MUTUAL FUNDS BASICS

Overview
An introduction to Mutual Funds
Types of Mutual Funds
Features of Mutual Funds
Common Myths
Asset Under Management

Mutual Fund Basics

1. A mutual fund is a collective investment scheme in which the money pooled in
by a large number of investors.
2. It is managed by a professional Fund Manager, who uses his knowledge,
experience and investment management skills to invest it in various financial
instruments.
3. An investor owns units in the fund, which is based on the amount invested.
4. An investor is known as a unit holder.
5. The increase in value of the investments along with other incomes earned from it
is then passed on to the investors / unit holders in proportion with the number of
units owned after deducting applicable expenses, load and taxes.
6. MFs in India follow a three-tier structure.
a. Sponsor (1st-tier)
b. Trust (2nd-tier)
c. AMC (3rd-tier)
7. Trustees appoint the Asset Management Company (AMC) to manage investors
money.
8. The AMC charges a fee for the services provided.
9. The AMCs Board of Directors must have at least 50% independent directors.
10.The AMC has to be approved by SEBI.

11.It functions under the boards supervision and also under the direction of the
Trustees and SEBI.
Asset Management Company
1. AMC manages investors money on a day to day basis.
2. The AMC cannot deal with a single broker beyond a certain limit of
transactions.
3. AMC prepares Offer Documents
4. It appoints intermediaries like independent financial advisors (IFAs), national and
regional distributors, banks, etc.
5. AMC is responsible for the acts of its employees and service providers.

Custodian
1. The Custodian is appointed by the Board of Trustees.
2. A custodians role is safe keeping of physical securities and also keeping a tab on
the corporate actions like rights, bonus and dividends declared by the
companies in which the fund has invested.
3.

The custodian also participates in a clearing and settlement system through

approved depository companies on behalf of mutual funds, in case of
dematerialized securities.

NFO
The launch of a new scheme is known as a New Fund Offer (NFO).
Before investing in the NFO, the investor are expected to read the Offer
Document (OD) carefully to understand the risks associated with the scheme.

RTA
Registrars and Transfer Agents (RTAs) perform the important role of
maintaining investor records.
All NFO forms, redemption forms etc. go to the RTAs office where the
information is converted from physical to electronic form.

 RTA takes care of allotments, redemptions, exit loads, folio numbers etc.

NAV
The NAV stands for Net Asset Value.
Just like a share has a price, a mutual fund unit has an NAV.
The NAV represents the market value of each unit of a fund or the price
at which investors can buy or sell units.
The NAV is generally calculated on a daily basis, reflecting the combined
market value of the shares, bonds and securities (as reduced by allowable
expenses and charges) held by a fund on any particular day.

EXPENSE RATIO
Expense Ratio is defined as the ratio of expenses incurred by a scheme to its
Average Weekly Net Assets.
It means how much of investors money is going for expenses and how much
is getting invested.
This ratio should be as low as possible.
It is not enough to compare a schemes expense ratio with peers.
The schemes expense ratio must be tracked over different time periods.
Ideally as net assets increase, the expense ratio of a scheme should come
down.

PORTFOLIO TURNOVER
Portfolio Turnover ratio calculated indicates how aggressively the portfolio is
being churned.
Fund managers keep churning their portfolio depending upon their outlook for
the market, sector or company.
Churning can be done very frequently or after sufficient time gaps.

 A very high churning frequency will lead to higher trading and transaction
costs, which may eat into investor returns.

CASH LEVELS
Cash level is the amount of money the MF is holding in Cash, i.e. the amount
not invested in stocks and bonds but lying in cash.
High cash levels can lead to under performance in a bullish market.
However in a falling market, high cash levels can protect investors wealth
from depleting.
It is important to see why the fund is sitting on high cash levels.
Lack of opportunities, bearish view, redemption pressures can be some of the
reason.

EXIT LOADS
Exit Loads, are paid by the investors in the scheme, if they exit before a
specified time period.
It reduces the amount received by the investor.
Not all schemes have an Exit Load, and not all schemes have similar exit
loads as well.
Some schemes have Contingent Deferred Sales Charge (CDSC).
It is nothing but a modified form of Exit Load, wherein the investor has to pay
different Exit Loads depending upon his investment period.

Investors Rights and Obligations

1. Investors are mutual, beneficial and proportional owners of the schemes assets.
2. The investments are held by the trust in its fiduciary capacity.
3. Investors have a right to receive dividends within 30 days of declaration.

