Understanding Mutual Funds

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Investment Retail Investors
NAV Exit Load Portfolio Dividend
Risk Management Factsheets Return Portfolio Tax Saving Redemption Entry Load Investment Objective Asset Allocation Open Ended Growth Fund Manager Repurchase Price AUMs Professional Management
Close Ended
Sale Price
Snapshot.
Mutual Fund
Why did Mutual Funds come into existence?
Why did Mutual Funds come into existence?
An old Axiom :
It is not wise to put all eggs into one basket
was probably in the minds of those who formed the first mutual fund.
Flow Cycle of a Mutual Fund
Diff. b/w MF and Direct Investment
Balance sheet of a Bank and Mutual Fund Risk-return structure of schemes
Organizational Structure of a Mutual Fund Classification of Mutual Fund Schemes
Regulatory Aspects
History of Mutual Funds
Portfolio Management Process AUM movements in India
Risk Management
Investments Checklists
Mutual Fund Comparison
Warning Signals
Tracking Mutual Funds
Expenses
Penetration of Mutual Funds
What Mutual Funds are not?

Diff. b/w MF and Direct Investment Balance sheet of a Bank and Mutual Fund Risk-return structure of schemes Organizational Structure of a Mutual Fund Classification of Mutual Fund Schemes
Regulatory Aspects
Risk Management
Warning Signals
Expenses
Returns
Investors
Securities
Fund Manager
Mutual Funds defined.a flow cycle
Flow Cycle explained

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.
The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Important Characteristics of Mutual Funds
The ownership is in the hands of the investors who have pooled in their funds.
It is managed by a team of investment professionals and other service providers.

The pool of funds is invested in a portfolio of marketable investments. The investors share is denominated by units whose value is called as Net Asset Value (NAV) which changes everyday. The investment portfolio is created according to the stated investment objectives of the fund.
Advantages of Mutual Funds to Investors
Portfolio diversification Professional Management Reduction in Risk Reduction in Transaction costs Liquidity Convenience and Flexibility Safety Well regulated by SEBI
Disadvantages of Mutual Funds to Investors
No control over the costs. Regulators limit the

expenses of Mutual Funds. Fees are paid as percentage of the value of investment. No tailor made portfolios. Managing a portfolio of funds. ( Investor has to hold a portfolio for funds for different objectives ).
A mutual fund is not 1.A portfolio of stocks, bonds and other securities 2.A company that manages investment portfolios 3.A pool of funds used to purchase securities on behalf of investors 4.A collective investment vehicle The Mutual fund is constituted as A trust A private limited company An asset management company A trustee company Mutual fund can benefit from economics of scale because of Portfolio diversification Risk reduction Large volume of trades None of the above
A mutual fund is not A portfolio of stocks, bonds and other securities A company that manages investment portfolios A collective investment vehicle A pool of funds used to purchase securities on behalf of investors
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Regulatory Aspects
Risk Management
Warning Signals
Expenses

Diversification is the key to success in equity investments. A diversified portfolio serves to minimize risks. An individual investor may not have the capital to build a diversified portfolio. Professional Management by mutual funds ensure that the best avenues are tapped with the aid of comprehensive information and detailed research. Liquidity of mutual funds is high as you have daily repurchase options for openend funds. Transaction costs are lower in mutual funds as compared to direct investment due to economies of scale. Convenience is high for mutual funds as they sell through service networks, banks and other distributors. Many funds allow investors the flexibility to switch between schemes within a family of funds. Blue Chip portfolio available to investors for as low as Rs. 500/-. High Service Standards maintained by mutual funds for unit administration. Transparency High degree of transparency is maintained by the funds.
Balance sheet of a Bank and Mutual Fund

Regulatory Aspects
Risk Management
Warning Signals
Expenses
Difference between Bank and Mutual Fund

Mutual Fund Balance Sheet Liabilities Assets Bank Balance Sheet Liabilities Assets
Difference between Bank and Mutual Fund

Mutual Fund Balance Sheet Liabilities Unit Capital Assets Investment in Financial Securities Bank Balance Sheet Liabilities Share Capital Deposits Assets Loans and Advances
Organizational Structure of Mutual Fund

Regulatory Aspects
Risk Management
Warning Signals
Expenses
How are Mutual Fund Structrured

In India Mutual fund is the form of a Public Trust created under the Indian trust Act. 1882. In India, Mutual funds are organized as trusts. The trust is either managed by a Board of Trustees, or by a trustee company. The trustees hold the unit holders money in a fiduciary capacity.(Money belongs to unit holders) In legal sense, the investors are the beneficial owners of investments. There must be at least 4 members in the Board of Trustees
At least 2/3 of the members of the board of trustees must be independent.

