Mutual Funds - An Overview - Rajesh Subudhi

8/3/2019 Mutual Funds - An Overview - Rajesh Subudhi

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Mutual Funds – AnMutual Funds – AnOverviewOverview

Rajesh Subudhi



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Topics

Advantages of Mutual Fund

Types of Mutual Funds

Classes of shares

Fund Companies and Supporting Agents

Portfolio Management (Events in a regular day of Mutual Fund)

Net Asset Value (NAV) ?



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The “advantages” of a Mutual Fund

1. Diversification2. Professional Management

3. Liquidity

4. Choice

5. Flexibility6. Regulation

7. Accessibility

8. Growth

9. Tax BenefitDefinition

An mutual fund, generally, is an entity that pools shareholders'

funds to provide the shareholders with professional investment management.

Advantages



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Types of Funds

Funds may be categorized along many dimensions:

Open end versus closed end

Underlying investment vehicle type

Risk/reward profile

Issuer Pool

Duration

Underlying investment vehicle location



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Open End Versus Closed End Funds

Open End Funds

Closed End Funds

• Create shares as needed

• Are priced based on Net Asset Value (NAV)

• Issue and redeem shares daily

• Are the most common form today

• Gather a pool of capital and issue a fixed number of shares

• Trade issued shares on a secondary market• Behave like common stocks

• Less common form today



E q u i t B a l a n F i x e d I

O p e n E n

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Investment Vehicle Type



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Risk/Reward Profile

I n c o m e

G r o w t h &

G r o w t h

A g g r e s s i v

E q u i t y F

G o v e r n m

L o w R i s k

H i g h Y i e l d

F i x e d I n c o



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Issuer Pool

L a r g e C

M i d C a

S m a l l C

S e c t o r

E q u i t y F u

F e d e r a l T

F e d e r a l A

M u n i c i p

C o r p o r

F i x e d I n c o



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Duration

M o n e y M

S h o r t T

I n t e r m e d i

L o n g T e

V a r i a b l e

F i x e d I n c o

• T-bills• Issues near maturity• Commercial paper • Repos

Maturities < 3 year

Maturities 3-10 years

Maturities > 10 years



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Location

D o m e s

D e v e l o p e

D e v e l o p i n

E m e r g i n g

F o r e i g n



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Class A Asset Value

Total Investment Pool Value

Class B Asset Value

Class C Asset Value

Class A Expense

Class B Expense

Class C Expense

Class A NAV

Class B NAV

Class C NAV

Classes of Shares



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The Mutual Fund Complex: Agents that Support the Fund

C u s t o d i

a n

I n v e s t m

e n t

A d v i s e r

T r a n s f e r

A g e n t

B r o k e r

U n d e r w r i t

e r /

D i s t r i b u t o r

F u n d

A c c o u n

t i n g

P u b l i c

A c c o u n

t a n t

O t h e r s

Fund Companies and Supporting Agents



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The Fund Itself...

Is a corporation/trust with directors/trustees, officers, and

shareholders

Holds a pool of assets (cash and securities)

Contracts with agents for services

Pursues a particular investment objective

Is defined by a prospectus



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The Fund Directors

y Are elected by the shareholdersy Have fiduciary responsibility to the shareholders

y Must meet the "prudent man" standard

y Approve the fund's contractual arrangements

yThe directors delegate the day-to-day management to the

fund's officers



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The Fund's Supporting Agents

r Investment Advisor

r Underwriter/ Distribution Agent

r Fund Accounting

r Custodian

r Transfer Agent

r Legal counsel and Independent

Auditors



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Investment Advisor

Responsible for implementing the fund's investment

policy (as defined in the prospectus)

Makes the asset allocation decisions

Expert in particular investment vehicles/strategies

May be internal or external

Fees paid may be:

1) annual fee (based on specified % of average net

assets (ANA)

2) performance fee (basic fee % + bonus/ penalty

based on fund performance

D J I A

L I B O

R

$

D J I A

L I B O

R

$



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Underwriter/ Distributor

± Underwriter/distributor must be a broker/dealer

± An affiliate of investment advisor

± Distributor acts as an agent or principal; sells

fund's shares for commission (sales charge)

± Sales charge are regulated



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Fund Accounting

Ë Maintains the "books of record” (fund’s general

ledger)

Ë Performs securities accounting

Ë Responsible for calculating the NAVË Calculates the distribution rate/amount

Ë Prepares fund financial statements

Ë

Often outsourced

T o d a y ' s N A V

112

2

3

4

56

7

8

9

10

11



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The Custodian

Holds the fund's securities

Holds and processes cash

Collects interest and dividends

Typically a bank

Required by statute



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The Transfer Agent

Performs shareholder record keeping:

Account setup and maintenance

Shareholder trade execution

Distribution allocation Internal and external reporting

Customer service

Reports daily activity to fund accounting May be performed internally or outsourced or a hybrid

Regulated



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Legal counsel and independent auditors

Assists in organization & compliance with

regulatory requirements and other legal matters

(registration statement filing etc)

Annual audits (Here we Come)

Approval of both board of directors and

shareholders required for selection of independent

auditors



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Portfolio Management

1. Fund accounting and the custodian give the advisor the cash status2. The advisor orders a security purchase

3. The broker executes the trade(s)

4. The custodian and fund accounting are notified of the trade(s)

5. On Trade date, the trade is reflected on the fund books

6. At the end of day Trade date, the pricing vendor supplies a price for the holding

7. The transfer agent is given the NAV

8. At some point, fund management checks for compliance

9. On day T+2, the trade settles

10. The issuer declares a dividend

11. On ex-date, fund accounting recognizes a dividend payable

12. The custodian receives the payment

13. The advisor orders a security sale (reverse of Step 2.)

(A few selected events)

Portfolio Management (Events in a regular day of Mutual Fund)



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Net Asset Value (NAV) = Fair Value of Assets/ outstanding shares

Where, Fair Value of assets is based on : Value of underlying securities

Accruals for income/ expense

Declaration of dividend to shareholders

Why NAV?

• Open-end investment companies

NAV computed on a daily basis

Sell/redeem shares at NAV using forward pricing

• Closed-end investment companies

Outstanding shares traded in the market like bonds/stocks

Market value used for trading based on NAV

Net Asset Value (NAV)



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Any QuestionsAny QuestionsThank YouThank You

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Mutual Funds - An Overview - Rajesh Subudhi

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