mutual fund

INTRODUCTION HISTORY PROS AND CONS STRUCTURE SEBI GUIDELINES TERMS RELATED TO MF TYPES RATIOS MF TAXATION FUTURE OF MUTUAL FUND INDUSTRY

Content

Challenges involved investing directly in

Capital Market• Requirement of

C apital

• Time

• Expertise

• Lack of Information

• Portfolio

• Volatility

Types of investmentPRODUCT RETURN SAFETY LIQUIDITY TAX

BENEFIT

CONVINIENCE

BANK DEPOSIT LOW HIGH HIGH NO HIGH

EQUITY HIGH LOW HIGH OR LOW

NO MODERATE

DEBT MODERATE MODERATE LOW NO LOW

PPF MODERATE HIGH LOW YES MODERATE

LIFE INSURANCE MODERATE HIGH LOW YES MODERATE

NSC MODERATE HIGH LOW YES MODERATE

MUTUAL FUNDS (OPEN ENDED)

MODERATE MODERATE HIGH NO HIGH

MUTUAL FUNDS (CLOSE ENDED)

MODERATE MODERATE HIGH YES HIGH

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Key Investment Considerations

SafetyYou get yourmoney back

Liquidity

You get your money back when you want it

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?

What is Mutual Fund??

• A mutual fund is the 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 securit ies .

• The income earned through these investments and the capital appreciation realized are shared by i ts unit holders in proportion to the number of units owned by them.

How Mutual Fund works?

How Mutual Fund works?

History

• First Phase – 1964-87 -Unit Trust of India (UTI) was

established on 1963 by an Act of Parliament.

• Second Phase – 1987-1993 (Entry of Public Sector

Funds) -SBI Mutual Fund was the first non- UTI

Mutual Fund established in June 1987

HISTORY OF MUTUAL FUND

• Third Phase – 1993-2003 (Entry of Private Sector

Funds) Kothari Pioneer (now merged with Franklin

Templeton) was the first private sector mutual fund

registered in July 1993.

• Fourth Phase – since February 2003 -In February

2003, following the repeal of the Unit Trust of India

Act 1963 UTI was bifurcated into two separate entities.

Cont….

Advantages of Mutual Funds

Advantages of Mutual Funds• Professional Management

• Diversification

• Convenient Administration

• Return potential

• Low cost

• Liquidity

• Transparency

• Flexibility

• Choice of schemes

• Well regulated

• Tax benefits

Purchase and withdrawal costs Ongoing management fees Potential poor performance No control over capital gains distribution Complicated tax reporting issues Potential market risk with all investments Some sales personnel are aggressive

Disadvantages of Mutual Funds

Investment Performance and Risk

Sector Performance

Management Fees and Expense Ratio

Cash Flows

Factors affecting MF

(AUM) represents the money which is managed bya mutual fund in a scheme

AUM = Net Asset Value * the number of units issued by that scheme

A change in AUM can happen either because of fall in NAV or redemptions.

What is aum??

Aum gROWTH

auM GROWTH BY SECTOR

AUM GROWTH OF COMPANY

MF should have the following 3-tier structure, they are:

Sponsor

Trustee / Trust

Asset Management Company

Custodian and other parties

Parties to a Mutual Fund

Akin to the promoter of the company

Contributes atleast 40% of the net worth of the AMC.

Posses sound financial record over five years period

Establishes the fund

Gets the fund registered with SEBI

Forms a trust and appoints a board of trustee

SPONSOR (TIER 1)

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 and custodian

TRUSTEES (TIER 2)

Floats schemes and manages according to SEBI.

Chairman of AMC cannot be a trustee of any MF.