Trustee of one mutual fund can not be a trustee of another mutual fund.
Savings
AMC
Trust
Units
Investments Returns
Unit holders
Registrar
SEBI
Custodian
Trust AMC
Constituents of Mutual Fund

Mutual Fund Sponsor Fund
Administrator
Distributor
Transfer Agent
Investor
Investment Advisors
Trust
AMC
Broker Dealers
Exchange
Custodian Investors Bank Mutual Funds Bank
DTCC

Sponsor
Akin to the Promoter of the company, Contribution of minimum 40% of net worth of AMC, Posses sound financial record over five years period, Establishes the Fund, Gets it registered with the SEBI, Forms a trust, & appoints Board of trustee.
Trustees

Holds assets on behalf of unit holders in trust, Trustees are caretaker of unit holders money, Two third of the trustees shall be independent persons (not associated with the sponsor), Trustees ensure that the system, processes & personnel are in place, Resolves unit holders GRIEVANCES, Appoint AMC & Custodian, & ensure that all activities are accordance with the SEBI regulation.

Custodian
Holds the funds securities in safekeeping, Settles securities transaction for the fund, Collects interest & dividends paid on securities, Records information on corporate actions.
Asset Management Company

Floats schemes & manages according to SEBI, Can not undertake any other business activity, other than portfolio mgmt services, 75% of unit holders can jointly terminate appointment of AMC, At least 50% of independent directors, Chairman of AMC can not be a trustee of any MF.
Distributor / Agents
Sell units on the behalf of the fund, It can be bank, NBFCs, individuals.

Banker
Facilitates financial transactions, Provides remittance facilities.
Registrar & Transfer Agent

Maintains records of unit holders accounts & transactions Disburses & receives funds from unit holder transactions, Prepares & distributes a/c settlements, Tax information, handles unit holder communication, Provides unit holder transaction services.
Broker/Dealer is an individual or institution that acts as a principal in securities transaction. Take the orders to the exchanges / ECNs for execution and trade for their own account and risk. When buying from a broker acting as a dealer, a customer receives securities from that firm's inventory. Since most brokerage firms operate both as a broker and as a Principal (dealer), the term broker/dealer is commonly used.
Broker
Who is the primary guardian of unit holders funds/assets The AMC The Trustees The Registrars The custodians Transfer Agents of a mutual fund are not responsible for Issuing and redeeming units of the mutual fund Updating investor records Preparing transfer documents Investing the funds in securities markets The Custodian of a mutual fund: Is appointed for safekeeping of securities Need not be an entity independent of the sponsors Not required to be receive deliveries with SEBI Does not give or receive deliveries of physical securities The Mutual fund is constituted as A trust A private limited company An asset management company A trustee company Which of the following cannot be distributors of a mutual fund Sponsor Associate of sponsor Associate of AMC Employees of AMC
Classification of Mutual Fund Schemes

Regulatory Aspects
Risk Management
Warning Signals
Expenses
AMFI Classification of MF Schemes

Fund schemes
Growth & Income Balanced Liquid & Money Market Gilt ELSS Fund of funds ETFs
Portfolio objectives
High Risk & High Return Moderate Risk & Return Fixed Return Zero Risk Tax Saving Additional diversification Market Driven
Each category is classified into more sub-categories.

