Professional Documents
Culture Documents
Alwyn Pinto
MBA Lecturer
Brief Class Outline
Topics to be covered
• Concept, Type of Mutual Funds
• Fund Structure and Constituents
• Legal and Regulatory Framework
• Accounting Valuation and Taxation
• Return, Risk, Performance and Fund Selection
• Life Cycles and Wealth Cycles
Mutual Funds- Concept, History, Products
• Investors contribute their money to a common pool.
• This common pool is called the ‘Mutual Fund’.
• Ownership of the pool of money is mutual and joint.
• While investing an Investor buys a part of the assets in the
pool.
• Investor’ share in the assets of the pool is called ‘units’.
• Market value per unit is known as ‘Net Asset Value- NAV’.
Advantages of Mutual Funds
• Portfolio Diversification
• Low Transaction Costs
• Professional Management
• Reduction in Risk
• Convenience to Operate
• Flexibility to Change Options
• Liquidity
History of Mutual Funds
• UTI was the first mutual fund set up in India, in 1963.
• In 1987 public sector financial institutions were allowed to set up mutual
funds.
• SBI was the second mutual fund set up.
• In 1993, private participation was allowed,
• In 1996 saw the emergence of a new set of regulations, currently referred
as SEBI (Mutual Fund) Regulations, 1996.
• Dividends declared by mutual funds were made tax free in 1999.
• In Feb 2003, UTI Act was repealed and UTI Mutual Fund was formed.
• Period from 2004 is called the phase of consolidation and growth.
Disadvantages of Mutual Funds
• Costs.
Trustees
Asset Management
Company
Depository Agent
Custodian
SimplyFinance
Fund Structure and Its Constituents
• In India mutual fund is structured as trusts.
• In US mutual funds are set up investment companies.
• In India mutual funds follow a 3 tier structure – Sponsor, Trust,
AMC.
• Sponsor promotes the trust and sets up the AMC.
• Trust is run by trustees.
• Trustees appoint the AMC.
Sponsors, Trust, AMC
• Sponsor
– 5 years experience in finance industry.
– Positive net worth for last 3 years.
– Contribute 40% to the AMC capital.
• Trustees
– Protectors of unit holders’ interests.
– SEBI regulates the function of trustees.
• AMC
– Investment manager to the mutual fund
– Registered as public or private limited company
– Capital is contributed by sponsor.
– Min net worth of Rs 10 crores always.
– 50% of the board should be independent.
Mutual Fund Constituents
• Custodian – Settlement of security transactions
– Is an industry body.
– Is registered with the regulatory body.
– Has limited powers to enforce rules, award penalties.
– All stock exchanges are SROs.
– AMFI is not an SRO.
Investors Rights and Limitations
SimplyFinance
Investment Pattern
• Equity
• Debt & Money Market Instruments
Accounting, Valuation and Taxation
• Assets Under Management – market value of portfolio
• Fund Running Expense – charged to the fund every day
• Net Asset Value – value of investor’ unit
• NAV= (AUM- expenses)/no of units
• Applicable NAV
» Non liquid schemes 3 pm
» Liquid schemes 12 noon
• NAV rounded off
» 2 decimals all schemes except liquid
» 4 decimals for liquid schemes
NAV and Load
• Two types of load
» Entry load, exit load
• SEBI regulates max load funds can charge.
• Open ended funds max entry/exit load 7%.
• A fund cannot charge both.
• Close ended funds max is 5%.
