Basics of Mutual Funds

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Basics of Mutual Fund
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I am an investor and where to invest my money???
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One stop shop for investment products.
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What is Mutual Fund?

• It is a pool of money, invested by number of
  investors, who share a common financial goal.
• There are few key pointers
• Pool of money, invested by number of investors
• It means, this is a product, wherein various
  investor invest their money in one basket and
  then the manager of the fund invest in different
  investment products.

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What is Mutual Fund?

• To share a common financial goal
• The main agenda of investment for any one is to
  earn profit/returns. As a renowned statement once
  said, higher the risk higher the profit
• Equity High risk, high return
• Bonds Lower risk, lower return
• Saving Bank A/C Lowest risk, lowest return.
• So, there are various investors and has various
  definition of profits.
• Mutual Fund has all kind of products to cater
  every kind of investors needs.

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Advantages of Mutual Fund

• Diversification (dont put all eggs in one
  basket)
• Mutual Fund, is a pool of investment, wherein
  many investor invest their money, and this money
  is invested in various number of shares, bonds
  etc. which reduces the risk of capital for an
  investor.

This is a beauty of a mutual fund, with a small
amount of an investor get invested various
sectors.
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Continued

• If one investor invested Rs. 10,000 in Kingfisher
  in 2012, his current market value is in negative.
• On another side, if an investor invests Rs. 5,000
  in Kingfisher and another one is in ITC, his
  current market value is in profit. This will make
  his entire investment amount is in profit.
• Liquidity (Invest any time, redeem any time)
• In mutual fund, you can withdraw (redeem) your
  investment at any period of time. Unlike, Real
  estate wherein selling as asset is very time
  consuming.

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Advantages

• Tax Benefits (tax is an important concern in
  investment)
• In equity fund, returns are tax free after one
  year.
• Invested in equity linked saving scheme (ELSS)
  upto Rs. 1 lacs u/s 80C
• Invested in Rajiv Gandhi Saving Scheme (RGSS)
  upto Rs. 25,000 u/s 80CCG.
• Professional Management (Managed by Fund
  Manager)
• Mutual Fund is like a doctor of investors fund,
  it manage it with complete professionally. The
  team of research investment has a sound
  knowledge and experience in their respective
  field. And, every fund has a designated Fund
  Manager.

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Systematic Transaction Facility

• In Mutual Fund, investor has an option to do the
  transaction on a regular basis i.e.
  Monthly/weekly/quarterly etc.
• Systematic Investment Plan (SIP) In this an
  investor can invest regularly in systematic
  manner. This is best for a young investor and who
  like to save some money regularly.
• Systematic Withdrawal Plan (SWP) In this
  investor can withdraw (redeem) his investment in
  instalment. This is best for the investor who
  wants regular income.
• Systematic Transfer Plan (STP) In this investor
  can transfer his fun from scheme A to scheme B
  regularly. It is a good strategy, if someone
  wants to book profit, and the same time want to
  invest in a safe fund where he can earn some risk
  free returns.
• For example STP from a equity scheme to debt
  scheme

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Structure of Mutual Fund
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Example
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What is the role of an AMC?

• This is an important part of a mutual fund
  structure, so we are discussing it in detail
• Role of an AMC
• To manage investors fund on day-to-day basis.
• Working for smooth process of managing investors
  fund and appointing proper departments to handle
  the process effectively.
• Improve the sales of mutual funds schemes. Via
• Appointing its own sales team
• Empanelling (connecting) with maximum number of
  distributors.
• Engage marketing activities for investors.
• To adhere all the rules of regulations of
  industry.
• On behalf of all these activities AMC charges
  fees.