Classification of MF schemes
By Structure
Open-Ended anytime enter/exit Close-Ended Schemes listed on exchange, redemption after period of scheme is over.
By Investment Objective
Equity (Growth) only in Stocks Long Term (3 years or more) Debt (Income) only in Fixed Income Securities, Gilt Funds primarily in G-Sec Liquid/Money Market Short-term Money Market (CPs, CDs, Treasury Bills) Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years)
Other Schemes
Tax Saving Schemes such as ELSS Special Schemes (ETFs, foreign funds)
Risk
Sectoral funds are most risky; money market funds are least risky
Tenor
Equity funds require a long investment horizon; liquid funds are for the short term liquidity needs

By Structure Open-ended plans
Open-ended plans do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. These schemes have unlimited capitalization, there is no cap on the amount one can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange. Open-ended plans are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. Any time entry option: An open-ended fund allows one to enter the fund at any time and even to invest at regular

By Structure. contd Close-ended plans
Close-ended plans have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. Such schemes cannot issue new units except in case of bonus or rights issue. After the initial issue, investor can buy or sell units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors expectations and other market factors intervals.

By Nature of Investment
Equity Funds are those that invest in shares or equity of companies. Bond Funds invest in fixed income instruments issued by government or corporate entities Hybrid Funds that invest in a combination of both stocks and bonds Money Market/Liquid Funds that invest in money market instruments Commodity Funds that invest in various commodities Real Estate Funds that invest in properties, land and building etc.

Types of Funds - By Investment Objective
Equity
Debt
Fixed Income Funds GILT Funds
Money Market
Equity Funds Index Funds Sector Funds
Money Market Mutual Funds
Balanced Funds
Liquid Funds

Other Schemes
3 year lock in period Minimum investment of 90% in equity markets at all times So ELSS investment automatically leads to investment in equity shares. Open or closed ended.
Eligible under Section 80 C upto Rs.1 lakh allowed

Dividends are tax free. Benefit of Long term Capital gain taxation.
Of the following fund types, the highest risk is associated with Balanced Funds Gilt Funds Equity Growth Funds Debt Funds A close ended mutual fund has a fixed NAV Fund Size Rate of Return Number of Distributors Equity Linked Savings Scheme does not have which of the following features? It entitles the unit holder to tax rebate The investment is locked in for 3 years A minimum stated level of investments is made in equity and equity related instruments None of the above Gilt funds invest in IT sector AAA securities Money market securities Government bonds When comparing a funds performance with that of its peer group, the following cannot be compared Two debt funds with 5 year maturities A broad-based equity fund with an IT Sector Fund A bond fund with bond index A government securities fund with a government security
Risk-return structure of schemes

Regulatory Aspects
Risk Management
Warning Signals
Expenses
Performance Measurement of Mutual Funds
Change in NAV= ( NAV at end NAV at beg.)*100 NAV at the beginning Total Return = ( Change in NAV+ Dividend) *100 NAV at beg.
Return on investment or Total Return with dividend reinvested at NAV.
Portfolio Turnover Rate It is lesser of assets purchased or sold the funds net assets.
A 100% turnover implies that the manager replaced his entire portfolio during the period in question
200% means portfolio changed in 6 months

A liquid fund has the highest portfolio turnover.
Computing Mutual Funds Net Asset Value
For investors, the performance of their investment depends on what happens to the funds per unit value, or net asset value (NAV)
NAV =
Market Value of Assets Liabilities Number of Shares Outstanding
Calculating a Mutual Funds Net Asset Value

Net Asset Value (NAV)
Definition: Total value of the mutual funds stocks, bonds, cash, and other assets minus any liabilities such as accrued fees, divided by the number of shares outstanding
Example: Stocks Bonds Cash Total value of assets Liabilities Net worth Outstanding shares NAV = $35,000,000 $15,000,000 $3,000,000 $53,000,000 ($800,000) $52,200,000 15 million $52,200,000/15,000,000 = $3.48
Example An open ended fund was purchased when its NAV was Rs. 22. One year later, its NAV was Rs. 24. The annualised percent NAV change is ______ Answer
% change in NAV = ( 24 -22) *100 = 9.09%
22

