GROUP-3

PRESENTED BY
Anoop Suresh Manikandan Prakash Rajasekar

MUTUAL FUND

DEFINITION

A mutual fund is a professionally managed type of collective investment that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.

Concept

A Mutual Fund is a 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 securities.

Concept
The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Mutual Fund Operation Flow Chart

Net Asset Value

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Thus, NAV of a mutual fund unit is nothing but the 'book value.

[(Market value of the funds investments + Receivables + Accrued income Liabilities Accrued Expenses)] NAV = -------------------------------------------------------Number of shares or units outstanding

Net Asset Value Calculation

Name of the scheme Size of the scheme Face value of the share Number of outstanding share Market value of the funds investments Receivables Accrued income Liabilities Accrued expenses NAV :ABC :Rs 100 cr :Rs 10 :10 cr :Rs 180cr :Rs 1cr :Rs 1cr :Rs 0.5cr :Rs 0.5cr :(180 +1+1-0.5-0.5)/10 = Rs.18.1

Average Annual Total Return

The SEC requires that mutual funds report the average annual compounded rates of return for 1-year, 5-year and 10-year periods using the following formula:

P(1+T)n = ERV

Formula
P(1+T)n = ERV

Where: P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).

Turnover
Turnover is a measure of the volume of a fund's securities trading. It is expressed as a percentage of net asset value and is normally annualized. Turnover equals the lesser of a fund's purchases or sales during a given period (of no more than a year) divided by average net assets. If the period is less than a year, the turnover figure is annualized.

AMC
AMC stands for Asset Management Company

It referred to as the investment manager, is a separate company appointed by trustees to run the Mutual Fund.

Classes of Financial Assets

Mutual Fund Invest in 3 board classes of financial assets: Stocks Bonds Cash

TYPES OF MUTUAL FUND

Open-end funds Closed-end funds Unit investment trusts Exchange-traded funds

Open-end funds
Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value

Closed-end funds
Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund

Unit investment trusts

Unit investment trusts or UITs issue shares to the public only once, when they are created. Investors can redeem shares directly with the fund (as with an open-end fund) or they may also be able to sell their shares in the market.

Illustrate
Suppose Bob purchases a share of a unit investment trust XYZ. The share costs him $1000 in addition to an entrance fee of $100. At the end of each quarter, Bob receives a dividend payment reflecting the dividends and interest earned by the securities underlying the unit trust. One day, Bob decides it is in his best interest to no longer hold his share of XYZ, so he sells it for a market price of $800 less an exit fee of $100 (Bob gets to keep $700 from

Exchange-traded funds
ETFs combine characteristics of both closedend funds and open-end funds. Like closed-end funds, ETFs are traded throughout the day on a stock exchange at a price determined by the market. To keep the market price close to net asset value, ETFs issue and redeem large blocks of their shares with institutional investors.

Investments and classification

Mutual funds may invest in many kinds of securities. The types of securities that a particular fund may invest in are set forth in the fund's prospectus, which describes the fund's investment objective, investment approach and permitted investments.

Investments and classification

Mutual funds are classified by their principal investments. The four largest categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds.

Money market funds

Money market funds invest in money market instruments, which are fixed income securities with a very short time to maturity and high credit quality. Investors often use money market funds as a substitute for bank savings accounts, though money market funds are not government insured, unlike bank savings accounts.

Bond funds
Bond funds invest in fixed income securities. Bond funds can be sub classified according to the specific types of bonds owned. Bond funds may invest in primarily U.S. securities, in both U.S. and foreign securities , or primarily foreign securities .

Stock Funds
Stock or equity funds invest in common stocks. Stock funds may invest in primarily U.S. securities, in both U.S. and foreign securities, or primarily foreign securities. They may focus on a specific industry or sector. A stock fund may be sub classified along two dimensions: (1) Market Capitalization and (2) Investment Style

Market Capitalization
Market capitalization or market cap is the value of a company's stock and equals the number of shares outstanding times the market price of the stock. Market capitalizations are divided into the following categories: Micro cap Small cap Mid cap Large cap

Investment Style
Stock funds are also sub classified according to their investment style: growth, value or blend (or core). Growth funds seek to invest in stocks of fast-growing companies. Value funds seek to invest in stocks that appear cheaply priced. Blend funds are not biased toward either growth or value.

Hybrid funds
Hybrid funds invest in both bonds and stocks or in convertible securities. Balanced funds, asset allocation funds, target date or target risk funds and lifecycle or lifestyle funds are all types of hybrid funds. Hybrid funds may be structured as funds of funds, meaning that they invest by buying shares in other mutual funds that invest in securities.

Index Versus Actively-Managed

An index fund or passively-managed fund seeks to match the performance of a market index, such as the S&P 500 index, while an actively managed fund seeks to outperform a relevant index through superior security selection

Mutual fund expenses

Investors in mutual funds pay fees. These falls into four categories: Distribution Charges Management Fee Other Fund Expenses Shareholder Transaction Fee Securities Transaction Fee

Distribution Charges
Distribution charges pay for marketing and distribution of the fund's shares to investors. Front-end load or sales charge Back-end load 12b-1 fees No-load funds Share classes

Management Fee
The management fee is paid to the fund manager and normally lends its brand name to the fund. The fund manager may also provide other administrative services.

Other Fund Expenses

Board of directors fees and expenses Custody fee Fund accounting fee Professional services Registration fees Shareholder communications Transfer agent services

Shareholder Transaction Fee

Shareholders may be required to pay fees for certain transactions Some funds charge redemption fees when an investor sells fund shares shortly after buying them

Securities Transaction Fee

A mutual fund pays any expenses related to buying or selling the securities in its portfolio. These expenses may include brokerage commissions. Securities transaction fees increase the cost basis of the investments.

Advantages of Mutual Funds

Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated