1. Unit 5 Portfolio Management
TECHNICAL ANALYSIS
Course Materials by
K.Rajeswari
Asst Professor
SNS college of technology
Unit 5 Portfolio Management

2. Mutual Funds
A trust that pools the savings of investors who share a common financial goal is known as MUTUAL FUND.
The money collected is then invested in financial instruments such as shares, debentures and other securities the income and capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.
Investment in securities are spread over a wide cross section of industries and sectors reducing the risk of the portfolio.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

3. Features
Mobilizing small savings: mutual funds mobilize funds by selling their own shares known as units. This gives the benefit of convenience and satisfaction of owning shares in many industries. Mutual fund invest in various securities and pass on the returns to the investors.
Investment Avenue: the basic characteristic of a mutual fund is that it provides an ideal avenue for investment for investors and enables them to earn a reasonable return with better liquidity. It offers investors a proportionate claim on the portfolio of assets that fluctuate in value.
Professional management: mutual fund provides investors with the benefit of professional and expert management of their funds. Mutual fund employees professionals/experts who manage the investment portfolios efficiently and profitably. Investors are relieved from the responsibility of following the markets on a regular basis.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

4. Diversified investment: mutual fund have the advantage of diversified investment of funds in various industries and sectors. This is beneficial to small investors who cannot afford to buy shares of established companies at high prices. Mutual fund allow millions of investors who have investments in variety of securities of different companies.
Better liquidity: mutual fund have the distinct advantage of better liquidity of investment. There is always a market available for mutual funds. In case of mutual funds it is obligatory that units are listed and traded thus offering our secondary markets for the funds. A high level of liquidity is possible for the fund holders because of more liquid securities in the mutual fund portfolio.
Reduced risks: the risk on mutual fund is minimum. This is because of expert management diversification , liquidity and economies of scale in transaction cost.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

5. Investment protection: Mutual funds are regulated by guidelines and legislative provisions put in place by regulatory agencies such as SEBI in order protect the investor interest the mutual funds are obligated to follow the provisions laid down by the regulators.
Switching facility: mutual funds provide investors with the flexibility to switch from one scheme to another, this flexibility enables investors to switch from income scheme to growth scheme and from close ended scheme to open ended scheme.
Tax benefits: mutual funds offer tax shelter to the investors by investing in various tax saving schemes under the provisions provided by the income tax act.
Low transaction cost: the cost of purchase and sale of MF’s is relatively lower.
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

6. Economic development: MF’s contribute to economic development by mobilizing savings and channelizing them to more productive sectors of the economy.
Convenience: MF units can be traded easily with little or no transaction cost.
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

7. Products
Investors have the option of choosing from a wide variety of schemes in a mutual fund depending upon their requirements. MF’s are classified as follows:
Operational classification:
Open ended scheme: when a fund is accepted and liquidated on a continuous basis by a MF manager, it is called as open ended scheme. The fund manager buys and sells units constantly as demanded by the investors. The capitalization of the funds changes constantly as it is always open for the investors to buy or sell their units. The scheme provides excellent liquidity facility to the investors. The buying and selling of units takes place at a declared NAV(Net Asset Value)
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

8. Close ended scheme: when a units of a scheme liquidated only after the expiry of a specified period it is known as close ended fund. Such funds have fixed capitalization and remain with the mutual fund manager, units of close ended schemes are traded on stock exchange in the secondary market. The price is determined on the basis of supply and demand. There are 2 prices for such funds, one that is market determined and the other is NAV based the market price may be above or below NAV. Managing a close ended scheme is comparatively easy for the fund Manager. The fund can be liquidated after a specified period.
Interval scheme: it is kind of close ended scheme with a feature that it remains open during a particular part of the year for the benefit of investors, to either off load or to undertake purchase of units at a NAV.
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

9. Return based classification
Income fund scheme: this scheme is customised to suit the needs of investors who are particular about regular returns. The scheme offers maximum current income where by the income earned by the units is distributed periodically there are 2 types of such schemes, one that earns a target constant income at relatively low risk while the other offers maximum possible income.
Growth scheme: it is a MF scheme that offers the advantage of capital appreciation of the underlying investment such funds invest in growth oriented securities that are capable of appreciating in the long run. The risk attached with such funds is relatively higher.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