Purchase price NAV at year end Interim Div. Rs. 3 Ex.-Div. NAV Rs. 21 Total Return=? Rs. 22 per Unit Rs. 23 per Unit
Assume investment of Rs. 10000 Step 1: Initial Units alloted =10000/22=454.55 Step 2:Total Div.=454.55*3=1363.65 Step 3: Additional Units=1363.65/21=64.94 Step 4:Total Units=454.55+64.94=519.49 Step 5:Withdral Amt. =519.49*23=11947.17 Gain =11947.17-10000=1947.17 Gain of 1947.17 on the investment of Rs. 10000 So that on the investment of Rs. 100 gain is 19.47 Ans:19.47%
Investing in NFO
Its new (Old wine in a new bottle, participate in Indias growth potential) Its at Rs 10 i.e its cheaper than a existing fund whose NAV is Rs.110
My neighbour is buying it My distributor / agent has strongly recommended it. I can make good profit in the short term Actually there is no difference/benefit an individual has by investing in an existing Mutual fund or New Fund Offering
Investing in NFO.. exapmle
Mutual Fund Investment Modes
Systematic Investment Plan (SIP)

Invest a fixed sum every month. (6 months to 10 yearsthrough post-
dated cheques or Direct Debit facilities) Fewer units when the share prices are high, and more units when the share prices are low. Average cost price tends to fall below the average NAV.
Systematic Transfer Plan (STP)

Invest in debt oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.
Systematic Withdrawal Plan (SWP)
Mutual Fund Investment Modes
SIP Calculation
Risk-return structure
Risk Return of different schemes
Risk-return structure Risk Return on Types of Funds
The amount required to buy 100 units of a scheme having an entry load of 1.5% and NAV of Rs. 20 is: Rs. 2000 Rs. 2015 Rs. 1985 Rs. 2030 A funds investments at market value total Rs. 700 crores, Total liabilities stand at Rs. 50 lacs and the number of units outstanding is 28 Crores. What is the NAV? Rs. 30.19 Rs. 24.98 Rs. 32.15 Rs. 40.49 An Investor buys one unit of a fund at an NAV of Rs. 20. He receives a dividend of Rs. 3 when the NAV is Rs. 21. The unit is redeemed at an NAV of Rs. 22. Total Return is a. 25.71% Rs. 27.51% 21.27% Rs. 21.75% A funds NAV is affected by Purchase and sale of investment securities Valuation of all investment securities held Units sold or redeemed All of the above If the NAV of an open-ended fund was Rs. 16 at the beginning of the year and Rs.22 after 13 months, the annualized change in NAV is 6.0% 34.6% 40.6% 37.5%

Regulatory Aspects
Risk Management
Warning Signals
Expenses

Global
First started in 1924 Nearly 8,300 mutual funds available today More mutual funds in existence today than stocks listed on NYSE and AMEX combined Nearly half of all U.S. households own mutual funds
UTI sole player in the industry, created by an Act of Parliament ,1963 UTI launches first product Unit Scheme 1964 In 1987 Public Sector Banks and FI's got permission to set up MF. SBI mutual fund was the first non -UTI mutual fund In 1993, Mutual Fund Industry was open to private players. SEBI's first set of regulations for the industry formulated in 1993 Significant innovations, mostly initiated by private players Implementation of new SEBI regulations led to rapid growth Bank mutual funds were recast as per SEBI guidelines UTI came under voluntary SEBI supervision. Dividends made tax free in 1999. Rapid growth, significant increase in corpus of private players
INDIA
1963 1987 1987 - 1993
1993 - 1996
1996 - 1999
1999 - 2000
Tax break offered created arbitrage opportunities Bond funds and liquid funds registered highest growth
History of Mutual Funds Phases of Mutual Fund Industry in India

Formation of UTI Entry of Public Sector Funds Entry of Private Sector Funds 1964 1987 1993 A phase dedicated to Retail Investors
2009 ?
Fig 1.1: Total Net Assets Fig 1.2: Global MF Assets by Fund Type
Importance points
IN USA, a MF is constituted as an investment company and an investor buys the share of the fund.
In USA, all mutual funds are open ended.

