Professional Documents
Culture Documents
Conceptual Framework
What is a Mutual Fund ?
INVESTORS
SECURITIES
Characteristics of Mutual
Funds
Investors own the mutual fund.
Professional managers (AMC) manage the fund for a
small fee.
Fees charged is specified by SEBI and is expressed as a
percentage of assets managed
The funds are invested in a portfolio of marketable
securities in accordance with the investment
objective.
Value of the portfolio and investors’ holdings, alters
with change in the market value of investments.
Mutual Funds:
A Packaged Product
Professional
Management Diversification
Convenience
Liquidity
Tax Benefits
Diversification
Open-ended: Close-ended:
Assures liquidity Buying and selling
As liquid as the can be done
banks through the stock
exchange
Periodic
redemption by
Mutual Funds
Convenience
Easy Way to Invest
Outsourcing of expertise
Affordability
Index 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
Investment objective
Equity funds suit growth objectives; debt funds suit income
objectives
The Risk Return Trade-off
Hedge Funds
Liquid Funds
Risk
History of Indian Mutual Funds
Phase I (1964-87)
Set up by RBI, de- linked later.
Act of parliament
First scheme US 64, still outside SEBI purview
Phase II (1987-93) entry of PSU Banks/ FIs
SBI in 87, LIC in 89, Indian Bank in 90
Phase III (1993-95) Entry of Private players
Phase IV (1993 onwards) SEBI regulation of Mutual
Funds
Fund Structure and Constituents
In UK
Two alternative structure
In USA
Investment Companies structure
In India
3 tier structure
Sponsor
Trust/Trustee
AMC
MUTUAL FUND - FRAMEWORK- India
Sponsor
the Distribution
Brokers Registrar
Custody
Investors
Markets Bank
UTI : Differences
Formed as a trust under UTI Act 1963
Voluntary submission to SEBI regulation
No separate sponsor or AMC
Major Difference
-Assured return Scheme
-Different accounting norm
-Ability to take and make loans
SPONSOR : Role
Promoter of the mutual fund
Creates a Trust under Indian Trusts Act, 1882
Appoints trustees
Creates AMC under Companies Act, 1956
Fulfils necessary formalities and applies to SEBI for
registration of the Trust as a Mutual Fund
Who is eligible to be a
Sponsor…?
Criteria
Financial services business
Sound track record
Positive net worth in last five years
3 year profit making record in the last 5
years including the last year
Atleast 40% contribution to AMC capital
Sponsors’ net worth in the immediately
preceding year is more than the capital
contribution to the AMC
TRUSTEE
Fiduciary responsibility to the Investors.
Directors to be approved by SEBI.
Execution of trust deed by sponsor in favour of trustee.
Trust deed is stamped and registered with SEBI
Legally responsible for administering the Trust and
Compliance with Regulations.
Norms for Trustees:
Experience in Financial Services
Minimum 4 members on the board and 2/3rd of the members
not to be connected with the sponsor
All major Decisions need trustee approval
ASSET MANAGEMENT COMPANY
Required to be registered with SEBI
Responsible for :
Launching Schemes
Managing Funds for Schemes
Performing Accounting Functions
All day to day affairs of the Mutual Fund
Quarterly reporting to Trustees
Income of an AMC /Asset Management Fee
1.25% of weekly average NAV of each Scheme up to Rs.100
cr of assets managed
1.00% greater than Rs.100 cr
Minimum 4 directors with 1/2 independent
At least Rs 10 cr of net worth to be maintained at all times
AMC cannot act as trustee for other MF
AMC of one MF cannot be trustee of another MF
TRANSFER AGENTS
Issue of Account Statements to
Investors
Arranges payment to Investors when
they redeem
Takes care of Non commercial
transactions like change of address,loss
of account statement etc.
