1. Mutual Funds – Tool for Wealth Management
By-
Nilesh Sodhani
CA (Final) Student

2. What is a Mutual Fund ? A Mutual Fund is a professionally managed
collective investment scheme
that pools money from many investors and
invests it in stocks, bonds, short-term money market instruments, and/or other securities.
The Mutual Fund will have a fund manager that trades the pooled money on a regular basis.

3. The Structure of Mutual Funds
In India Mutual fund is the form of a Public Trust created under the Indian trust Act
In India, Mutual funds are organized as trusts. The trust is either managed by a Board of Trustees, or by a trustee company.
The trustees hold the unit holders money in a fiduciary capacity.(Money belongs to unit holders)
In legal sense, the investors are the beneficial owners of investments.

4. Shares of ownership in a public company.
Basic Understanding of Stocks and Bonds
Stocks :
Shares of ownership in a public company.
The most common owned investment
Types of Stocks :
Cyclical Stocks
Growth Stocks
Value Stocks

5. Bonds :
The money which you lend to the government or a company, and
in return you can receive interest on your invested amount,
which is back over predetermined amounts of time.
The most common lending investment traded on the market.
Many other types of investments - annuities, real estate, and precious metals

6. Working of Mutual Funds
Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern.
Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways:
Dividend, the most organic way
Redemption of their shares by investors at a discount to the current NAVs.

7. Concept of Mutual Funds
Investors pool their money
Investors get Mutual Fund Units on Proportionate basis
The Money collected from investors is invested by the Fund Manager
The Fund Manager realises gains or losses, and collects dividend or interest income
Such gains are passed on to the investors in proportion of no. of units held by them

8. Open Ended Funds
Purchase and sell units of the fund, at NAV related prices, at any time, directly from the fund.
Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, in the initial offer period. After a pre-specified period say 30 days, the fund is declared open for further sales and repurchases
Investors receive account statements of their holdings,
The number of outstanding units goes up and down
The unit capital is not fixed but variable.

9. Closed ended Funds
Open for sale to investors for a specified period, after which further sales are closed.
Any further transactions happen in the secondary market where closed-end funds are listed.
The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV.
The corpus of closed ended funds remains unchanged.
The unit capital is fixed, one time sale.

10. Types of Mutual funds Types of Mutual Funds Stock Funds
Taxable Bond Funds
Municipal Bond Funds
Stock and Bond Funds
Money Market Funds

11. 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

12. Generally seek to generate current income with limited risk
Taxable Bond Funds
Generally seek to generate current income with limited risk
Can vary by maturity
Short-term, Intermediate-term, Long-term
Can vary by type of bond
Government
Corporate
Mortgage-backed
International/Global
Bond Index funds

13. Municipal Bond Funds
Provide investors with income exempt from Federal taxation
Often concentrate on single states to avoid state income taxation as well

14. Stock and Bond Funds
Seek to provide a combination of income and value appreciation.
Different names
Balanced funds (60% equity+40% of debt securities) Goal: to conserve principal, by maintaining a balanced portfolio of both stocks and bonds
Blended funds: Mutipurpose funds(e.g., balanced target maturity, convertible securities that invest in both stocks and bonds
Flexible funds: Flexible income, flexible portfolio, global flexible and income funds, that invest in both stocks and bonds

15. Money Market Funds
These debt funds invest only in instruments with maturities less than a year.
Provide safe, current income with high liquidity
Invest in money market securities
T-bills, Bank CD’s, Commercial paper, etc.
NAV stays at Re.1; income either paid out or reinvested daily
Provide an alternative to bank deposits, but not FDIC insured

16. Key Information Mamorandum
It’s attached with the Mutual Fund Form which contains :
1. Name of the fund.
2. Investment objective
3. Asset allocation pattern of the scheme.
4. Risk profile of the scheme
5. Plans & options
6. Minimum application amount/ no. of units
7. Benchmark index
8. Dividend policy
9. Name of the fund manager(s)
10 . Expenses of the scheme: load structure, recurring expenses
11. Performance of the scheme (scheme return v/s. benchmark return)
12. Year – wise return for the last 5 Financial Years