In USA, funds are also classified as Tax Exempt and Non Tax Exempt Funds In India, classified as Open Closed ended, Load and No Load Funds. Mutual Fund is NOT a company, it can be called as a portfolio of stocks, bonds and other securities or it can be called as pool of funds used to purchase securities on behalf of investors or a collective investment vehicle.
After UTI, the first mutual funds were started by a. Private sector banks b. Public sector banks c. Financial institutions d. Non-banking Finance Companies The private sector was granted permission to enter the mutual fund industry in a. 1992 b. 1993 c. 1998 d. 1995 In US all Mutual Funds are classified as
a) b) c) Close Ended Open Ended Both
Regulatory Aspects
Diff. b/w MF and Direct Investment History of Mutual Funds in India Balance sheet of a Bank and Mutual Fund Risk-return structure of schemes Organizational Structure of a Mutual Fund Classification of Mutual Fund Schemes
Regulatory Aspects
Risk Management
Warning Signals
Expenses
Regulatory Aspects
Regulations - India
Regulatory Aspects
Governed by SEBI (Mutual Fund) Regulation 1996 All MFs registered with it, constituted as trusts ( under Indian Trusts Act, 1882) Bank operated MFs supervised by RBI too AMC registered as Companies registered under Companies Act, 1956 SEBI- Very detailed guidelines for disclosures in offer document, offer period, investment guidelines etc. NAV to be declared everyday for open-ended, every week for closed ended Disclose on website, AMFI, newspapers Half-yearly results, annual reports Select Benchmark depending on scheme and compare
Regulatory Aspects
Regulations - US
SEC- Securities Exchange Commission is the regulatory body of security industry including Mutual Fund. The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.
Regulatory Aspects
Regulations - US
Mutual funds are regulated by four primary laws: Securities Act of 1933: specifies disclosure requirements Securities Exchange Act of 1934: details antifraud rules Investment Company Act of 1940: requires registration and minimal operating standards Investment Advisors Act of 1940: regulates fund advisors Mutual funds are the only companies in the U.S.that are required by law to have independent directors, as follows (2001 SEC rules)
Independent directors must constitute a majority of the board

Independent directors select and nominate other independent directors Legal counsel to the independent directors must also be independent
Compliance with SEBIs Requirements

Sebi has categorised obligations of Trust into General Due Diligence and Specific Due Diligence.
General Due Diligence Due care in appointing AMC Directors, observing irregularities in functioning. The purpose is to ensure that trust properties are protected by competent persons and agencies. Ensuring that appointed constituents are duly regd. With SEBI.
Specific Due Diligence Trustees must appoint independent auditors and obtain periodic audit reports. To obtain Compliance Test reports from the AMC once every 2 months. To prescribe a Code of Ethics for Trustees and AMC personnel.
Compliance with SEBIs Requirements

Only SEBI registered AMC can be appointed as investment managers of mutual funds AMC must have a minimum net worth of Rs. 10 Cr., at all times An AMC cannot be an AMC or Trustee, of another Mutual Fund
AMC s cannot indulge in any other business, other than that of asset management
At least half of the members of the Board of an AMC, have to be independent The 4th Schedule of SEBI regulations spells out rights and obligations of both trustees and AMCs
Mutual Fund AMC appointment
The trustees, on the advice of the sponsors usually appoint the AMC The AMC is usually a private limited co., in which the sponsors and their associates or JV partners ,are shareholders The AMC has to be a SEBI registered entity, with a minimum net worth of Rs. 10 Cr.
The trustees sign an investment management agreement with the AMC, which spells out the functions of the AMC
How are Indian mutual funds organized?
Though the trust is the mutual fund, the AMC is its operational face The AMC is the first functionary to be appointed and is involved in the appointment of all other functionaries
The AMC structures the mutual fund products, markets them and mobilises the funds, manages the funds and services the investors All the functionaries are required to report to the trustees who lay down the ground rules and monitor their working
What are the restrictions on the AMC?
AMC s cannot launch a scheme without the prior approval of the trustees AMC s have to provide full details of investments by employees and Board members in all cases where the investment exceeds Rs.1 Lakh AMC s cannot take up any activity that is in conflict with the activities of the mutual fund
Portfolio Management Process

Flow Cycle of a Mutual Fund Diff. b/w MF and Direct Investment History of Mutual Funds in India Balance sheet of a Bank and Mutual Fund Risk-return structure of schemes Organizational Structure of a Mutual Fund Classification of Mutual Fund Schemes
Regulatory Aspects
Risk Management
Warning Signals
Expenses
Portfolio Management Process Portfolio Management Process