should be registered with SEBI
Appointed by Board of AMC
CUSTODIAN
Auditor
-Separate auditor for AMC and mutual
Fund
Legal & Regulatory Environment
D e p a r t m e n t o f C o m p
C o m p a n y L a w B o a r
M i n i s t r y o f L a w & J
Ministry of Finance
Supervises both SEBI and RBI
Preliminary information
Summary information about the mutual
fund, the scheme and terms of offer
Mandatory disclaimer clauses as required by
SEBI
Glossary of terms in the offer document,
which defines the terms used
Standard and scheme specific risk factors
pertaining to the scheme being offered
Fund Specific Information
Insurance Companies
NRIs/ FIIs
Client Servicing
Compliance Officer
Individual Agents
Distribution Companies
Banks and NBFCs
Direct marketing channels
NAV - COMPUTATION
Tenor
Short and long
Put and call options
Interest payment
Fixed and floating
Periodic vs discounted
Credit quality
Gilt, guaranteed and others
Traded and non-traded
Debt instruments
Commercial Deposits
Corporate Debentures
Govt Securities
Reinvestment Risk
Call Risk
Liquidity
Inflation
Price and Yield
= (8/110)*100
= 7.27%
Interest Rate Sensitivity
= 1.5*4
= - 6%
Credit Risk
Initial Issue
Transaction Annual Recurring Expenses
Cost Expenses
Entry / Exit load AMC Fee
Custodian Fee
CDSC for no-load Registry Exp.
schemes Trustee Fee
Audit Fee
Mktg. & Selling Exp.
Brokerage Exp.
Others
Fees & Expenses
Initial Issue expenses only for closed
ended equity fund
For launching of the scheme
Can charge up to 6%
Recurring Expenses
Mkt & selling exp including brokerage
Transaction cost
R&T cost
Custodian Fees
Audit fees etc
Investor Communication’s cost
Fees & Expenses
Amc can charge Investment management fee to
the fund on weekly avg. net assets.
Marking to Market
Equity Valuation Norms - Listed, Unlisted, NPA,
Un-traded
Debt valuation norms - Listed, Unlisted, Illiquid
Money Market Instruments - valuation norms
Effect of Buybacks, Mergers
Valuation Models - CRISIL
Valuation
TRADED SECURITIES
Last quoted closing price on the SE where principally
traded
If Not traded on any SE on a particular day, then earliest
previous day price is taken (not more than 30 days)
Valuation = MP * current holding
NON - TRADED SECURITIES
Stocks which are not traded for more than 30 days on
any SE are valued on good faith basis by AMC within
following parameters
Debt - YTM basis
Equity
Capitalisation of earning or NAV or combination of both
Evaluating Fund
Performance
Change in Nav
Total Return
Total Return with dividend reinvested at NAV
CAGR
Performance Evaluation
Change in Nav - The most common
Nav on day 1 = Rs.10
Nav on day x = Rs.12
% Change in nav = dayx-day1/day1 * 100
= 2/10 *100 = 20 %
Limitations:
Does not account for dividend
Suitable only for growth plans
Annualizing Rate of Return
NAV on Day 1: Rs 10
Nav after 6 months : Rs 12
Formula : A = P (1+r) ^n
Where A is the total amount at the end of the
investment period, P is the principal amount invested,
r is the rate of return and n is the time period of the
investment.
Performance Evaluation
Other Parameters
Expense ratios - indicates fund efficiency
and cost effectiveness
Portfolio Turnover ratio - measures
amount of buying and selling done by the
fund
Transaction cost
Fund size
Cash holdings
How MF Scheme Returns are
Calculated
Growth option : Returns calculated using CAGR on
NAV’s
Dividend option : Returns calculated using CAGR on
ex-dividend NAV’s, assuming dividends re-invested.
Less than 1 year, returns are calculated using
Change in NAV method.
Risk Parameters
Review Periodically
Financial Planning. . . . .
Elaborated
Create asset allocation plan
- tailor make portfolio suiting client needs
Start early
Example
- 50% Equity and 50% Debt
- Equity markets rise ensuring profit booking
- 50:50 Ratio maintained
Flexible Asset Allocation
Strategy
No portfolio re-balancing
Expense Ratio
Portfolio Quality
Credit Rating of portfolio holdings
Average maturity
Duration
Money Market Fund Selection
Expense Ratio
Credit Quality
Yield
Start early
Thank You