17. Performance Measurement
Earnings can be either dividend or capital gains.
Rate of Return = Income Earned *100/ Amount invested.
Simple total return (STR) method includes the dividends paid to the investor
STR = {NAV(end) – NAV ( begin)}+ Dividend paid * NAV at beginning
Rule of 72 is a thumb rule used in finding doubling period. If Rate = 12%, then money will double in 72/12 = 6 years.
Comparison with :
Market Index
Funds in the same group
Other similar investible products

18. Performance Measurement
Change in NAV= ( NAV at end – NAV at beg.)*100
NAV at the beginning
Total Return = ( Change in NAV+ Dividend) * NAV at the beginning
Return on investment or Total Return with dividend reinvested at NAV.
Portfolio Turnover Rate – It is lesser of assets purchased or sold divided by the fund’s net assets.
A 100% turnover implies that the manager replaced his entire portfolio during the period in question
200% means portfolio changed in 6 months
A liquid fund has the highest portfolio turnover.

19. Numerical 1 :
An open ended fund was purchased when its NAV was Rs. 22. One year later, its NAV was Rs. 24. The annualised percent NAV change is _ _ _ _
Answer
% change in NAV = ( ) *100 = 9.09% 22

20. Numerical 2 :
Purchase price Rs. 22 per Unit NAV at year end Rs. 23 per Unit Interim Div. Rs. 3 Ex.-Div. NAV Rs. 21 Total Return = _ _ _ _ _ Assume investment of Rs Step 1: Initial Units alloted =10000/22= Step 2:Total Div.=454.55*3= Step 3: Additional Units= /21=64.94 Step 4:Total Units= = Step 5:Withdral Amt. =519.49*23= Gain = = Gain of on the investment of Rs So that on the investment of Rs. 100 gain is Ans:19.47%

21. Measuring performance of mutual funds
Comparison
Portfolio Analysis Tools
Comparison with :
Market Index
Funds in the same group
Other similar investible products
Standard Deviation
Beta Analysis
R-squared
Sharpe Ratio
Portfolio Turnover Ratio
Total Expense Ratio

22. Stage
Financial needs
Investment preferences
Accumulation stage
Investing for long term identifed
Growth options and long term
financial goals
products.High risk appetite
Transition Stage
Near term needs for funds as
Liquid and medium term investments.
pre-specified needs draw closer
Lower risk appetite
Reaping Stage
Higher liquidity requirements
Preference for income and debt products
Inter Generational
Long term investment of inheritance
Low liquidity needs.
transfer
Ability to take risk and invest for the long term
Sudden wealth surge
Medium to long term
Wealth preservation.
Preference for low risk products

23. Mutual Fund Expenses and Considerations
Loads
Commission to the broker to financial advisor who sold the fund to the investor
For load funds, the offer price is the fund’s NAV plus the load (while no-load funds are sold at their NAV)
Ex. 4% load with NAV Rs.96, buy at Rs.100
Load range from around 3% (low-load) to 8.5%
12b-1 Fees: pay to the distributor (.25%-.75% )+ .25% servicing charge in some cases)
Fees deducted from the asset value of the fund to cover marketing expenses
An alternative to loads

24. Mutual Fund Expenses (Contd…)
Offering Price= NAV/(1-load %).
Investing Rs.1,000 in a load MF with 7% and expected return of 10%,
Rs.value=1000(1-.07)(1.10)=1023 (2.3% growth)
Investing Rs.1,000 no load MF with 8% return and 2% redemption fee,
Rs.value=1000(1-0)(1.08)(1-.02)= (5.84% growth)
Rs.35.4 Difference

25. Mutual Fund Expenses (Contd…)
Deferred Sales Loads
Redemption charges when fund shares are sold (rather than when purchased)
Often high (5-7%) if shares are sold within the first year, but then fall over time, perhaps even disappearing eventually
Share Classes
Many funds offer several different classes of shares (A-B-C) with different fee structures
Best choice usually depends of investment horizon

26. Mutual Fund Expenses (Contd…)
Management Fees
Fees deducted from the fund’s asset value to compensate the fund managers
Some adjust fees according to the fund’s performance
Expense ratio
Adding all fees and calculating expenses as a percentage of the fund’s asset

27. 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 at least 10-20% in international or global funds.
Own funds in different asset classes and consider life-cycle investing.

