Mutual Funds

Dr. Ramesh Chandra Babu,

M.Com.,MBA.,FDPM(IIM-A), UGC-NET, MISTE, Ph.D
Associate Professor ,
School of Business and Management,
CHRIST University
Bengaluru- Karnataka- India
 Mutual Fund

Mutual Fund is a trust that pools the savings of a number of

investors who share a common financial goal. Mutual Fund offers an
opportunity to invest in a diversified professionally managed basket
of securities at a relatively low cost.
Your Investment Menu Card

Instrument Tax Return Duration

Benefit

EPF √ 8.50% Long Term

PPF √ 8% Long Term
NSC √ 8% Long Term
FD’s – Banks & √ 5.70 to 8.50% Short Term
Post Office

Senoir Citizen √ 9% Long Term

Savings Scheme
Mutual Funds √ Market Linked Long Term &
Short Term
ULIP √ Market Linked Long Term
NPS √ Market Linked Long Term
Direct Equity √ Market Linked Long Term
Gold √ Market Linked Short Term
Real Estate √ Market Linked Long Term
Cost of money lying idle…

Money in savings account + 100000

Interest earned in 1 year (@4% per + 4000
annum)
104000
Tax on Interest (@30%) - 1200
Impact of Inflation (@6% per annum) - 6000

Value at the end of year 1 96,800

Your investment ought to beat the inflation !!!

Challenges involved investing directly in
Capital Market

▪ Time
▪ Expertise
▪ Lack of Information
▪ Portfolio
▪ Volatility
Key Investment Considerations

Liquidity

You get your money back when you want it

Safety
You get your
money back

Plus Convenience
How easy is it to invest, disinvest
and adjust to your needs?
Post-tax Returns

How much is really left for you post tax?

What is Mutual Fund and Why Mutual Fund

▪ A mutual fund is the trust that pools the savings of a number of

invetors who share a common financial goal.

▪ Anybody with an investible surplus of as little as a few hundred

rupees can invest in Mutual Funds.

▪ The money thus collected is then invested by the fund manager in

different types of securities. These could range from shares to
debenture to money market instruments, depending upon the
scheme’s stated objective.

▪ It gives the market returns and not assured returns.

▪ In the long term market returns have the potential to perform

better than other assured return products.

▪ Mutual Fund is the most cost efficient distributors of financial

products
How Mutual Fund works?
A vehicle for investing in portfolio of stocks and bonds
Structure of Mutual Fund

Custodian keeps safe custody of the investments (related documents of securities invested).
Structure of Mutual Funds

• A mutual fund comprises four separate entities, namely sponsor,

mutual fund trust, AMC and custodian. The sponsor establishes the
mutual fund and gets it registered with SEBI.

• The mutual fund needs to be constituted in the form of a trust and the
instrument of the trust should be in the form of a deed registered under
the provisions of the Indian Registration Act, 1908.

• The sponsor is required to contribute at least 40% of the minimum net

worth of the asset management company. The board of trustees
manages the MF and the sponsor executes the trust deeds in favour of
the trustees. It is the job of the MF trustees to see that schemes
floated and managed by the AMC appointed by the trustees are in
accordance with the trust deed and SEBI guidelines.
Types of Mutual Funds

Types of
Mutual Funds

By
By
Investment
Constitution
Objective

Close Ended Open Ended Interval Equity Funds Debt Funds Cash Fund
Advantages of Mutual Funds

1.Professional Management
2.Diversification

3.Convenient Administration

4.Return potential
5.Low cost
6.Liquidity

7.Transparency

8.Flexibility

9.Choice of schemes
10.Well regulated
11.Tax benefits
How do I make money from a mutual fund?

1. Capital appreciation:
As the value of securities in the fund increases, the fund's unit price will also
increase. You can make a profit by selling the units at a price higher than at which
you bought

2. Coupon / Dividend Income:

Fund will earn interest income from the bonds it holds or will have dividend income
from the shares

3. Income Distribution:
The fund passes on the profits it has earned in the form of dividends

Disclaimer
As the value of securities in the fund increases, the fund's unit price will also increase. You can
make a profit by selling the units at a price higher than at which you bought. Although Mutual
Fund does not guarantee the same.
Mutual Fund- How to invest in Mutual Funds
Selection Process- 3 step process

Step 3 Select the ideal

mix of schemes
Investing in just 1
scheme may not meet all
Step 2 Choose the right your investment needs.
mutual fund. You may consider
investing in a
1. The track record of
combination of schemes
performance over the last few
to achieve your specific
years in relation to the
goals.
appropriate Benchmark and
similar funds in the same
Step 1 Identify your category
investment needs
2. How well the mutual fund is
1. What are my investment organized to provide efficient,
objectives and needs? prompt and personalized
2. How much risk am I willing service.
to take? 3. Degree of transparency as
3. What are my cash flow reflected in frequency and
requirements? quality of their communications.
Mutual Fund- Which one to buy?