Investment Objective
Portfolio Construction Security Selection Investment Portfolio Optimizer
Risk Management
Regulatory Aspects
Risk Management
Warning Signals
Expenses
Risk Management Risk Management Function Risk category

Fund management
Risk factors
Volatility in performance, portfolio concentration, Interest rate movement, liquidity risk & credit risk. Deal error, settlement problem, NAV & fund pricing Operations error, inaccurate financial reporting, fraud. Error in deal processing, fraud . Customer Marketing & distribution New product development, selling & distribution Critical knowledge loss, skills shortage, third party Other business risk risk Disaster recovery & business contingency plans. Insurance against third party loss (R&TA), arising from error & omission.
Investment Checklists
Regulatory Aspects
Risk Management
Warning Signals
Expenses
Investing Checklist
Draw up your asset allocation Financial goals & Time frame (Are you investing for retirement? A childs education? Or for current income? ) Risk Taking Capacity Identify funds that fall into your Buy List Obtain and read the offer documents Match your objectives In terms of equity share and bond weightings, downside risk protection, tax benefits offered, dividend payout policy, sector focus Check out past performance Performance of various funds with similar objectives for at least 3-5 years (managed well and provides consistent returns)
Investing Checklist
Think hard about investing in sector funds For relatively aggressive investors Close touch with developments in sector, review portfolio regularly
Look for `load' costs

Management fees, annual expenses of the fund and sales loads Does the fund change fund managers often? Look for size and credentials
Asset size less than Rs. 25 Crores

Diversify, but not too much Invest regularly, choose the S-I-P MF- an integral part of your savings and wealth-building plan.

Regulatory Aspects
Risk Management
Warning Signals
Expenses

Absolute returns
% difference of NAV Diversified Equity with Sector Funds No
Benchmark returns
SEBI directs Fund's returns compared to its benchmark
Time period
Equal to time for which you plan to invest
Equity- compare for 5 years, Debt- for 6 months
Market conditions
Proved its mettle in bear market
Expenses
Regulatory Aspects
Risk Management
Warning Signals
Expenses
Expenses
Expenses of Mutual Fund

Accounted for in FUND RETURN
Management fee* Group fee* Performance fee* Administrative fee* Brokerage costs Interest costs
Not included in FUND RETURN

Front end sales load Back end sales load Transaction fee Redemption fee Account maintenance fee Bid ask spreads
An asterisk * indicates fee which is included in a funds expense ratio. As per SEBI Rule, expense ratio should be 2.5% for equity & 2.25% for debt fund of fund value.
Mutual fund fees & expenses?

Two types of loads in Mutual Fund Front end load
mutual fund. Front-end loads reduce the amount of your investment. For example, let's say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund
Fees that is charged at the time of investing in a
Back end load
fund.For example, the above $950 grows to $5000 in 2 years. There is back end load of 5%. Hence $ 250 will be deducted from the total amount and the investor will receive $4750.
Fees charged at the time of redeeming out of a mutual
There are some other fees which Mutual fund charges to the investor. Although these fees are only a few percentage points a year and seem like a minor expense, they create a serious drain on the performance over a period of years.
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Limited Access
Mutual fund fees & expenses.. Contd
Contingent deferred sales charge

A mutual fund may charge sales charges that are reduced at certain time intervals. For example, the fund may charge 6% of the sale price the first year after the shares are bought. Each year thereafter the fee would be reduced by 1% until no fee would be charged. This is an incentive for investors to leave their money in the fund.
Management fees
Mutual funds may charge fees to cover expenses such as advertising, brokers' costs and toll-free telephone lines. These are 12b-1 fees,
regulated by law.
Transfer fees
A fee is charged each time the investor transfers money within the company
.
Limited Access
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What are Initial Issue Expenses
Expenses that are incurred in the launch of the fund are called as initial issue expenses. The costs of registration and fund formation Legal and advisory expenses Costs of launching the scheme Advertisement and promotion expenses Distribution costs Commissions to selling agents SEBI imposes a ceiling of 6% on these expenses.
What are Initial Issue Expensescontd
Can the Fund be launched without bearing any initial issue expenses ? Yes Such funds are called as no load funds AMCs can charge an investment management fee, which is 1% higher than the statutory limit, in this case.
Update on Initial Issue Expenses
Latest changes on Initial Issue Expenses

