional share of the fund’s gains,
losses, income and expenses.

What is Mutual Fund?

 Passed
Pool Their
back to
money with

Generates
Invest in

Mutual Fund Operation

Flow Chart
Classification
Open-end Fund
• Available for sale and repurchase at all
times based on the net asset value (NAV)
per unit.
• Unit capital of the fund is not fixed but
variable.
• Fund size and its total investment go up
if more new subscriptions come in than
redemptions and vice-versa.

Open-end Vs. Closed-end Funds

Closed-end Fund
• One time sale of fixed number of units.
• Investors are not allowed to buy or
redeem the units directly from the funds.
Some funds offer repurchase after a fixed
period.
• Listed on stock exchange and investors
can buy or sell units through the
exchange.

Open-end Vs. Closed-end Funds

 Mutual Fund Types
Money Market Funds/Cash Funds
• Invest in securities of short term nature I.e. less than
one year maturity.
• Invest in Treasury bills issued by government,
Certificates of deposit issued by banks, Commercial Paper
issued companies and inter-bank call money.
• Aim to provide easy liquidity, preservation of capital and
moderate income.
Gilt Funds
• Invest in Gilts which are government securities with
medium to long term maturities, typically over one year.
• Gilt funds invest in government paper called dated
securities.
• Virtually zero risk of default as it is backed by the
Government.
• It is most sensitive to market interest rates. The price
falls when the interest rates goes up and vice-versa.
 Debt Funds
Debt Funds/Income Funds
• Invest in debt instruments issued not only by
government, but also by private companies, banks and
financial institutions and other entities such as
infrastructure companies/utilities.
• Target low risk and stable income for the investor.
• Have higher price fluctuation as compared to money
market funds due to interest rate fluctuation.
• Have a higher risk of default by borrowers as compared
to Gilt funds.
• Debt funds can be categorized further based on their
risk profiles.
• Carry both credit risk and interest rate risks.
These funds invest in physical assets such
as gold, platinum, silver, oil, commodities
and real estate. Gold Exchange Traded
Funds (ETFs) and Real Estate Investment
Trusts (REITs) fall within the category of
real asset funds.

Real asset funds

 Equity Funds
Equity Funds:
• Invest a major portion of their corpus in equity
shares issued by companies, acquired directly in
initial public offering or through secondary
market and keep a part in cash to take care of
redemptions.
• Risk is higher than debt funds but offer very
high growth potential for the capital.
• Equity funds can be further categorized based
on their investment strategy.
• Equity funds must have a long-term objective.
 Hybrid Funds
Balanced Funds:
• Has a portfolio comprising of debt instruments,
convertible securities, preference and equity
shares.
• Almost equal proportion of debt/money market
securities and equities. Normally funds maintain
a Equity-Debt ratio of 55:45 or 60:40.
• Objective is to gain income, moderate capital
appreciation and preservation of capital.
• Ideal for investors with a conservative and long-
term orientation.
DiversifiedEquity Funds
Sector Funds
Index Funds
Exchange Traded Funds (ETFs)
Fund of Funds (FOF)
Fixed Maturity Plan (FMP)

Investment Philosophy
Country or Region Funds
These funds invest in securities (equity
and/or debt) of a specific country or
region with an underlying belief that the
chosen country or region is expected to
deliver superior performance,which in turn
will be favorable for the securities of that
country.

Geographic Regions
Offshore Funds
These funds mobilise money from
investors for the purpose of investment
within as well as
outside their home country.

Geographic Regions
Benefits of Investing Through
Mutual Funds
 Fund managers are responsible for implementing
a consistent investment strategy .
 Fund managers monitor market and economic
trends and analyze securities

Professional Money Management

 Diversification is one of the best ways to reduce
risk.

 Mutual funds offer investors an opportunity to

diversify across assets.

Diversification
 Investorscan sell their mutual fund units on any
business day.

 Receive the current market value on their

investments within a short time period (normally
three- to five-days).

Liquidity
The minimum initial investment for
a mutual fund is fairly low for most
funds (as low as Rs500 for some
schemes.