10. Conservative fund Scheme: a scheme that aims at providing a reasonable rate of return, protecting the value of investment and achieving capital appreciation is called a conservative fund scheme. It is also known as middle of road funds as it offers a blend of the above features. Such funds divide their portfolio in stocks and bonds in such a way that it achieves the desired objective.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

11. Investment based classification
Equity fund: such fund invest in equity shares they carry a high degree of risk such fund do well in favorable market conditions. Investments are made in equity shares in diverse industries and sectors.
Debt funds: Such fund invest in debt instruments like bonds and debentures. These funds carry the advantage of secure and steady income there is little chance of capital appreciation. Such funds carry no risk. A variant of this type of fund is called liquid fund which specializes in investing in short term money market instruments.
Balanced funds: such scheme have a mix of debt and equity in their portfolio of investments. The portfolio is often shifted between debt and equity depending upon the prevailing market conditions.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

12. Sectoral fund: Such fund invest in specific sectors of the economy
Sectoral fund: Such fund invest in specific sectors of the economy. The specialized sectors may include real estate infrastructure, oil and gas etc, offshore investments, commodities like gold and silver.
Fund of Funds: such funds invest in units of other mutual funds there are a number of funds that direct investments into specified sectors of economy. This makes diversified and intensive investments possible.
Leverage funds: the funds that are created out of investments with not only the amount mobilized from investors but also from borrowed money from the capital markets are known as leveraged funds. Fund managers pass on the benefit of leverage to the mutual fund investors. Additional provisions must be made for such funds to operate. Leveraged funds use short sale to take advantage of declining markets in order to realize gains. Derivative instruments like options are used by such funds.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

13. Gilt fund : These funds seek to generate returns through investment in govt. securities. Such funds invest only in central and state govt. securities and REPO/ reverse REPO securities. A portion of the corpus may be invested in call money markets to meet liquidity requirements. Such funds carry very less risk. Their prices are influenced only by moment in interest rates.
Indexed funds: these funds are linked to specific index. Funds mobilized under such schemes are invested in securities of companies included in the index of any exchange. The fund performance is linked to the growth in concerned index.
Tax saving schemes: certain MF schemes offer tax rebate on investments made in equity shares under section 88 of income tax act. Income may be periodically distributed depending on surplus. Subscriptions made Upto Rs are eligible for tax rebate under section 88 for such scheme. The investment of the scheme includes investment in equity, preference shares and convertible debentures and bonds to the extent % and rest in money market instruments.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

14. Structure Of Mutual Funds In India
Mutual Funds in India follow a 3-tier structure.
The first tier is the sponsor who thinks of starting the fund.
The second tier is the trustee. The Trustees role is not to manage the money. Their job is only to see, whether the money is being managed as per stated objectives.
Trustees may be seen as the internal regulators of a mutual fund.
Trustees appoint the Asset Management Company (AMC) who form the third tier, to manage investor’s money.
The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

15. Sponsor
Any corporate body which initiates the launching of a mutual fund is referred to as “The sponsor”.
The sponsor is expected to have a sound track record and experience in financial services for a minimum period of 5 years and should ensure various formalities required in establishing a mutual fund.
According to SEBI, the sponsor should have professional competence, financial soundness and reputation for fairness and integrity.
The sponsor contributes 40% of the net worth of the AMC.
The sponsor appoints the trustee, The AMC and custodians in compliance with the regulations.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

16. Trustee
Sponsor creates a public trust and appoints trustees. Trustees are the people authorized to act on behalf of the Trust. They hold the property of mutual fund.
Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund.
The Trustees role is not to manage the money but their job is only to see, whether the money is being managed as per stated objectives.
Trustees may be seen as the internal regulators of a mutual fund.
A minimum of 75% of the trustees must be independent of the sponsor to ensure fair dealings.
Trustees appoint the Asset Management Company (AMC), to manage investor’s money.
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

17. Custodian
A custodian’s role is keeping custody of the securities that are bought by the fund manager and also keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested.
The Custodian is appointed by the Board of Trustees.
The custodian also participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities.
Only the physical securities are held by the Custodian.
The deliveries and receipt of units of a mutual fund are done by the custodian or a depository participant at the instruction of the AMC and under the overall direction and responsibility of the Trustees.
Regulations provide that the Sponsor and the Custodian must be separate entities.
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