4. AMC must dispatch redemption proceeds within 10 working days of the

request failing which it has to pay an interest @ 15% or as may be specified from
time to time subject to regulations.
5. Investors can obtain relevant information from the trustees and inspect
documents like trust deed, investment management agreement, annual reports,
offer documents etc.
6. They must receive audited annual reports within 6 months from the financial
year end.
7. Investors can wind up/terminate a scheme/AMC if unit holders representing
75% of schemes assets pass a resolution to that respect.
8. Investors have a right to be informed about changes in the fundamental
attributes of a scheme.
9. Investors can approach the investor relations officer for grievance redressal.
10.In case the investor does not get appropriate solution, he can approach the
investor grievance cell of SEBI.
11.The investors can also sue the trustees.
12.The OD is a legal document and the investor is required to read the OD carefully
before investing.
13.The OD contains all the material information that the investor would require to
make an informed decision.
14.It is not mandatory for the fund house to distribute OD but an abridged version
(KIM) has to be provided.

Open Ended and Close Ended

An open ended scheme allows the investor to enter and exit at his
convenience, anytime.
A close ended scheme restricts the freedom of entry and exit.
In case of open ended schemes, investors can buy the units even after the
NFO period is over.
The buy/sell of units takes place at the NAV.
In order to provide entry and exit option, close ended mutual funds list their
schemes on stock exchanges.

 Sometimes, close ended funds also offer buy-back of fund shares/units, thus
offering another avenue for investors to exit

Equity Mutual Funds

1. Equity Funds are defined as those funds which have at least 65% of their
Average Weekly Net Assets invested in Indian Equities.
2. These are by far the most widely known category of funds though they account
for roughly 30% of the industrys assets.
3. Equity funds essentially invest the investors money in equity shares of
companies.
4. Fund managers try and identify companies with good future prospects and invest
in the shares of such companies.
5. They generally are considered as having the highest levels of risks and hence,
they also offer the probability of maximum returns.
6. Equity Funds do not give any assurance of guaranteed returns.
7. Relatively safer types of Equity Funds include Index Funds and diversified Large
Cap Funds, while the riskier varieties are the Sector Funds.
8. Equity Funds carry the potential to deliver high returns and the profits will be
linked with the performance of the company.
9. Equity Funds invest in multiple companies (diversify) that usually dont belong to
one or correlated sectors.
10.In the long run, one needs to be guarded against inflation and in the short run,
market fluctuations. Equity, though volatile, has proved to be a better bet
against inflation, provided one has a long term investment.
11.Equity Funds can be classified on the basis of market capitalization of the stocks
they invest in namely Large Cap Funds, Mid Cap Funds or Small Cap Funds or
on the basis of investment strategy the scheme intends to have like Index Funds,
Infrastructure Fund, Power Sector Fund, Quant Fund, Arbitrage Fund, Natural
Resources Fund etc.
12.In the long run, one needs to be guarded against inflation and in the short run,
market fluctuations.
13.Equity, though volatile, has proved to be a better bet against inflation, provided
one has a long term investment.trust

Equity Mutual Funds

1. INDEX FUND
2. DIVERSIFIED LARGE CAP FUNDS
3. MIDCAP FUNDS
4. SECTORAL FUNDS
5. Arbitrage Funds
6. Multi-cap Funds
7. Quant Funds
8. P/ E Ratio Fund
9. International Equities Fund
10.Growth Schemes
11.ELSS
12.Fund of Funds

Debt Mutual Funds

1. A Debt Mutual Fund works on borrowing. So what are the conditions that are
usually laid down when one borrows?
2. Reasonable assurance that the principal investment will be returned.
3. The interest that will be generated based on the rate of interest (also known as
the coupon rate).
4. Tenure or the time over which the principal will be returned.
5. Debt Funds typically invest in G-secs, T-bills, CPs, NCDs, CDs, CPs, Bonds and
other fixed income securities as well as lend money to large organizations or
Corporates, in return of a fixed interest rate.
6. Investing in Debt Mutual Funds would be ideal if one is looking at a potentially
higher return than Liquid Funds over a medium term time horizon, between 3 to
24 months.

Liquid Mutual Funds

1. Liquidity means the ability to immediately convert your assets to cash.
2. A highly liquid asset is as good as hard cash.
3. Liquid Funds have the least risk factor and may give returns that are slightly
higher than a savings account.
4. Liquid Funds invest in faster maturing debt securities, therefore making them
less risky.
5. The closer the debt instrument is to its maturity, the higher the chances and
surety of you getting the principal and interest (if any).

Hybrid Mutual Funds

1. As the name suggests, Hybrid Funds are those which have a combination of
asset classes such as debt and equity in their portfolio.
2. They invest in a blend of debt, money market instruments and equity.
3. Breaking it down even further, depending on the mix of equity and debt, there
could be various types of Hybrid Funds as well.