Cannot undertake any other business activity other than PMS

Atleast 50% of independent directors

AMC (TIER 3)

Holds the funds securities in safekeeping

Settles securities transaction for the fund

Collects interest & dividends paid on securities

Records information on corporate actions

CUSTODIANS

Maintains records of unit holders accounts and transactions

Disburses & receives funds from unit holder transactions

Prepares and distributes a/c settlements

Tax information, handles unit holder communication

Provides unit holder transaction services

REGISTRAR AND TRANSFER AGENTS (RTA’s)

Incorporated on 22 Aug, 1995

Modeled on the lines of SRO

Professional and healthy market

Protects and promotes the interest of investors

ASSOCIATION OF MUTUAL FUNDS IN INDIA

(AMFI)

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Formation of trust.

Set up of board of trustees

Minimum net worth of the AMC should be 10 crs

AMC and trustees – 2 separate entities

Approval of SEBI

SEBI GUIDELINES

Registration of MF schemes

90% minimum distribution of profits

A common format to disclose their entire portfolios on half- yearly basis

fully revise and update offer document and memorandum at least once in two years

Bring uniformity in disclosures of various categories of advertisements

Reduce initial offer period from a maximum of 45 days to 30 days

Dispatch statements of account once the minimum subscription amount specified in the offer document is received

Invest in mortgaged backed securities of investment grade given by credit rating agency.

Identify and make provisions for the non-performing assets (NPAs)

Disclose information in a revised format on unit capital, reserves, performance in terms of dividend and rise/fall in NAV during the half-year period, annualized yields over the last 1, 3, 5 years in addition to percentage of management fees etc.

Declare their NAV s and sale/repurchase prices of all schemes updated daily on regular basis on the AMFI website by 8.00 p.m. and declare NA V s of their close ended schemes on every Wednesday

un-audited half-yearly results are to be published before the expiry of one month from the close of each half-year

All the schemes by mutual funds shall be launched within six months from the date of the letter containing observations from SEBI on the scheme offer document

Mutual funds are required to disclose large unit-holdings in the scheme, which are over 25% of the NAV

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Mutual, beneficial and proportional owners

Receive dividend within 30 days of declaration

In case of redemption, 10 working days. If the AMC fails, an interest of 15% is paid.

In case of failure to claim the redemption proceeds, then NAV is applicable

Investors Rights and Obligations

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Right to receive audited annual reports and other relevant information

Right to wound up a scheme if unit holders representing 75% of scheme’s assets pass a resolution

Right to be informed about the fundamental attributes of a scheme

Can approach Investor relations officer for grievance redressal

Investors Rights and Obligations

NFO is launched in the market to raise capital AMC launches new schemes, under the name of the Trust NFOs are offered for a stipulated period. Investors can invest in these schemes at the offer price

(most cases Rs 10) for stipulated period only. After the NFO period, investors can take exposure in

these funds only at the prevailing NAV.

New Fund Offer (NFO)

Offer document

• Discloses important information about the investment instrument.• SEBI’s format for offer document includes:

o Date of publication, name and type of scheme

o Investment objectiveo Risk factoro Historic statso Features and plans of schemeo Management of fundso Information about load and

expenses

o Investment restrictionso Turnover of portfolioo Unitholders’ rightso Tax treatmentso Valuation policyo NAVo Minimum investment

NAV represents a fund's per share market value. Price at which investors buy ("bid price") fund shares

from a fund company and sell them ("redemption price") to a fund company.

NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities.

Net Asset Value (NAV)

Market value of the funds investments + Receivables + Accrued Income – (Liabilities + Accrued expenses)

_________________________________________________ Number of units outstanding

Calculation of nav

LIABILITIES RS CRS

ASSETS RS CRS

UNIT CAPITAL 300 SHARES 345

RESERVES AND SURPLUS 85.7 DEBENTURES 23

MONEY MARKET INSTRUMENTS 12

ACCRUED EXPENDITURE 1.5 ACCRUED INCOME 2.3

OTHER CURRENT LIABILITIES 0.5 OTHER CURRENT ASSETS 1.2

DEFERRED REVENUE EXPENDITURE

4.2

387.7 387.7

UNITS ISSUED (Cr.) 30

FACE VALUE (RS.) 10

NET ASSETS (RS.) 385.7

NAV (RS.) 12.86 39

Calculation

RETURN OF 28.57%

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TRANSACTION FEES

PERIODIC FEES

LOADSOTHER

OPERATING EXPENSES

EXPENSES

EXPENSES

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Various Expenses

Transaction Fees

Purchase Fees

Redemption Fees

Exchange Fees

Periodic fees

Management fees

Account fees

Other operating expenses

Transaction costs

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LOAD

NO LOAD

LOADS

EXIT (BACK-END)

ENTRY (FRONT-END)

Load is fee payable by the investor when they enter/exit an MF scheme

LEVEL LOAD/LOW LOAD

A measure of what it costs an investment company to operate a mutual fund.

Expense ratio= fund's operating expenses /average dollar value of its AUM

largest component of operating expenses is the fee paid to a fund's investment manager/advisor

Expense ratio for Mf

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HEDGE FUNDS

PRIVATE EQUITY FUNDS

VENTURE CAPITAL FUNDS

MUTUAL FUNDS

Investment Tradable securities

Private companies

Start ups Stocks, bonds, derivatives etc

Risk Very high medium High Low

Availability Only to HNI’S Everyone Everyone Everyone

Tenure shorter Longer (5-8) Medium (3-5)

COMPARISON

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Equity funds Money market mutual funds Debt funds Hybrid funds Gilt funds Other funds

Types of Mutual Funds

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Diversified Equity Fund: These funds aim to diversify the investments across companies and across sectors. Small and Mid-Cap Funds: These funds are aggressive in their investment nature with an aim to generate long term appreciation from a portfolio that is substantially constituted of equity and equity related securities, which are not part of top 100 stocks.

Sector Specific Funds: These invest into sectors which are mentioned in their objective or offer documents, such as banking, FMCG, etc.

Tax Saving Funds (ELSS): It offers tax rebates to investor u/s 80C of I. T. Act.

Equity funds

SBI Blue Chip Fund(G)

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Also known as Money Market Schemes

These funds provide easy liquidity and preservation of capital.

These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs.

These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1 day to 3 months.

Liquid funds

JPMorgan India Liquid Fund

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Gilt Funds: Invest their corpus in securities issued by government. These funds carry zero default risk but are associated with Interest Rate Risk.

Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and government securities.

Monthly Income Plan (MIPs): MIPS invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market.

Short Term Plans (STPs): These investments are meant for a horizon of three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs)

Debt Funds

HDFC High Interest Fund

Systematic investment plan (SIP)- Investor can invest in fixed amount every month for a

pre-decided period of time. Usually 6months or 1year.- Helps investor to average out the cost of investment Systematic withdrawal plan (SWP)- Minimize the risk of redeeming all the units - Meets liquidity needs for regular expenses- Profits are regularly encashed by the investor Systematic Transfer plan (STP)

Variety of mutual funds in terms of Services/options

and plans

Average unit cost to investor = Rs. 11.86 (60000/5058.35)

Average unit price to investor = Rs. 11.91 (Avg. of unit prices)

Systematic withdrawal plan (SWP)- Minimize the risk of redeeming all the units - Meets liquidity needs for regular expenses- Profits are regularly encashed by the investor

Systematic Transfer plan (STP)- Amount withdrawn is reinvested in some other scheme

of same MF

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Example – How does a Systematic Transfer Plan workThis is best understood using an example. Say you want to

transfer2,000 from an equity MF scheme to a debt MF scheme every month.

Month 1Equity MF units before transfer: 1,000

Debt MF units before transfer: 0Equity MF unit NAV:20

Debt MF unit NAV:15Equity MF units needed (redeemed from your account)

=2,000 /20 = 100Debt MF units allotted =2,000 /15 = 133.33

Equity MF units after transfer = 1000 – 100 = 900Debt MF units after transfer= 0 + 133.33 = 133.33

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Month 2Equity MF units before transfer: 900

Debt MF units before transfer: 133.33

Equity MF unit NAV:22Debt MF unit NAV:16

Equity MF units needed ( redeemed from your account) =2,000 /22 = 90.91Debt MF units allotted =2,000 /16 = 125

Equity MF units after transfer = 900 – 90.91 = 809.09Debt MF units after transfer = 133.33 + 125 = 258.33

And so on…

To attract Risk averse investors

Scheme aims at protecting initial capital investment and does not guarantee returns

Capital Protection schemes

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Example : 1) If you invest Rs. 100 ; after 1 year returns is 20% so end of the year it becomes Rs. 100 + 20= Rs. 120.

2) Now second year also you make a profit of 20% so your money is Rs. 120 + 24 = Rs. 144

3) After 2 years your money of Rs. 100 is now Rs. 144 so your

Absolute returns for 2 years is 44% whereas Annualized returns is 20% year on year.

Absolute return and Annualized return

SEBI regulation on disclosure in offer document, advertisment etc.

Steps: calculate growth in number of units (dividend re-

invested) calculate opening wealth calculate closing wealth

Compounded Average Growth Rate of Return

Quantitative Evaluation of Mutual Fund Schemes

Returns ◦ XIRR◦ Dividend Re-investment

(CAGR)◦ Compounding of Periodic

Returns

• Risk◦ Standard Deviation◦ Alpha◦ Beta ◦ Weighted Average Maturity◦ Modified Duration

Risk Adjusted Returns◦ Sharpe Ratio◦ Sortino Ratio◦ Treynor Ratio◦ Jensen’s Alpha

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CAGR (Dividend Re-investment)

The compounded annual growth rate (CAGR) can be calculated as follows:CAGR = 100 X {(I2 ÷ I1) (1÷r)}-1i.e. 100 X {(19,127 ÷ 14,000)(365÷382} - 1i.e. 34.74%

It is rate of return for the period of holding Also known as total return or point to point returns. HPR = {[INCOME+(END PRICE – BEGINNING

PRICE)]*BEGINNING PRICE}*100 HPR ={ [2+(12-10)]/10}*100 = 40%

Holding Period Return

DIVIDEND 2 HPR 40%BEG. PRICE 10END PRICE 12HOLDING PERIOD 1 YEAR

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Calculation of Return using XIRR Function

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Div idend Re- investment (CAGR)

The compounded annual growth rate (CAGR) can be calculated as follows:CAGR = 100 X {(I2 ÷ I1) (1÷r)}-1i.e. 100 X {(19,127 ÷ 14,000)(365÷382} - 1i.e. 34.74%

difference between the returns an investor expects from a fund Alpha = {(Fund return-Risk free return) – (Funds beta)

*(Benchmark return- risk free return)} Fund return (Fund performance in last one year): 75%

Risk free return: 8%Benchmark return (Sensex performance in last one year): 41%Beta: 0.69Alpha=0.44 for this fund.

A positive alpha means the fund has outperformed its benchmark index

Alpha

Market risk is measured by Beta It relates the return of a stock or mutual fund to a market index Reflects the sensitivity of a fund’s return to fluctuations in

market index Calculation of Beta: Y = a + βX Beta = 1 indicates -security's price will move with the market. Beta < 1 means security will be less volatile than the market. Beta > 1 indicates that the security's price will be more volatile

than the market. Eg- if a stock's beta is 1.2, it's 20% more volatile than the

market.

Beta

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It quantifies how a fund performs relative to the risk it takes

Sharpe index measures risk premium of a portfolio, relative to the total amount for risk in the portfolio

Sharpe Index =(Rp) – (Rt)/ Standard Deviations of the Portfolio Return

Portfolio Average Return (Rp)Risk Free Rate of Interest (Rt)

Sharpe Ratio

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Compounding of Periodic Returns

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Beta compares a fund's returns with a benchmark, standard deviation measures how far a fund's recent numbers stray from its long-term average.