Your Investment
Based on your goals and
goal risk tolerance

Capital Capital
Generate Income
Preservation Appreciation
Mutual Fund Products – Risk / Return Graph

Hybrid & MIP Sectoral Funds

Debt Equity
>> Return <<

>> Return <<

GILT & Bond Funds Diversified Funds (ELSS)

Short Term Funds Balanced Funds

Ultra Short Term Funds Arbitrage Funds

Liquid fund Index Fund

Lo Med Hi Lo Med Hi
>> Risk << >> Risk <<
Equity Linked Saving Schemes (ELSS)
advantage: all about 80C investments
Instrument Returns Lock In
Period (in
Years)
EPF 8.50% Until Retirement
PPF 8% 15
NSC 8% 6
FD’s – Banks & Post office 5.70 to 8.50% 5
Senior Citizen Savings Scheme 9% 5
Life Insurance Policies 5 to 6% 3
ELSS Market Linked 3
ULIP Market Linked 5
NPS Market Linked till age 60

ELSS Advantage over other tax saving instruments

1. Low Lock in period
2. Earn market linked return
3. Tax free returns
Investment in Mutual Fund through SIP
SIP – Systematic Investment Planning
…it is a method of investing a fixed sum, at a regular interval, in a mutual fund.
It is very similar to monthly saving schemes like a recurring monthly deposit / post office deposit

Advantages of Systematic Investment Planning

▪ Encourages Regular Investments (just like recurring deposit
schemes)
▪ A Convenient way to invest regularly
▪ Lower initial investment without cutting into regular expense
▪ Long term perspective
▪ Rupee Cost Averaging Benefit to counter volatility - it brings down
the average cost of your Investments
▪ No timing the market!!!
▪ Meet investment objective with investment needs
▪ Helps to match the risk / return profile
SIP: The Power Of Compounding

SIP of Rs. 1000 invested per month @ 8% pa till the age of 60.

Starting Age Total Amount Value at the age

Saved of 60
25 4,20,000 23,09,175
30 3,60,000 15,00,295
35 3,00,000 9,57,367
40 2,40,000 5,92,947

…the sooner you start, makes a difference!

Demystifying NAV – Net Asset Value

While selecting a fund, the NAV shouldn’t be the criteria, A low NAV need not mean that
it’s a good buy ...
Mutual Fund
Scheme Name NAV's on Growth
Jan 1st 2017 Oct 21st 2017
A 23.55 38.97 65.5%
B 7.44 12.04 61.8%
C 19.86 30.23 52.2%
D 21.70 31.57 45.5%
E 12.10 16.56 36.9%

In the above example during the period under consideration the best growths have been recorded by the
funds with the “lowest” (Scheme B Rs 7.44) and the “highest” (Scheme A- Rs 23.55) NAVs respectively.
On the other hand the least growth has been recorded by (Scheme E), a fund with a low NAV.

Clearly the data suggests that there is no correlation between the NAV size and the returns.
Types of risks associated with Mutual Fund
Investment
Risk is an inherent aspect of every form of investment. For Mutual Fund investments, risks
would include variability, or period-by-period fluctuations in total return.

Market risk: At times the prices or yields of all the securities in a particular market rise or fall
due to broad outside influences. This change in price is due to 'market risk'.

Inflation risk: Sometimes referred to as 'loss of purchasing power'. Whenever the rate of
inflation exceeds the earnings on your investment, you run the risk that you'll actually be able
to buy less, not more.

Credit risk: In short, how stable is the company or entity to which you lend your money when
you invest? How certain are you that it will be able to pay the interest you are promised, or
repay your principal when the investment matures?

Interest rate risk: Interest rate movements in the Indian debt markets can be volatile leading
to the possibility of large price movements up or down in debt and money market securities and
thereby to possibly large movements in the NAV.

Other risks associated are:

Investment risks Liquidity risk Changes in the government policy

 Net Asset Value (NAV)
• Net Asset of the Scheme = Market Value of Investments +
Receivables* Other accrued income + Other Assets — Accrued
Expenses – Other Payables - Other Liabilities
 Computation of Returns

D
Mutual funds - Evaluation