Mutual Fund Expenses
• Expenses to be charged with SEBI specified limits
»2.5% for first 100 crores
»2.25% for next 300 crores
»2% on next 300 crores
»1.75% for balance assets
»Debt funds charge 0.25% less across
• Investment management expenses
»1.25% on the first 100 crores
»1% on the remaining assets
»I% extra in case of no load funds
Initial Issue Expenses & Accounting Policies
• DDT
» 12.5% for individuals and HUFs
» 20% for institutional investors
Tax Aspects
• Equity funds
» STCG @15% plus Surcharge
» LTCG Nil
• Debt funds
» STCG marginal rate of tax
» LTCG 10 % without indexation
» 20% with indexation
• STT payable @0.25% while equity is redeemed
• ELSS schemes eligible for deduction upto 1 lakh
• ELSS under section 80©
Risk, Return and Performance
• Return to the investor is in the form of
– Dividends
– Capital appreciation
• Returns are calculated using
– Change in NAV method
• {(NAV at the end –NAV at the beginning)/NAV at beginning }*100
Total return method
• {(Dividend+ Change in NAV)/NAV at beginning }*100
SimplyFinance
Return Methods
• Return on Investment method
– {(value of holdings at end- value at beginning)/value at beginning
}*100
• Compounded Annualized Growth Rate
R = (V1/V0)^1/n -1
• V1= Value at the end
• V0= Value at the beginning
• n = holding period in years
• R = is the rate of interest
SimplyFinance
Expense Ratio and Income Ratio
• Expense ratio
– (Total expenses incurred/ average net assets)*100
– Very important information for liquid & debt funds
• Income ratio
– Net income earned/average net assets
– Not calculated as funds have unrealized income also
SimplyFinance
Portfolio Turnover
• Portfolio turnover measures the extent to which securities are
bought and sold
• Portfolio turnover % = (value of assets purchased or
sold)/net assets *100
• High portfolio turnover indicates high costs
• An important criteria for equity funds
SimplyFinance
Portfolio Features
• Small funds
– More agile
• Large funds
– Less agile
– Enjoys economies of scale
SimplyFinance
Benchmarks
• Benchmarks are independent portfolios not managed by any
fund manager
• Equity funds are benchmarked against equity index
• Debt funds benchmarked with debt indices
• Relative benchmarks
– Funds must invest in same asset class
– Funds should have same investment pattern and objectives
– Size and quality of assets should be comparable
SimplyFinance
SEBI Regulations on Returns
• Return is calculated using growth option NAV
• Return is calculated using NAV without considering load
• Returns to be calculated for 1,3,5 and 10 years and since
inception
• Returns for less than one year is not annualized except in case
of liquid funds
• Returns for more than one year is CAGR
SimplyFinance
Risk in Mutual Funds
• Measures of risk is as follows
– Standard deviation
• Measures the funds fluctuation around the mean level
• Higher volatility gives high SD
– Beta Coefficient
• Measures the sensitivity of the fund to market movements
• Index funds with a beta of 1
• Higher the variance from the index , higher is the beta
– Exmarks
• Measures the correlation of a fund with the market
• Exmarks of 100% indicates perfect correlation with market
SimplyFinance
Risk-adjusted Return
• Risk premium
– Fund return- risk free rate of return
• Sharpe ratio
– Risk premium/std deviation of return
• Treynor ratio
– Risk premium/beta of the fund
• P/E ratio
– Price of the stock/earnings per share
– Higher the P/E higher the risk
SimplyFinance
Selecting an Equity Fund
• Funds to be categorized according to objectives
• Diversified funds offer growth
• Sector funds come with higher risk
• Dividend yield funds are income generating
• A good equity fund will have
– High gross div yield
– Low beta
– High ex marks
• Never select funds based only on past record
Classification Based on Valuation
• Growth Stocks, Value stocks ,Cyclical stocks
• Passive fund management
» Aims at delivering market returns
• Active fund management
» Aims at delivering better returns than market
• Growth Style
» Aims for capital appreciation by investing in growth
stocks
• Value Style
» Invests in undervalued stocks and expects price to go up
in future
Equity Stock Selection Tools & Structure
• Fundamental Analysis
» Involves studying the finance and operations of a company
• Technical Analysis
» Studying the price movements of a stock and predicting
future price
• Quantitative Analysis
» Using mathematical tools for equity valuation
• Fund Managers
» Take overall decision about the fund
• Security Analysts
» Tracks companies/ industry
• Security Dealers
» Executes buy and sell orders
Comparing Investment Options
• Investment Options to be compared with respect to
– liquidity
– returns
– flexibility
– risk
– convenience
– stability
SimplyFinance
Life Cycles and Wealth Cycles