Fund X has a 10% average rate of return and a standard deviation of 5%, most of the time, its return will range from 5% to 15%.

Large standard deviation supposedly shows a more risky fund than a smaller one

Higher the deviation, higher the risk & vice versa.

It is calculated by taking the square root of variance.

Standard Deviation

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Standard Deviation

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Weighted Average MaturityFixed rate debt instruments have a price risk. When interest rates in the market go up, the debt instruments already issued, based on the erstwhile lower interest rates, lose value. Similarly, when interest rates in the market go down fixed rate debt instruments gain value.

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Modified Duration

The implication is that if the yields in the market were to change by 1%, this debt security is likely to change in value by 1.68%.

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S(market) = (.10-.05)/.18 = .278

S(manager X) = (.14-.05)/.11 = .818

S(manager Y) = (.17-.05)/.20 = .600

S(manager Z) = (.19-.05)/.27 = .519

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(Portfolio Return – Risk-Free Rate) / Beta

The numerator identifies the risk premium and the denominator corresponds with the risk of the portfolio. The resulting value represents the portfolio's return per unit risk

Treynor ratio

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Now, you can compute the Treynor value for each:

T(market) = (.10-.05)/1 = .05

T(manager A) = (.10-.05)/0.90 = .056

T(manager B) = (.14-.05)/1.03 = .087

T(manager C) = (.15-.05)/1.20 = .083

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Alpha is the risk-adjusted return on an investment Alpha demonstrates whether your investment

outperformed or underperformed a risk-related benchmark

The formula for alpha is expressed as follows: a = Rp – [Rf + (Rm – Rf) ß]Where: Rp = Realized return of portfolio Rm = Market return Rf = risk-free rate

Jensen’s Alpha

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First, we calculate the portfolio's expected return:

ER(D)= .05 + 0.90 (.10-.05) = .0950 or 9.5% return

ER(E)= .05 + 1.10 (.10-.05) = .1050 or 10.50% return

ER(F)= .05 + 1.20 (.10-.05) = .1100 or 11% return

Then, we calculate the portfolio's alpha by subtracting the expected return of the portfolio from the actual return:

Alpha D = 11%- 9.5% = 1.5%

Alpha E = 15%- 10.5% = 4.5%

Alpha F = 15%- 11% = 4.0%

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EQUITY DEBT

GOLD OTHERS

VALUATION OF INVESTMENTS BY MF SCHEMES

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• Securities are valued at the last quoted closing price on the stock exchange.TRADED

• Trades less than Rs. 5 lakh in value and 50,000 shares in volume.

• Valued as per appropriate valuation methods

NON TRADED

EQUITY

84

• Valued at weighted average price.

• If not traded on a particular day, then on Amortization basis.

RESIDUAL MATURITY OF UPTO 91

DAYS

• Valued at weighted average price.

• If not traded on a particular day, then on YTM basis.

RESIDUAL MATURITY OF OVER 91

DAYS

DEBT

Securities Valuation

Government Securities Yield to Maturity Basis at prevailing market price

Instruments acquired on ‘Repo’ Basis

Resale price after reducing interest applicable up to the date of sale

Rights issue When rights are traded: V = n/m * (P-R)When rights are renounced/not subscribed for: Price of renouncement

Gold – Gold Exchange Traded Schemes (GFTS) / Exchange Traded Funds (EFTS)

Based on prices fixed by London Bullion market Association (LBMA) in USD per ounce

Valuation of other instruments

V = Value of rightsn = No. of rights offered m = No. of original shares P = Ex-Rights PriceR = Rights issue price

TAX AND MUTUAL FUNDS

Capital asset typically refers to anything that you own for personal or investment purposes.

Capital assets are further classified as Financial Assets and Non-Financial Assets.

The profit (if any) that you make on your mutual fund investments when you redeem or sell the MF units is referred to as Capital Gains. It can be a Short Term Capital Gain (STCG) or a Long Term Capital Gain (LTCG) depending upon the ‘Period of Holding’. The tax that is applicable on these profits is known as ‘Capital Gains Tax’.