Exchange Traded Funds (ETF)

1. ETFs are units which investors buy/sell from the exchange, as against a normal
MF unit, where the investor buys/sells thru a distributor or directly from the AMC.
2. ETFs have relatively lesser costs as compared to a mutual fund scheme.
3. ETFs issues units to few designated participants, who are also called as
Authorized Participants (APs), who in turn act as market makers for the ETFs.
4. APs provide two way quotes for the ETFs on the exchange, which enables
investors to buy and sell the ETFs at any given point of time when the stock
markets are open for trading.
5. ETFs trade like stocks and Buying/selling ETFs is similar to buying and selling
shares on the stock exchange.
6. Prices are available on real time and the ETFs can be purchased through a CM
just like one would buy / sell shares.

7. There are huge reductions in marketing expenses and commissions as the APs
are not paid by the AMC, but they get their income by offering two way quotes
on the floor of the exchange.
8. Due to these lower expenses, the Tracking Error for an ETF is usually low.
9. Tracking Error is the Standard Deviation of the difference between daily returns
of the index and the NAV of the scheme.
10. Tracking Error is the acid test for an Index funds/ ETFs.

Flexibility
Investors have differing patterns of earning and spending, which is why
investments need to be flexible so as to allow them to invest as per the
situation.
Mutual Funds have invest in various schemes, from money market
instruments to equities, thus catering to people whod like to invest for
duration ranging from a day to years.
Minimum amounts of investment range from as low as Rs. 500, with no upper
limit.
In case of open ended funds, daily investment and withdrawal is possible.
Invested funds can be received within 1 to 5 working days.
There is no maintenance charge on the portfolios. One can invest either
directly with the AMC or through a Financial Intermediary.

Liquidity
Liquidity is all about having access to the money youve invested at your
convenience.
What is the point of getting high returns if you cant use the funds when you
need it?
In open ended funds, one can buy/sell on any business day and get the
payment within 3 working days.
There is a 15% penalty imposed on Asset Management Company if you dont
get your money within 10 working days.

Transparency
While investing in Mutual Funds, the money is handed over to a professional,
whose entire job is to keep track of markets and look out for the best possible
opportunities for the investor.
Mutual Funds publish monthly fact sheets which basically lists out all the
important facts one needs to know about the scheme.
Details of the companies and the amount invested in each company and the
rating of the companys issuance in case the instrument is a debt instrument.
Past returns, dividends and performance ratios.
In addition, the NAV is published on AMFI and on each of the fund company
websites on a daily basis, ensuring that youre always in the loop about your
investments.
Diversification
Dont keep all your eggs in one basket, diversifying your investments will
help you lower your risk.
By spreading out your money across different types of investments, investing
in multiple companies and investing in more than one sector, you ensure that
you always have a back-up plan intact.
So when you look to invest, always consider a wide range of options.
Equity Mutual Funds invest in shares of various companies whereas Debt
Funds invest in government securities, NCD, CDs, CPs bonds and other fixed
income securities.
Thus as an investor, you will be able to have a diversified investment basket.

Lower transaction costs

The power of bargaining lies in buying anything wholesale. The rate of buying
in wholesale will obviously be much lesser compared to the retail rates.
Apply the same principal to Mutual Funds and what do you get? With many
people pooling in their savings, you get the advantage of the power of
bargaining which reduces the overall transaction cost.

 As per prevalent tax laws, under provisions of Section 10 (23D) of the Act,
any income received by the Mutual Fund is exempt from tax; which simply
means that funds dont pay any tax on the gains obtained from selling
securities that they buy on behalf of their investors.

Some Common Myths

MUTUAL FUNDS ARE FOR EXPERTS
Part of the fear of Mutual Funds is that everything will go above your head
and that only experts in finance can understand how they work. This is not
true at all! Unlike the equity market, you dont have to take the call on when
to buy or sell shares, the fund manager will do it for you. It is his job to track
various sectors and companies. He will help you decide where to invest your
money. So in actuality, even if you arent a financial expert, you will still have
access to someone who is, and with his help theres no doubt you will make
the right decisions.

MUTUAL FUNDS ARE ONLY FOR LONG TERM

Long-term investments have a slight advantage, but that doesnt mean that
Mutual Funds are only for such investors. In fact, there are various short-term
schemes where you can invest from a day to a few weeks.

MUTUAL FUND IS AN EQUITY PRODUCT

People usually associate Mutual Funds with Equity Funds, but this is not
entirely true. Mutual Funds invest in a variety of instruments ranging from
equity to debt. Within debt they may invest in debt instruments that mature
in a day (also known as Money Market Instruments) to those that mature in 1
or even 10 years.

MFs with Rs. 10 NAV is better than MFs with Rs.25 NAV
This simply comes down to a subconscious movement towards what seems to
be cheaper.
The fact is that what matters is the percentage return on invested funds.