 Affordability
 Investorscan pick up the scheme depending
upon the risk /return profile.

Flexibility and variety

All the MF are registered with the SEBI.

Function within the strict regulation

designed to protect the interest of the
investors

Regulation
Options Available to the
Investor
 Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience
Bank Low High High No High
Deposit
Equity High Low High or No Moderate
Instruments Low
Debentures Moderate Moderate Low No Low

Fixed Moderate Low Low No Moderate

Deposits by
Companies

Bonds Moderate Moderate Moderate Yes Moderate

 Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience
RBI Relief Moderate High Low Yes Moderate
Bonds
PPF Moderate High Low Yes Moderate

National Moderate High Low Yes Moderate

Saving
Certificate

National Moderate High Low Yes Moderate

Saving
Scheme

Monthly Moderate High Low Yes Moderate

Income
Scheme
 Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience
Life Moderate High Low Yes Moderate
Insurance
Mutual Moderate Moderate High No High
Funds
(Open-end)
Mutual Moderate Moderate High Yes High
Funds
(Closed-
end)
1. Mutual Funds invest only in shares.
2. Mutual Funds are prone to very high
risks/actively traded.
3. Mutual Funds are very new in the
financial market.
4. Mutual Funds are not reliable and
people rarely invest in them.
5. The good thing about Mutual Funds is
that you don’t have to pay attention to
them.

Myths about Mutual Funds

 Facts about Mutual Funds
1. Equity Instruments like shares form only a
part of the securities held by mutual funds.
Mutual funds also invest in debt securities
which are relatively much safer.
2. The biggest advantage of Mutual Funds is
their ability to diversify the risk.
3. Mutual Funds are their in India since 1964.
Mutual Funds market is very evolved in
U.S.A and is there for the last 60 years.
4. Mutual Funds are the best solution for
people who want to manage risks and get
good returns.
 Facts about Mutual Funds
5. The truth is as an investor you should
always pay attention to your mutual funds
and continuously monitor them. There are
various funds to suit investor needs, both
as a long term investment vehicle or as a
very short term cash management vehicle.
Path to knowledge & Wealth creation
from
Mutual Funds
 when an investor invests in a mutual fund, he invests at its
existing NAV. The investor buys the units at a price (i.e.
NAV), the calculation of which is based on the current
market price of all the assets that the mutual fund owns.

 In case of the stock market investing however, the stock

price of a company is usually different from its intrinsic
worth The stock price could be higher (premium) or lower
(discount) as compared to the book value of the company.

 The reason for such a ‘mis-pricing’ could be that investors

evaluate the company’s future profitability and suitably
pay a higher or lower price as compared to its book value.

Invest in the mutual fund, not its NAV

there is no correlation between the NAV
and the performance of the mutual fund.
This makes an investment decision based
on the NAV potentially misguiding.
own risk profile
 the fund house’s management style
 the mutual fund’s performance.

As an investor, you need to

consider factors such
some equity funds adhere to the growth
style of investment (aggressively
managed funds); while others follow the
value style of investment (conservatively
managed funds). So, it is important for
investors to select a fund that takes on
risk in line with their own risk appetite.

own risk profile

individualistic
style
team-based investment

Fund management style

It is imperative for investors to evaluate a
mutual fund on parameters related to risk
like Standard Deviation and Sharpe Ratio
as also its NAV appreciation.
The best deal for an investor will come
from a mutual fund that has higher NAV
appreciation and Sharpe Ratio and lower
Standard Deviation

Mutual fund performance

SEBI has made it mandatory for fund
houses to state this disclaimer explicitly,
whenever they mention the past
performance of a scheme.
Despite these disclaimers, investors do
continue to get lured by the catchy
advertisement which boasts about the
scheme’s past performance.