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Regulators
Securities Exchange Board of India (SEBI) SEBI
is a regulator of Indian Mutual Fund, so all the
fund houses in India has to adhere the rules
regulations of SEBI. These regulations has been
mentioned in SEBI Mutual Fund Regulation Act,
1996 Apart from this, as Mutual Fund is a trust,
so it have to adhere the rules of Indian
Companies Act, 1956 Indian Trust Act,
1882. Association of Mutual Fund In India It is
an association created to enhance the mutual fund
industry, to adhere the best sales practice and
educate investors about mutual fund. One key
member of every AMC is a part of AMFI. U.K. Sinha
is Chairman of SEBI Milind Barve is chairman of
AMFI
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What is New Fund Offer (NFO)

• Whenever an AMC launches a new scheme, it is
  known as NEW FUND OFFER (NFO)
• This is for the period of 15 days (except ELSS)
• NFO of ELSS fund has a period of 20 days.
• In NFO, the units are allotted at Rs. 10 which
  is as same as a cost price of a new scheme, which
  is also known as Face Value.
• This face value is also use at the time of
  declaration of dividend as same as it function
  in equities.
• For Example Motilal Oswal AMC, has launched its
  new scheme called MOSt Focus Mid Cap 30, which
  has NFO period of 15 days dated 3rd Feb, 2013 to
  17th Feb 2013. At this time units were allotted
  at Rs. 10.

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What is NAV Why it is important?
Net Asset Value In laymen terms, it is a price
of a scheme, like any other product which has its
own price. If anyone wants to invest in a
particular scheme, it invests as per its current
NAV anyone wants to redeem his investment,
redeem at current NAV. How it calculated?
NET ASSET VALUE (NAV) ASSETS - LIABILITIES
NET ASSET VALUE (NAV) NO.OF UNITS ISSUED
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Net Asset Value (NAV)
If an AMC invested Rs. 10,000 in equity market
current value is Rs. 12,000. The expenses
incurred in handling funds is Rs. 500. No. of
units allotted to its all investors is 1,000. So
NAV if scheme is Assets Rs. 12,000 Liabilities
Rs. 500. No. of units 1,000. NAV
(12,000-500)/1,000 11,500/1,000 NAV Rs. 11.5
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Why NAV is important?

• It is important for a various reason
• It is a price of a scheme.
• Current NAV of any scheme, describes the
  performance of the fund.
• For example
• If a scheme launched in Feb, 2012 allotted
  units _at_ Rs. 10. after 6 months, NAV of a fund is
  Rs. 12, (scheme has given 20 returns), after an
  year if NAV is Rs. 8, scheme is in negative 20
  from the date of NFO.

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Why NAV fluctuates??

• There are four reason of which NAV fluctuates
• Performance of investment Fund manager invests
  the money into various securities, the
  performance of these securities impact NAV. (if
  price of invested securities increases, NAV
  increases vice versa).
• Investment redemption If investor invest in
  Mutual Fund, he becomes the member of fund house,
  his entry and exit impact on the NAV. Like if an
  investor invested in a particular scheme, it will
  increase the asset of a fund, so NAV will
  increase, and if someone redeems, it take out the
  money from fund, so asset side reduces, so NAV
  reduces.

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• Expenses of scheme If a scheme has huge expenses
  due to portfolio restructuring, marketing
  expense, distribution expenses etc. It impacts
  inversely with NAV. Higher the expenses, lower
  the NAV. So, always check the expense ratio of a
  fund, before investing. Note SEBI, tracks the
  expense incurred by an AMC in a particular
  scheme, if any excess amount that has be borne by
  AMC.)
• Declaration of Dividend If a scheme declares
  dividend, and after the payment of dividend, NAV
  of a fund. Reduces, because bank balance has been
  reduces because of payment has made by an AMC.
• If a scheme declares dividend of Re.1, then NAV
  of next day (ex-dividend NAV) reduces by Re.1

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What is Units?
It is like share in equity, wherein mutual fund
allots units in against of investment made by an
investor. Allotment of units is based on face
value in the time of NFO , and post-NFO is based
on NAV. For example If an investor invested Rs.
1 lacs in a Scheme A in NFO, he will get Rs. 1
lacs/ Rs. 10 10,000 units. If invested
post-NFO, and NAV of scheme is Rs, 20, at the
time of investment, he will get, Rs. 1 lacs / Rs.
20 5,000 units allotted
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What are the expenses in Mutual Fund?

• There are only two direct expenses in mutual fund
  for an investor
• Entry Load When an investor invests in a mutual
  fun, it gets a charge of small amount lets say
  0.5 0f NAV, which is known as entry load. Hence
  now entry load is NIL.
• Exit Load When an investor wants to redeem
  (withdraw) his investment, AMC charges a small
  amount lets say 1 of NAV, which is known as
  exit load.
• Expense Ratio It is not directly charged to
  investors, however this expenses is adjusted in
  NAV and it is charged on the total funds
  collected in a scheme. This has a beauty that
  this charge is get distributed among all the
  investor.