18. Asset Management Company (AMC)
Trustees appoint the Asset Management Company (AMC), to manage investor’s money.
The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them.
The AMC’s Board of Directors must have at least 50% of Directors who are independent directors.
The AMC has to be approved by SEBI. The AMC functions under the supervision of it’s Board of Directors, and also under the direction of the Trustees and SEBI.
It is the AMC, which in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities.
In order to do this the AMC needs to follow all rules and regulations prescribed by SEBI and as per the Investment Management Agreement it signs with the Trustees.
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

19. AMC
The role of the AMC is to manage investor’s money on a day to day basis. Thus it is imperative that people with the highest integrity are involved with this activity.
The AMC cannot deal with a single broker beyond a certain limit of transactions.
The AMC cannot act as a Trustee for some other Mutual Fund.
The responsibility of preparing the OD lies with the AMC.
Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC.
Finally, it is the AMC which is responsible for the acts of its employees and service providers.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

20. Operational Efficiency of Mutual funds
Net Returns: the operational of a mutual fund is best judged by its ability to earn for the investors better and safe returns in the form of capital appreciation and the dividends or income received on such investment.
Returns are calculated keeping in mind the expenses incurred while earning such returns which include trusteeship fee, management fee, administrative fee, fund accounting fee, initial charges, brokerage etc. SEBI has fixed an overall limit on expenses as per the regulations.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

21. NAV (per unit) = Total Market Value – Fund liabilities
Net Asset Value: It is another parameter to measure the operational efficiency of the fund. The intrinsic value of a unit under a specific scheme is referred to as the NAV of the scheme. The value gives an idea of the amount that may be obtained by the unit holder on sale of the unit to the mutual fund company
NAV (per unit) = Total Market Value – Fund liabilities
No. of outstanding Units
Load : The initial expenses that are incurred by a mutual fund in relation to the scheme operated by it is referred to as the load of the scheme. According to SEBI guidelines a certain percentage of load must be borne by the expected scheme.
Disclosures: A highly transparent nature of mutual fund is said to operate to benefit the investors and service their needs. MFs are supposed to follow certain norms and ample disclosures for their operation. Disclosures are made through half yearly and annual reports where all the information relating to the scheme is disclosed.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

22. Investor protection: the fund manager is supposed to follow certain safe guards to protect the interest of the investors. Unit certificates are to be issued within 6 weeks from the date of closure of subscriptions. Units submitted for transfer should be executed within 30 days. A dividend warrants are to be dispatched within 42 days of declaration of dividend. Repurchase proceeds should be dispatched within 10 working days from the date of redemption. SEBI takes all possible safeguards such as conducting inspections of the mutual funds to ensure that investors interests are protected. Defaulting AMC are prohibited from issuing new schemes.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

23. Advantages of Mutual Funds
Mutual Funds give investors best of both the worlds. Investor’s money is managed by professional fund managers and the money is deployed in a diversified portfolio. Mutual Funds help to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments.
A mutual fund analyses the investments for investors as fund managers assisted by a team of research analysts analyze the market daily.
Investors can enter / exit schemes anytime they want (at least in open ended schemes). They can invest in an SIP, where every month, a stipulated amount automatically goes out of their savings account into a scheme of their choice.
There may be a situation where an investor holds some shares, but cannot exit the same as there are no buyers in the market. Such a problem of illiquidity generally does not exist in case of mutual funds, as the investor can redeem his units by approaching the mutual fund.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

24. As more and more AMCs come in the market, investors will continue to get newer products and competition will ensure that costs are kept at a minimum.
Investors can either invest with the objective of getting capital appreciation or regular dividends i.e., mutual fund are structured to suit the needs of all investors.
An investor with limited funds might be able to invest in only one or two stocks / bonds, thus increasing his / her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified.
Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type.
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V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

25. The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk/ return profile
All the Mutual Funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management

26. Thanks…
4/15/2018
V.Prabakaran, AP/MBA - IM - Unit-5 Portfolio Management