CAPITAL GAINS TAX

• Long Term Capital Gains• If you make a gain / profit on your investment in

a Equity Mutual Fund scheme that you have held for over 1 year, it will be classified as Long Term Capital Gain.

• If you make a gain / profit on your investment in a Non-Equity Mutual Fund scheme (or in a Debt Fund) that you have held for over 3 years, it will be classified as Long Term Capital Gain.

• Short Term Capital Gains• If your holding in a Equity mutual fund scheme is

less than 1 year i.e. if you withdraw your mutual fund units before 1 year, after making a profit, then the profit will be considered as Short Term Capital Gain.

• If you make a gain / profit on your Debt fund (or other than equity oriented schemes) that you have held for less than 36 months (3 years), it will be treated as Short Term Capital Gain.

Capital Gain Taxation applicable to Equity Oriented Schemes

Resident Individual / HUF

Domestic Corporates NRI

Long Term Capital Gains (Units held for more than 12 months)

NIL NIL NIL

Tax deducted at Source = NIL



Short Term Capital Gains (Units held for 12 months or less)

15% + 12% Surcharge + 3% Cess = 17.304%

15% + Surcharge as applicable + 3% Cess= 17.304% or 16.5315%

15% + 12% Surcharge + 3% Cess = 17.304%



Tax deducted at Source = 17.304%

Capital Gain Taxation applicable to Schemes other than equity oriented schemes

Resident Individual / HUF

Domestic Corporates NRI

Long Term Capital Gains [Units held for more than 36 months] (Listed Units)

20% with indexation + 12% Surcharge + 3% Cess= 23.072%

20% with indexation + Surcharge as applicable + 3% Cess= 22.042% or 23.072%





Long Term Capital Gains [Units held for more than 36 months] (Unlisted Units)


20% with indexation + Surcharge as applicable + 3% Cess= 22.042% or 23.072%

10% without indexation + 12% Surcharge + 3% Cess= 11.536%




Short Term Capital Gains (Units held for less than 36 months)

30%^ + 12% Surcharge + 3% Cess = 34.608%

30% + Surcharge as applicable + 3% Cess = 34.608% or 33.063%

30%^ + 12% Surcharge + 3% Cess = 34.608%



Tax deducted at Source = 34.608% (Listed and Unlisted) ^

The securities transaction tax (STT) was introduced in India a few years ago, to stop tax avoidance of capital gains tax.

Transactions in stock, index options and futures would also be subject to

transaction tax. Tax is applicable whether you buy or sell the securities. STT is levied on every purchase or sale of securities that are listed on the

Indian stock exchanges. This would include shares, derivatives or equity-oriented mutual funds units.

The rate of tax that is deducted is determined by the central government, and it varies with different types of transactions and securities.

STT is deducted at source by the broker or AMC, at the time of the transaction itself, the net result is that it pushes up the cost of the transaction done.

SECURITIES TRANSACTION TAX

Transaction Rates Payable By

Purchase/ Sale of equity shares 0.1% Purchaser/ Seller

Purchase of units of equity oriented mutual fund Nil Purchaser

Sale of units of equity oriented mutual fund 0.001% Seller

Sale of an option in securities 0.017% Seller

Sale of an option in securities, where option is exercised

0.125% Purchaser

Sale of a futures in securities 0.010% Seller

Sale of units of an equity oriented fund to the Mutual Fund

0.001% Seller

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Future of Mutual Fund Industry

Diverse range of products

Stringent regulations for MF Distributors

Eligibility norms of AMC may be revised

Trading through stock exchange platforms

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Future of Mutual Fund Industry

Growth of Real Estate Mutual Funds

Expansion of MF network in Tier II cities & rural areas due to increased level of awareness

Thank you

Date post:	14-Apr-2017
Category:	Economy & Finance
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