What are Mutual Funds?

ConceptFor your best friend Shiv’s birthday, you want to buy the

following things for him…

Rs.400

Rs.30Rs.100 Rs.500

• You need approximately Rs.1000 to buy all the things but you have only

Rs.200

• You are not sure what gift to buy

• You do not want to compromise on the quality of the gift nor do you

want to drop out any of the things…WHAT WOULD YOU DO???

ConceptYou are not the only one who is facing this dilemma…there are 4

common friends of Shiv and you who are facing the same situation

One of the 4 friends suggest that if each one contributes his share

of Rs.200, we will have Rs.1000 with which we can together buy all

the things!

You all collectively chose the bouquet, card, gift and cake…

Shiv is very happy to receive the gift.

The same concept

works in a mutual

fund!

ConceptInvesting directly

• You need more money if you want to buy multiple securities

• You should have the expertise to chose the right security

• Your portfolio might be limited to shares of 4 or 5 companies

• You need to give a lot of time to monitor your investments and keep a track of the market

Investing through a fund

• You get an exposure to an entire portfolio by pooling your money into the fund even with limited resources

• A fund manager who has en expert manages the portfolio

• Diversification across various sectors – mitigation of risk

• The fund manager takes care of churning of the portfolio

How a fund works?

Investors

Fund Manager

Securities

Returns

Pool their

money with..

Invest in..Generate..

Passed

back to..

Concept of Unit?

• What is a ‘UNIT’?

• When the investors invest money in the mutual fund, they are issued “units”

• No. of units allotted = Amount invested / NAV

• Units are like the shares of the fund

• As the value of investment grows, the price of every unit also grows. This is indicated by NAV (Net Asset Value)

If you invest Rs.10,000 and the NAV is Rs.10; you get 1000 units

Concept of NAV• NAV

• 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

• NAV = (Total Assets – Total Liabilities) / Total no. of units

• In a simple language NAV is nothing but the price of 1 unit at the end of that day. NAV of a fund is declared daily (on all working days)

Let us do some calculation

• A fund has a Total Asset of 10 crore as on 1st June 2007. The liabilities are Rs.1Lac on that day; Total number of units are 10 Lac. Calculate the NAV.

• On 1st Nov 2007 the Total Assets grow to 11 crore. Let us assume that the liabilities are Rs.1 lac. Calculate the NAV.

• If an investor had invested Rs.20000 on 1st june, what were the no. of units allotted to him?

• If he sells these units on 1st Nov, what would be their value?

Ans: NAV = (10 crore – 1 Lac) / 10 Lac = 99.9

Ans: NAV = (11 crore – 1 Lac) / 10 Lac = 109.9

Ans: No. of units = 20000 / 99.9 = 200.2002

Ans: Value of units = 200.2002 * 109.9 = 22,002 Profit ofRs.2,002

Classification of Mutual Funds

Based onInvestor Participation

Based onInvestment Philosophy

Based on

Investment Plan

Open Ended

Closed Ended

Equity

Balanced

Debt

Liquid

Growth

Income

Dividend

Reinvestment

Systematic

Investment Plan

Systematic

Withdrawal Plan

MF –Risk Return Matrix

LIQUID FUND

DEBT FUND

BALANCED FUND

EQUITY FUND

RETURN

RIS

K

Advantages of a Mutual Fund• Portfolio diversification

• Professional management

• Reduction / diversification of risk

• Convenient Administration

• Return potential

• Reduction of transaction costs

• Liquidity

• Transparency

• Convenience and flexibility

• Choice of schemes

• Tax benefits

Disadvantages of a Mutual Fund• No control over costs

• No tailor-made portfolios, but family of schemes

• Managing a portfolio of funds

• Daily NAV pressure

• Corporate Money rather than retail

Tax Saving Mutual Funds• Equity Linked Saving Schemes (ELSS) are Tax Saving Mutual Funds

• Features

• ELSS are equity funds with tax benefits offered u/s 80C

• Investments upto Rs.1,50,000 qualify for exemption

• Lock in period is 3 years

• Returns in ELSS depend on the market and fund performance hence returns are not assured and fluctuate widely, in line with the stock markets

• These funds are available round the year and can be taken as lump sum investments or through SIPs

Thank You