IIE will be permitted for closed ended schemes only and such scheme will not charge Entry load
IN CES, IIE shall be amortized on a weekly basis over the period of scheme. IN OES, the sales, marketing and other expenses of sales should be met from the entry load and not IIE
Mutual Fund Expenses
Can the AMC charge all the expenses that it incurs, to the income of the fund ?
No. There are two levels of restrictions At the first level only certain kinds of expenses, that are identified as having been incurred for the conduct of the business of the fund, can be charged to the fund. The second level of regulation refers to the limit on the total expenses, that can be charged to the fund
Following is the maxmum limit on the expenses For net assets up tp Rs. 100 Cr For the next Rs 300 Cr. Of net assets For the next Rs 300 Cr. Of net assets For the remaining net assets
2.50% 2.25% 2% 1.75%
On debt funds the limits on expenses are lower by 0.25%
Mutual Fund Expenses
What are the fees charged by the AMC ?
The fees are regulated by SEBI as follows: For the first Rs.100 Cr. Of net assets: 1.25% For the net assets exceeding Rs. 100 Crore: 1.00%
If the AMC does not charge any of the initial issue expenses to the fund, it can charge the scheme a management fee, that is 1% higher than the above rates
Mutual fund fees & expenses
Two types of loads in Mutual Fund Front end load
mutual fund. Front-end loads reduce the amount of your investment. For example, let's say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund
Fees that is charged at the time of investing in a
Back end load
fund.For example, the above $950 grows to $5000 in 2 years. There is back end load of 5%. Hence $ 250 will be deducted from the total amount and the investor will receive $4750.
Fees charged at the time of redeeming out of a mutual
91
There are some other fees which Mutual fund charges to the investor. Although these fees are only a few percentage points a year and seem like a minor expense, they create a serious drain on the performance over a period of years. Limited Access
Mutual fund fees & expenses continued.
Contingent deferred sales charge

A mutual fund may charge sales charges that are reduced at certain time intervals. For example, the fund may charge 6% of the sale price the first year after the shares are bought. Each year thereafter the fee would be reduced by 1% until no fee would be charged. This is an incentive for investors to leave their money in the fund.
Management fees
Mutual funds may charge fees to cover expenses such as advertising, brokers' costs and toll-free telephone lines. These are 12b-1 fees, regulated by law.
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Transfer fees
A fee is charged each time the investor transfers money within the
Limited Access

Regulatory Aspects
Risk Management
Warning Signals
Expenses
Keeping Track
Filling up an application form and writing out a cheque = end of the story No! Periodically evaluate performance of your funds Fact sheets and Newsletters Websites such as www.valueresearchonline.com, www.mutualfundsindia.com, www.morningstar.in, www.lipperweb.com et al. Newspapers Professional advisor
Warning Signals
Regulatory Aspects
Risk Management
Warning Signals
Expenses
Warning Signals
Warning Signals
Fund's management changes; Performance slips compared to similar funds; Fund's expense ratios climb; Beta, a technical measure of risk, also climbs; Independent rating services reduce their ratings of the fund; It merges into another fund; Change in management style or a change in the objective of the fund.
AUM movements in India

Regulatory Aspects
Risk Management
Warning Signals
Expenses
AUM movements in India

Movement of AUMs in different categories over a period of time
100% 90% 80% 1960 3908 1479 4316 1893 6917 1740 4876
3927 3730
8726 2057
19063 1975
11577 6368
12105
10801 14164 32424 64711 97757 112349 82776 11348
17996
70% 60% 50% 40% 30%
59447
14371 4663 22938 5472 67144 119538 6833 9170
19937
11659
99081 192129
31551 77469 54195 71258 47451
197132 197342 52903 86349
20% 10%
0%
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec 08
Income
Equity
Balanced
Liquid/Money Market
Gilt
ELSS
GOLD ETFs
Other ETFs
FoFs
Stock Funds have become a mainstream product. Liquid Plus Funds and FMPs have seen aggressive inflows due to regulatory changes. New asset classes like ETFs and FoFs have emerged.
AUM movements in India Indian Asset Management Industry - Growth in Assets

