S

MUTUAL FUND

Concept of Mutual Fund (MF’s)

Defined:- A fund that is created when a large number of investors put in their money, and is managed by professionally qualified persons.

It is a vehicle for collective investment, a way of becoming part-owner of the investment held under the scheme.

Till 1986, UTI was only mutual fund in India, which has outnumbered to 33 major emerged Mf’s.

Entities in MF’s operation

Sponsor:- It is like promoter of a company, maybe a bank, FI’s or a financial service company. For E.g. sponsor for Templeton Mutual Fund is Templeton international INC. Sponsor is responsible for setting up and establishing the mutual fund.

Trustee:- a corporate body appointed by sponsor. It appoints Asset Management Company(AMC), secure necessary approvals, periodically monitor AMC functions.

Entities in MF’s continues…

Asset Management Company(AMC):- also referred to as the investment manager, is separate company appointed the trustees to run the mutual fund. For E.G.: Templeton Asset Management Pvt. Is AMC of Templeton MF.

Custodian:- it handles investment back office operations of MF’s. It looks after receipt and delivery of securities, collection of income, distribution of dividends.

Registrar & Transfer Agents:- they handle investor related services such as sending fact sheet, annual reports. It may be outsourced to SEBI approved agents like KARVY & CAMS.

MF’s FLOW PATTERN

ORGANISATION OF MF’s

Mutual funds Classified

By structure

Open ended

schemes

Close ended

schemes

Interval schemes

Investment objective

Growth schemes

Income schemes

Balanced schemes

Money market

schemes

Other schemes

Tax saving schemes

Index schemes

Sector specific

schemes

Classification Discussed…

Open ended schemes:- is the one that an investor can buy or sell as and when they intend to at a NAV based price.

Close-ended schemes:- it usually issue units to investors only once, when they launch an offer, called New Fund Offer (NFO). Thereafter, these units are listed in stock exchanges where they are traded on daily basis.

Exchange Traded Funds:- is a hybrid of close-ended & open-ended index funds. It is listed on stock exchange and like an open-ended fund it creates and redeems units in line with rise and fall of demand.

Open-ended Vs. Close-ended

Open-ended index fund

Subscription on continuous basis.

Permits investor to withdraw funds on continuing basis.

No fixed maturity period.

Not listed in secondary market.

Close-ended index fund

subscription for limited period(usually 3months).

Does not allow withdrawal as and when they like.

Has a fixed maturity period(5 to 15 yrs).

Listed on secondary market.

Structuring in ETF

Primary market

Secondary market

seller

Authorized participant/fina

ncial institutions

Fund

Creation in-kind

Redemption in-kind

NSE

ETF units CashBuy/sell

Arbitrage

Buyer

cashETF units

Mutual Fund Terminology

NAV- It is actual value of a share on any business day. Its equal to

market value of the funds investment +receivable +accrued income –liabilities-

accrued expenses Number of shares outstanding

Continues…

Rate of return –It is the of money gained or lost on an investment relative to amount of money invested. It is also called as ROI

Repurchase price –It is the price at which the buyer of the securities is obilized to sell back the asset to the seller in relation to repurchase agreement

Standard deviation- equal to the square root of mean of the squares of the deviations from the arithmetic mean of the distribution.

Continues…

BETA - beta of a fund measures its past price volatility relative to a particular stock market index

ALFHA- Alpha measures the extra return earned on a scheme on a risk –adjusted basis

Large cap- Larger companies worth $5 billion or more, like General Electric (NYSE: GE).

Mid cap- Medium-size companies worth $1 billion to $5 billion, like Barnes & Noble (NYSE: BKS).

Small cap - Smaller companies worth $250 million to $1 billion, like Hot Topic (Nasdaq: HOTT).

Advantages of Mutual Funds

Increased Diversification

Daily Liquidity

Professional Investment Management

Ability to participate in investments that may be available only to larger investors

Service & Convenience

Government oversight

Ease to comparison

Disadvantages of Mutual Funds

Fees

Less control over timing of recognition of gains

Less predictable income

No opportunity to customize

References of study

http://finance.indiamart.com/india_business_information/mutual_fund_companies.html

www.wikipedia.com/finance

http://sunseven.hubpages.com/hub/The-Top-10-Mutual-Funds-in-India

Security Analysis & Portfolio Management – Prassana & Chandra

Security Analysis & Portfolio Management- P. Pandian

http://www.e-investing.in/mutual-funds/106-reliance-mutual-fund-now-indias-largest-mf.html

AMIT KUMAR ROYVIVEK SINGHNITIN VERMAPARITOSH JAIN