MUTUAL FUNDS
K K JINDAL
What is a mutual fund?
A mutual fund is a common pool of money into which investors place their contributions that are to be invested in different types of securities in accordance with the stated objective Each investor has a right to a proportional share of the assets of the fund and any income it earns Company sells shares to the public and invests the proceeds in a pool of securities
Jointly owned by the funds investors Invested according to the objective of the fund
Mutual Funds
Operations Flow Chart
(Reference: [Link])
Fund Structure
Fund Sponsor
Trustees
Asset Management Company
Depository
Agent Custodian
Advantages of Mutual Funds
Diversification Professional Management Ease of buying and selling Small amount of money required to open an account Multiple withdrawal options Distribution or reinvestment of income and capital gains Switching privileges in fund family Multiple services
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Disadvantages of Mutual Funds
Purchase and withdrawal costs Management fees Potential poor performance No control over capital gains distribution Complicated tax reporting issues Potential market risk with all investments Aggressive or unethical sales personnel
Computing Net Asset Value
For investors, the performance of their investment depends on what happens to the funds per share value, or net asset value (NAV) NAV= Market Value of Assets Liabilities Number of Shares Outstanding
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Mutual Fund Returns
Three sources of return: Income distributions (ID)
Bond interest, stock dividends
Capital gain distributions (CGD)
Realized gains/losses from selling assets
From unrealized gains/losses from assets
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Changes in NAV (NAV)
Closed-end and Open-end Funds
Closed-end funds Shares are issued by an investment company only when the fund is originally set up After all original shares are sold you can only purchase shares from another investor Open-end funds Shares are issued and redeemed by the investment company at the request of investors. Investors can buy and sell shares at the net asset value.
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Load Vs. No-load Funds
Marketing a new mutual fund scheme involves initial expenses. These expenses are charged to the investors through loads and are recovered from the investors in different ways:
Front-end or entry load is charged to the investor at the time of his entry into the [Link] has since disallowed this load Back-end or exit load is charged to the investor at the time of his exit from the scheme. Deferred load is charged to the investor over a period of time. Contingent deferred sales charge: Different amount of loads are charged to the investor depending upon the time period the investor has stayed with the fund. The longer he stays with the fund, lesser the amount of exit fund he is charged. Very often, AMCs do not charge any initial expenses to the investor in the IPO. These are hence are no-load funds. In no-load funds, the investors get units for the complete amount invested.
Types of Mutual Funds
Funds classified according to the type of security in which they invest Examples:
Stock Funds Taxable Bond Funds Municipal Bond Funds Stock and Bond Funds Money Market Funds
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Common Stock Funds
Most popular type of fund Wide variety with different objectives and levels of risk
Growth Industry or sector funds Geographic areas International or Global Equity Index funds
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Bond Funds income Generally seek to generate current
with limited risk Can vary by maturity
Short-term, Intermediate-term, Long-term Government Corporate Municipal International/Global Bond Index funds Infrastructure funds Life style fund
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Can vary by type of bond
Stock and Bond Funds
Seek to provide a combination of income and value appreciation Different names
Balanced funds Hybrid funds Flexible funds Asset Allocation funds
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Money Market Funds
Provide safe, current income with high liquidity Invest in money market securities T-bills, Bank CDs, Commercial paper, etc. Provide an alternative to bank deposits
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Aim is to create savings pools to meet future expenses relating to various goals like higher education, housing marriage and retirement Goal series fund typically invest in multi-asset class such as equities, gold and debt Fund marketers expect such funds to attract inflows as it is easy to push solution based product to retail investors Fidelity recently launched Children Fund Commission expected by distributors 1-1.25%
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Goal series Funds
Risk-Return Tradeoff
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Assets Under Management as on 31st March, 2010
Structure Mature Balanced LSS 39
Open End lose End N 3533 5955
C Assured Return B
Total
7902004323 5 E 1222 1 825 -
1761 5955 I 6 65396 45200 750000
Gilt
Growth ncome 4571 Liquid/Money Market
21524 2302 1498
45200
Total Total
Amount in Rs. Crores
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Mutual Fund Prospectus
Must be available to and should be reviewed by investors Contains:
Funds investment objective Investment strategy Principal risks faced by investors Recent investment performance Expenses and fees
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NFOs
Equity MFs through 24 NFOs collected just about Rs 3000 crores down by over 57% from 2009 and lowest in last 4 years
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Mutual Fund Investment Strategies
Choose in funds consistent with your objectives, constraints, and tax situation Consider index funds for a large portion of your fund portfolio When possible, invest in no-load funds with below-average expense and turnover ratios Invest. Dont speculate. Be regular Own funds in different asset classes and consider life-cycle investing
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When should you sell?
Personal considerations
Portfolio rebalancing
Be aware of capital gains with selling fund shares
Fund considerations
Change in portfolio manager Change in investment style Fund is growing too large or too fast Persistent bad performance
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references
Investments, Fifth Edition, William F. Sharpe ICRA Money and Finance [Link] [Link] [Link] [Link]
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Thank you
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