 Given a similar performance level of 10% appreciation, a Rs. 10 NAV will rise
to Rs. 11 whereas a fund with a NAV of Rs. 200 will rise to Rs. 220.
The reality is, due to an already demonstrated performance, the chance of
the Rs. 200 scheme posting the 10% appreciation is higher than the one that
has just started its journey.
Instead of concentrating on a low NAV and more number of units, it is
worthwhile to consider other factors like the performance track record, fund
management and volatility that determine the portfolio return.

One needs a large sum to invest in Mutual Funds

Most funds today allow investments as low as Rs. 1000, with no limits on the
maximum amount.
In fact, even for Equity linked savings schemes the amount is as low as Rs.
500.
There is no monthly or annual maintenance charge even if you dont transact
further.
Mutual Funds also offer the SIP facility in many of their schemes which allows
you to invest small amounts of your choice regularly.

One needs to have a DEMAT account to buy MFs

There are multiple ways in which you can buy Mutual Funds, some of which
are:
Offline: By filling up a form through financial intermediaries like independent
financial advisors, banks, financial distribution houses etc.
Online: Through the many accessible distributor websites and through AMC
websites
If you have a Demat account, you can even consolidate the Mutual Fund
holdings along with other holdings in the Demat account.
You can even buy Mutual Funds through the same intermediary who helps
you buy and sell shares on exchanges.

Funds with a higher NAV have reached the peak

A common misconception because of the general association of Mutual Funds
with shares.
Mutual Funds invest in shares, so they can get in and out whenever the Fund
Manager deems appropriate. If the Fund Manager feels that a stock has
peaked, he can choose to sell it.
The NAV is nothing but a reflection of the market value of the shares held by
the fund on any day. In all probability the NAV is high on account of a good
performance over the years.
Imagine two schemes. Scheme A is a new scheme with an NAV of Rs. 15 and
Scheme B is an old scheme with an NAV of Rs. 150. If the holdings of both
these schemes increase by 10%, the NAV of both schemes will go up by 10%.
The NAV of scheme A will be Rs. 16.5 and that of scheme B be Rs. 165. So
you realize that it doesnt really matter if the NAV is Rs. 15 or Rs. 150.

Total Assets
Assets managed by the Indian mutual fund industry has grown from Rs.9.02
trillion in March 2014 to Rs.11.34 trillion in December 2014. This is an
absolute growth of 25.7% in assets from the start of this financial year.

Scheme wise composition of assets

Schemes

Composition of Assets

Debt Oriented Schemes

45.33%

Equity Oriented Schemes

29.71%

Liquid/ Money Market

23.01%

ETFs

Scheme wise composition of assets

1.95%

 The share of equity oriented schemes in mutual fund assets has been
growing since March 2014, increasing from 22% to 30% in December 2014.
The proportionate share of debt-oriented schemes has fallen from 52% to
45% during the same period.

Investor Type-wise Composition

Individual investors account for about 46% of mutual fund assets, of which
high net worth investors (HNIs) as a category account for about 26%
Institutional investors account for 54% of the mutual fund assets, of which
corporates are the larger chunk at about 47%. The rest are Indian and foreign
institutions.

Investor Categories
Institutional investors dominate liquid and money market schemes (92%) and
debt-oriented schemes (60%).
Equity-oriented schemes derive almost 86% assets from individual investors
(Retail + HNI)

Composition of Investors Holdings

Individual investors primarily hold equity oriented schemes; while institutions
hold liquid and debt oriented schemes.
55% of individual investor assets are held in equity oriented schemes.
90% of institutions assets are held in liquid / money market schemes and
debt oriented schemes.

Institutional & Individual Investors

Individual investors increased their investment in mutual funds from Rs.3.99
lakh crores in March 2014 to Rs. 5.25 lakh crores in December 2014, an
increase of 31.68%.
Individual investors contributed 44.19% of the assets in March 2014. This
increased to 46.28% by December 2014.

 Institutional assets grew from Rs.5.04 lakh crores to Rs. 6.09 lakh crores.
The growth in investments by individual investors was also higher than the
26% overall growth in assets for the mutual fund industry.

TOP PERFORMING FUNDS

MF SCHEME

1-MONTH 3MONTHs

6
1-YEAR
MONTHs

ICICI PRU EQUITY SAVING SR 1

DP (G)

6.40%

11.50%

22.20%

85.90%

ICICI PRU EQUITY SAVING SR 1

DP (G)

6.30%

11.20%

21.40%

83.60%

TATA GROWING ECO INFRA B

DIRECT (G)

6.10%

8.60%

19.50%

66.60%

TATA GROWING ECO INFRA B (G) 6.10%

8.50%

19.10%

65.50%

ICICI PRU INDO ASIA EQUITY

DIRECT (G)

8.50%

17.70%

63.40%

ICICI PRU INDO 4.90%

ASIA EQUITY
IP (G)

5.0%
8.40%

17.40%

62.50%