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What is Sales price Repurchase Price?

• Sales Price This is a price when an investor
  invest. It is calculated by
• Sales price NAV Entry Load
• If one investor invested Rs. 10,000 in a fund
  NAV is Rs. 20, entry load is 1, the sales price
  will be
• Rs. 20 (Rs. 20 X 1
• Rs. 20 Rs. 0.2
• Rs. 20.2
• Note Now entry load is NIL, so sales price is as
  same as NAV

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• Repurchase Price This is a price when an
  investor redeems his investment.
• It is calculated by
• Repurchase price NAV Exit Load
• If one investor wants to redeem 1,000 units, in a
  fund NAV is Rs. 20, ext load is 1, the
  repurchase price will be
• Rs. 20 - (Rs. 20 X 1)
• Rs. 20 - Rs. 0.2
• Rs. 19.8
• Note If an investor hold his investment for a
  long period of time (lets say for more than a
  year) exit load become NIL.

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• Asset Classes There are majorly three types of
  classes of an asset.
• Equity
• Debt
• Gold
• Asset Allocations A major part of assets of a
  scheme is its investment, and it has to allocate
  it carefully among the desired asset classes.
• Portfolio It is a list of companies wherein a
  fund manager will invests the collected fund.

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• Asset Under Management (AUM) This is a fund
  collected by an AMC including all the schemes it
  has launched till date.
• HDFC Mutual Fund has maximum amount of AUM (Rs.
  104,000 Cr.)
• Corpus It is a total amount collected under one
  particular scheme.

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What is an Offer Document??

• It is a prospectus of a mutual fund, like in our
  college we use to get prospectus of a college at
  the time of joining that college, which includes
  all the information of this college, likewise, in
  OFFER DOCUMENT all the important information of a
  mutual fund and related parties like AMC,
  sponsor, trustees etc. is informed. It is divided
  into two parts
• Scheme Information Document (SID) In this the
  detailed information of a scheme is mentioned,
  like NFO open date, close date etc. fund
  managers name and his experience, objective of
  the fund, asset allocation etc.
• Statement of Additional Information (SAI) This
  includes all the information of a mutual fund,
  like detailed information of sponsor, trustee,
  AMC, RTA their rights obligation, investors
  right and obligations. Legal information about
  the fund house.

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What is KIM?

• Key information Memorandum (KIM)
• It is a abridged (short) version of offer
  document. This includes key pointers of a
  particular scheme, and it is mandatory for an AMC
  to distribute to the investor with the
  application form of a scheme.
• It includes
• NFO details (NFO Open date, close date etc.)
• Fund Managers information
• Investment details and criteria
• Application forms
• Asset allocations, etc.

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Pariksha 3

1. Who can invest in Mutual Fund?
2. Individual
3. Insurance, Banks etc.
4. NRI
5. All of the above

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• Which of the following is not an advantages of
  Mutual Fund?
• Diversification
• Liquidity
• Tailormade portfolio
• None of the above

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• What is the benefit of diversifications?
• Gets exposure of more no. Of products/shares
• Investor gets the right to pick his favourite
  stocks
• It reduces the risk of loss from one products.
• Both 1 and 2
• All 1, 2 3

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• 4. Why returns in mutual fund is guaranteed?
• Because it has the exposure in equity.
• Because all the asset classes are traded in the
  market it moves according to the sentiments of
  the market
• Because fund manager doesnt have the knowledge
  of the market.
• 1 2

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• 5. What is a golden rule of investment?
• Dont put all eggs in one basket
• Men are from mars and women are from venus
• Double your money by investing in equity
• Real estate creates maximum wealth

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• 6. AMFI stands for?
• Association of Most Focused Investors
• Association of Mutual fund in India
• Association of Main fund of India
• Association of Major funds in India

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• 7. AMFI is involve in
• Setting guidelines for mutual funds to follow
  best selling practices.
• Conducting awareness programme for investors.
• Regulating distributors of Mutual Funds
• All of the above

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• 8. AMFI is regulator of Mutual Fund
• True
• False