28. Investment Strategies (Contd….)
If you actively manage your portfolio, consider the past year’s “hot funds.”
Do not attempt to time the market; timing strategies add little except costs and risk.
Use dollar cost averaging by investing a set dollar amount each month.
Avoid investing money shortly before the capital gain distribution dates (prospectus).
Do not own too many funds. You will get average returns with high expenses.

29. Advantages of Mutual Funds
Simplicity
Diversification
Professional Management
Liquidity
Economies of Scale

30. PROFESSIONAL MANAGEMENT
ADVANTAGES
DISADVANTAGES
LIQUIDITY
ECONOMIES OF SCALE
DIVERSIFICATION
PROFESSIONAL MANAGEMENT
TAXES
DILUTION
COSTS

31. LIQUID & MONEY MARKET FUNDS
Risk Consideration
High level of Return
High level of Risk
EQUITY FUNDS
Returns comparatively less risky
DEBT FUNDS
Provide stable but low level of return
LIQUID & MONEY MARKET FUNDS

32. Risk – Return Relationship

33. DOs in Selecting the Best Mutal Fund
Draw down your Investment Objective
Collect necessary information
Pick out companies consistently performing above average
Get a clear picture of fees & associated costs, taxes etc.
Risk Analysis with the help of Sharpe Ratio & Beta Analysis
Selecting one with a low minimum initial investment

34. Tax Implication in Mutual Funds
The dividends are tax free in the hands of unitholders by it is liable to dividend distribution tax in case of closed ended fund and debt funds( equity <50%)
No TDS on any income distribution by MF
The earning on selling units is known as Capital Gain
If units are held for less than 12 months--- STCG
Else the earnings is known as LTCG.

35. Capital Gain Taxation
The difference between sale and purchase price is known as capital gain / loss.
The sale and purchase of units in equity oriented scheme of MF is subject to STT at the prescribed rate
Under Section 111 A of the IT ACT, STCG on sale of equity oriented scheme is taxed at the rate specified by the govt. ( currently10%). LTCG
LTCG if equity oriented scheme of MF is exempt from tax.
Tax on other scheme is 10% for LTCG ( without indexation) and 20% with indexation.

36. Other Points in Taxation
Section 80 C – Individual and HUF are entitled to deduction upto Rs. 1 lakh in respect of payment out of taxable income towards certain instruments which includes ELSS of Mutual funds.
Dividend Stripping – ( Section 94(7) – If investor buy units within 3 months prior to record date of dividend and sells those units within 3 months of record date, then the loss if any, shall be ignored.
Units are not considered under wealth tax
Section 195 – 20% TDS for LTCG and 30% TDS on STCG if unit holder is a NRI. 48% TDS if unit holder is foreign company.

37. Buying Mutual Funds
At the time of Initial Public Offerings made by Mutual Fund Companies
From Stock Exchanges ( Closed End Funds )
Buying Open End Funds perpetually from the Company

38. What are Large-cap and Small-cap Shares ?
The size of a company in the equity markets is determined by market capitalisation (no. of shares issued * market price/share)
LARGE CAP
SMALL CAP
Market Capitalisation High
Greater Liquidity
Comparatively Smaller Returns
Cost of Transaction Low
Market Capitalisation Low
Poor Liquidity
Comparatively Higher Returns
Cost of Transaction High

39. Computation of NAV
For investors, the performance of their investment depends on what happens to the fund’s per share value, or net asset value (NAV).
NAV= Market Value of Assets – Liabilities
Number of Shares Outstanding
NAV1=NAV0+All Incomes-All Distributed
Example: NAV0=Rs.100, Distributed 1) Net Realized Gains=Rs.2 and 2) Net Investment Income=Re.1.
NAV1= Rs.100-Rs.2-Re.1=Rs.97

40. Thank You