5.1

Mutual Funds Study Session 5

LOS 1 : Introduction

A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective.

A Mutual Fund is the most suitable investment for the cautious investors as it offers an opportunity to invest in a diversified professionally managed basket of securities at a relatively low cost.

Mutual fund is a type of passive investment. If investors directly investment in market is known as active investment.

LOS 2 : NAV (Net Asset Value) per unit

As per SEBI Regulation, every mutual fund company should calculate its NAV on a daily basis (excluding holidays) NAV = 𝐍𝐞𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐒𝐜𝐡𝐞𝐦𝐞𝐍𝐨.𝐎𝐟 𝐮𝐧𝐢𝐭𝐬 𝐎𝐮𝐭𝐬𝐭𝐚𝐧𝐝𝐢𝐧𝐠

Net Assets i.e. Total Assets – Total External Liabilities

= [Market Value of Investments + Receivables + Accrued Income + Other Assets]

–

[Accrued Expenses + Payables + Other liabilities]

5.2

Note:

NAV signifies the realizable value that the investor will get for each unit that one is holding, if the scheme is liquidated on that date.

NAV is calculated for each Scheme & not for whole Company. While using NAV, we should always give preference to market value, If market value is not given then

use book value.

LOS 3 : Calculation of Return (HPR)

Investors derive three type of Return :-

(i) Cash Dividend (ii) Capital Gain Disbursements (iii) Change in the Fund’s NAV per unit (Unrealized Capital Gain) [Closing NAV – Opening NAV]

Return = 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐍𝐀𝐕 – 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐍𝐀𝐕 𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝 𝐫𝐞𝐜𝐞𝐢𝐯𝐞𝐝 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐆𝐚𝐢𝐧 𝐑𝐞𝐜𝐞𝐢𝐯𝐞𝐝𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐍𝐀𝐕 × 𝟏𝟎𝟎

LOS 4 : Different Plans Under Mutual Fund

1. Dividend Payout Plan : Under this plan, Mutual Fund Co. declares & distributes dividend to its unitholders on regular basis.

Impact : NAV will fall & no. of units will remain same.

2. Bonus Plan : Free units are distributed to the unitholders like bonus shares.

Impact : NAV will fall & no. of units will increase.

3. Growth Plan : Neither dividend is distributed nor are bonus units given. NAV will be increase to the extent of growth.

Impact : NAV will change according to the mkt only & no. of units will remain same.

4. Dividend Re–investment Plan : Although dividend is declared but it is not paid. Amount of dividend is again re-invested at the ex-Dividend NAV price prevailing at the time of declaration.

Impact : NAV will fall & no. of units will increase.

LOS 5 : Expense Ratio

Expense ratio = 𝐄𝐱𝐩𝐞𝐧𝐬𝐞 𝐈𝐧𝐜𝐮𝐫𝐫𝐞𝐝 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐍𝐀𝐕

Note:

Average NAV = 𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐍𝐀𝐕 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐍𝐀𝐕𝟐

LOS 6: Relationship between Return of Mutual fund, Recurring Expenses, Issue Expenses & Return Desire by Investors (Indifference Point)

Required return by investors = (Return of Mutual fund – Recurring Expenses) (1 – Issue Expenses)

5.3

LOS 7: Entry Load & Exit Load

Entry Load is paid by the investor at the time of purchase of Mutual Fund unit.

Sale Price of NAV = NAV (1 + Entry Load)

Exit Load is paid by the investor at the time of selling of mutual fund units.

Realized value of NAV = NAV (1 – Exit Load)