Past performance is not everything

 there are certain critical points that the past
performance numbers in isolation do not tell
you
risk the investor has been exposed to
Before making any investment, it must be
evaluated based on the risk-return criterion;
evaluating the investment option across any
one of the two i.e. risk or return on a stand-
alone basis will not provide the necessary
assessment

Past performance is not everything

It does not take into consideration
the performance of its peers.
You should compare an investment (be it
a mutual fund, fixed deposit, unit-linked
insurance plan– ULIP, among others) with
its comparable peer group while assessing
whether or not you should invest in it.

Past performance is not everything

Past performance fails to highlight the
investment processes and approach.It
does not tell you whether the past
performance is the result of:
 i) good fortune/luck
 ii) a star fund manager
 iii) a team-based investment approach
past performance is no guarantee of
future performance

Past performance is not everything

We all want to buy at the lows and sell at
the highs. And yes, ideally one should
enter the market when it is at lower levels
and exit when it is at higher levels.
But, to do so is almost impossible. No one
can predict where the markets are
heading tomorrow.

Don’t time your mutual fund

investments - Take a SIP
you should invest regularly for the
purpose of meeting your long-term
investment objectives. An effective and a
hassle-free way of investing regularly is
through the SIP (Systematic Investment
Plan) route.
With SIPs, you don’t have to worry about
timing the market since you are investing
a fixed amount at regular intervals (like a
month or quarter, for instance).
Don’t time your mutual fund
investments - Take a SIP
o Light on the wallet:
The investor who can’t afford to
invest a huge amount can simply take
the SIP route.
o Makes market timing irrelevant:
whether in bull or bear
o Power of compounding:
earlier you begin your SIPs, the more sun
or corpus you will have

5 good reasons for investing

regularly through SIPs
 Lowers the average cost:
People who invest through SIPs capture
the lows as well as the highs of the
market. In an SIP, your average cost of
investing comes down since you will go
through all phases of the market, bull or
bear.
How to select a mutual fund
PERFORMANCE
It important that the team managing the
fund should have considerable experience
in dealing with market ups and downs.
Remember: Fund houses should be
process-driven and not 'star' fund
manager driven.

Fund Management
Cost
 Building a mutual fund portfolio is not a very
simple task since many of these funds seem to
be saying (as dictated by the investment
objective) and doing (in terms of investments)
totally different things.
 process of building a mutual fund into two steps.
 Step 1: Process of elimination

How to build a mutual fund portfolio

 How mutual funds can be used for
financial planning

Mutual funds allow the financial planner to align the

investment goals on the mantra of
Diversification
 Portfolio Strategy
 Rebalancing
 Tax efficiency
10 pointers to investing in
mutual funds
 Rights and Obligations of
investors are
In case of dividend declaration, investors have a right to receive
the dividend within 30 days of declaration
On redemption request by investors, the AMC must dispatch the
redemption proceeds within 10 working days of the request.
Investors can obtain relevant information from the trustees and
inspect documents like trust deed, investment management
agreement, annual reports, offer documents, etc. They must
receive audited annual reports within 6 months from the financial
year end.
Investors have a right to be informed about changes in the
fundamental attributes of a scheme. Fundamental attributes
include type of scheme, investment objectives and policies and
terms of issue.
Investors can approach the investor relations officer for
grievance redressal
 SEBI ordered mutual funds not to disclose
the indicative portfolio or indicative yield
of their newly launched Fixed Maturity
Plans (FMPs)
 Abolition of entry load
 SEBI also stepped in to provide mutual
fund investors transparency, by making
distributors disclose commissions (upfront
and trail) to the investor.

Reforms in the year 2009

 Online mutual fund trading platform was
launched by the exchanges (BSE and
NSE)

 SEBI allowed mutual fund investors to

change their mutual fund distributors
without obtaining a No Objection
Certificate (NOC) from their earlier
distributor,

Reforms in the year 2009

The year 2010, we believe, would continue to
bring in reforms in the mutual fund industry,
making every initiative pro-investor. Also,
many new players are likely to enter the
mutual fund space, thus
leading to an increase in the product offering
to mutual fund investors. The potential for
growth will come from inherent strengths and
sustained interest by foreign and domestic
funds as well as the common investor.

Year 2010 for the Mutual Fund Industry