700000
600000
549936
500000
-13 %
413365
400000
66 %
300000
323597
14 %
200000
199248 140093 150537
101822
100000
122600
0 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 May-08 Dec 08
Total Assets Under Management as on March 2009 Rs 493286 crores Total No. of players - 36

Regulatory Aspects
Risk Management
Warning Signals
Expenses
Penetration of Mutual Funds Penetration vis--vis Other Financial Products

250
235
230
200
182
In Millions
150
100
90
58
50
26 8.4
0
Bank A/cs
Credit Cards
Debit Cards
Mutual Fund Folios
Life Insurance Retails Broking Customers Accounts
Mobile Subscribers
Note: Penetration of Mutual Funds is still low as compared to Banks and Insurance Companies.

Regulatory Aspects
Risk Management
Warning Signals
Expenses
What Mutual Fund are not
MFs are not get rich quick investments MFs are not risk free investment MFs are not assured return investment MFs are not a universal solution to all investment needs
Myths about Mutual Funds
Mutual Funds invest only in shares. Mutual Funds are prone to very high risks/actively traded. Mutual Funds are very new in the financial market. Mutual Funds are not reliable and people rarely invest in them. The good thing about Mutual Funds is that you dont have to pay attention to them.
Factors to be considered before choosing a Mutual Fund
Track record / experience of the fund house Stability of the investment team / adherence to an investment process Consistent performance of the fund across market cycles Disclosure and service levels offered by the fund house Relative performance among its peer group (across time periods) Investment style (whether it suits your risk profile) Look for Expense Ratio, Exit load etc
Thank You

Understanding Mutual Funds

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Understanding Mutual Funds

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KASH Management Services Pvt Ltd

Investment Retail Investors

NAV Exit Load Portfolio Dividend

Why did Mutual Funds come into existence?

Why did Mutual Funds come into existence?

It is not wise to put all eggs into one basket

Flow Cycle of a Mutual Fund

Diff. b/w MF and Direct Investment

Balance sheet of a Bank and Mutual Fund Risk-return structure of schemes

Organizational Structure of a Mutual Fund Classification of Mutual Fund Schemes

History of Mutual Funds

Portfolio Management Process AUM movements in India

Mutual Fund Comparison

Tracking Mutual Funds

Penetration of Mutual Funds

What Mutual Funds are not?

Flow Cycle of a Mutual Fund

Flow Cycle of a Mutual Fund

History of Mutual Funds

Portfolio Management Process AUM movements in India

Mutual Fund Comparison

Tracking Mutual Funds

Penetration of Mutual Funds

What Mutual Funds are not?

Flow Cycle of a Mutual Fund

Flow Cycle of a Mutual Fund

Mutual Funds defined.a flow cycle

Flow Cycle explained

Important Characteristics of Mutual Funds

It is managed by a team of investment professionals and other service providers.

Advantages of Mutual Funds to Investors

Disadvantages of Mutual Funds to Investors

No control over the costs. Regulators limit the

Diff. b/w MF and Direct Investment

Flow Cycle of a Mutual Fund

History of Mutual Funds

Portfolio Management Process AUM movements in India

Mutual Fund Comparison

Tracking Mutual Funds

Penetration of Mutual Funds

What Mutual Funds are not?

Diff. b/w MF and Direct Investment

Balance sheet of a Bank and Mutual Fund

Flow Cycle of a Mutual Fund

History of Mutual Funds

Portfolio Management Process AUM movements in India

Mutual Fund Comparison

Tracking Mutual Funds

Penetration of Mutual Funds

What Mutual Funds are not?

Balance sheet of a Bank and Mutual Fund

Difference between Bank and Mutual Fund

Balance sheet of a Bank and Mutual Fund

Difference between Bank and Mutual Fund

Organizational Structure of Mutual Fund

Flow Cycle of a Mutual Fund

History of Mutual Funds

Portfolio Management Process AUM movements in India

Mutual Fund Comparison

Tracking Mutual Funds

Penetration of Mutual Funds

What Mutual Funds are not?