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• 9. SEBI is the regulator of Mutual Fund
  under
• SEBI Mutual Fund Regulation Act, 1956
• SEBI Mutual Fund Regulation Act, 1992
• SEBI Mutual Fund Regulation Act, 1996
• SEBI Mutual Fund Regulation Act, 1881

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• 10. SEBI stands for
• Share exchange board of India
• Stock exchange board of India
• Securities exchange Board of India
• None of the above

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• 11. Role of an AMC is
• To regulate the industry
• To launch a new scheme
• To protect the investor from the losses
• To manage the funds of investors investment

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• 12. Registrar transfer Agent (RTA) is
  appointed by AMC for
• To give best service to the client
• To issue units dividend, redemption cheques.
• To solve the query of investors.
• All of the above

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• 13. Sponsor, who initiates to launch a mutual
  fund
• False
• True

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• 14. NFO is a period when a new scheme launched
  by an AMC
• False
• True

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• 15. If an investor wants to redeem his
  investment in NFO, at what price he can redeem?
• Rs. 10
• Current NAV
• He cannot redeem
• NAV exit load

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• 16. In NFO units are allotted at
• Rs. 10
• Current NAV
• NAV entry load

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• 17. NAV is
• Total Assets Total Liabilities
• Total Assets/No. Of units issues
• (Total Assets- Total Liabilities)/No. Of units
  issued
• Total Liabilities/ No. Of units issued

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• 18. A fund has invested Rs. 20,000 in market and
  its current market value is Rs. 25,000 and fund
  expenses is Rs. 1,000 and no. Of units allotted
  to investor is 2,000. NAV will be?
• Rs. 12
• Rs. 9.5
• Rs. 13
• Rs. 10

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• 19. If current NAV is Rs. 15, and an investor
  wants to invest Rs. 60,000, how many units will
  be allotted?
• 4,000
• 6,000
• 8,000
• 12,000

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• 20. NAV of the fund is Rs. 20 and exit load is
  1, what will be the sales price?
• Rs. 20
• Rs. 20.20
• Rs 19.80
• Rs. 22

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• 21. What is repurchase price?
• NAV- Entry Load
• NAV Exit Load
• NAV Exit Load
• NAV Entry Load

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• 22. Offer Document is
• Combination of SID SAI
• In SID, all scheme information about the scheme
  is mentioned
• In SAI, all detailed information of fund house is
  mentioned.
• All of the above

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DISCLOSURE
Motilal Oswal Securities Ltd. (MOSL) Member of
NSE, BSE MSEI - CIN no. U65990MH1994PLC079418 R
egistered Office Address Motilal Oswal Tower,
Rahimtullah Sayani Road, Opposite Parel ST Depot,
Prabhadevi, Mumbai-400025 Tel No. 022-3980
4263 www.motilaloswal.com. Correspondence
Address Palm Spring Centre, 2nd Floor, Palm
Court Complex, New Link Road, Malad (West),
Mumbai- 400 064. Tel No 022 3080 1000.
Registration Nos. NSE (Cash) INB231041238 NSE
(FO) INF231041238 NSE (CD) INE231041238 BSE
(Cash) INB011041257 BSE (FO) INF011041257
BSE (CD) MSEI (Cash) INB261041231 MSEI (FO)
INF261041231 MSEI (CD) INE261041231 CDSL
IN-DP-16-2015 NSDL IN-DP-NSDL-152-2000
Research Analyst INH000000412. AMFI ARN 17397.
Motilal Oswal Asset Management Company Ltd.
(MOAMC) PMS (Registration No. INP000000670)
PMS Mutual Funds are offered through MOAMC
which is group company of MOSL. Motilal Oswal
Wealth Management Ltd. (MOWML) PMS (Registration
No. INP000004409) is offered through MOWML which
is a group company of MOSL. Motilal Oswal
Securities Ltd is a distributor of Mutual Fund
IPOs. Please read the Risk Disclosure Document
prescribed by the Stock Exchanges carefully
before investing. Investment in Securities is
subject to market risk and there is no assurance
or guarantee of the returns. Details of
Compliance Officer Name Neeraj Agarwal, Email
ID na_at_motilaloswal.com , Contact No.022-30801085