KHETAN EDUCATION MUTUAL FUNDS_FT

MUTUAL FUNDS

INTRODUCTION

A Mutual Fund is an organisation in the form of a ‘Trust’ which pools the savings of the
investors to invest in the capital market in a variety of securities. The returns earned on the
investment are distributed among unit holders in proportion of their holding.

THERE ARE BROADLY TWO SCHEMES OF A MUTUAL FUNDS:

a. Open ended scheme:
This has got unlimited authorized capital with no maturity date. The investors can buy
and sell units at any point of time directly from the fund.
b. Closed ended scheme:
This has got limited authorised capital with a particular maturity date and lock in period
after which the fund is liquidated. Since, The fund gets closed after initial offer, it is listed
in the stock market in order to provide liquidity to the investors.
Advantages of Mutual Funds:
a. High Returns
b. Economies of scale
c. Tax benefits
d. Expert Advice
e. Synergy Benefits

Disadvantages of Mutual Funds:

a. High Cost
b. Over-diversification
c. Manipulation of funds
d. Disturbance of tax planning ⟶ An unexpected small income from a mutual fund can
change the tax bracket of an investor, thereby spoiling the tax planning.

Net Asset Value (NAV)

NAV is the market value of all assets less liabilities divided among all units. NAV is
computed daily and it represents per unit of holding.
Market value of all assets-liabilities
NAV =
no.of units
Computation of return from a Mutual Fund
Return from Mutual Fund = Dividend per unit + Capital gains unit + NAV1 - NAV0 × 100
NAV0

..................................................................... 99 ...............................................................
MUTUAL FUNDS_FT KHETAN EDUCATION
1. A has invested in three Mutual fund schemes as per details below:
MF A MFB MFC
Date of investment 01.12.03 01.01.04 01.03.04
Amount of investment ` 50,000 ` 1,00,000 ` 50,000
Net Asset Value (NAV) at entry date ` 10.50 ` 10.0 `10.0
Dividend received up to 31.03.04 ` 950 ` 1,500 Nil
NAV as on 31.03.04 ` 10.40 ` 10.10 ` 9.80
Required: What is the effective yield on per annum basis in respect of each of the three
schemes to Mr. A up to 31.03.04?
Ans.
A. FOR MF A:
Amount = ` 50,000 NAV0 = ` 10.50
` 50,000
No. of Units = = 4,761.90 Units
` 10.50
Dividend = ` 950
` 950
Dividend/Unit = = ` 0.20/unit
4, 761.90
0.20 + 10.40 - 10.50
Return (4months) = × 100 = 0.95%
10.50
Annual Return = 0.95% × 3 = 2.85% p.a.
Or,
Effective Annual Return = [(1+ 0.95%)3 – 1] × 100 = 2.88% p.a.

B. FOR MF B:
Date of investment = 01.01.04
Maturity = 3 months
Amount invested = ` 1,00,000 NAV0 = ` 10
` 1,00,000
No. of Units = = 10,000 Units
` 10
Dividend = ` 1,500
` 1, 500
Dividend/ Unit = = ` 0.15/Unit
10, 000
0.15 + 10.10 - 10
Return (3months) = × 100 = 2.5%
10
Annual Return = 2.5% × 4 = 10% p.a.
Or,
Effective Annual Return = [(1+ 2.5%)4 – 1] × 100 = 10.38% p.a.

..................................................................... 100 ...............................................................

 KHETAN EDUCATION MUTUAL FUNDS_FT

C. FOR MF C:
Date of investment = 01.03.04
∴ Maturity = 1 month
Amount invested = ` 50,000, NAV0 = ` 10
` 50,000
⇒ No. of Units =
= 5,000 Units
` 10
Dividend = Nil
9.80 - 10
Return = × 100 = -2%
10
Annual Return = - 2% × 12 = -24% p.a.
Or,
Effective Annual Return = [(1- 2%)12 – 1] × 100 = -21.5% p.a.

2. Mr. D had invested in three mutual funds (MF) as per the following details:
Particulars MF A MF B MF C
Amount of Investment 2,00,000 5,00,000 4,00,000
NAV at the time of purchase 10.00 25.00 20.00
Dividend Yield up to 31.03.2022 3% 5% 4%
NAV as on 31.03.2022 10.50 22.80 20.80
Annualized Yield as on 9.733% - 11.185% 15%
31.03.2022
Assume 1 Year = 365 Days.
Mr. D has misplaced the documents of his investments. You are required to help Mr. D
to find out the following:
(i) Number of units allotted in each scheme,
(ii) Value of his investments as on 31.03.2022,
(iii) Holding period of his investments in number of days as on 31.03.2022
(iv) Dates of original investments
(v) Total Return on investments,
(vi) Assuming past performance of all three schemes will continue for next one year,
what action the investor should take? What will be the expected return for the next
one year after the above action?
(vii) Will your answer as above point no. (vi) changes if the Mutual fund charges exit
load of 5% if the investment is redeemed within one year? If so, advise the investor
what and when the action to be taken to optimise the returns. (8 Marks)

..................................................................... 101 ...............................................................

MUTUAL FUNDS_FT KHETAN EDUCATION
Sol.
(i) Number of Units in each Scheme
MF ‘A’ 2,00,000 = 20,000
10.00
MF ‘B’ 5,00,000 = 20,000
25.00
MF ‘C’ 4,00,000 = 20,000
20.00

(ii) Value of Investment on 31.03.2022

MF A = 20,000 × ` 10.50 ` 2,10,000
MF B = 20,000 × ` 22.80 ` 4,56,000
MF C = 20,000 × ` 20.80 ` 4,16,000
Total ` 10,82,000

(iii) Yield on each Fund

Capital Yield Dividend Yield Total Yield (%)
MF A ` 2,10,000 ` 6,000 ` 16,000.00 8.00
- ` 2,00,000
= ` 10,000
MF B ` 4,56,000 ` 25,000 - ` 19,000.00 -3.80
- ` 5,00,000
= - ` 44,000
MF C ` 4,16,000 ` 16,000 ` 32,000.00 8.00
- ` 4,00,000
= ` 16,000
Total ` 29,000.00

No. of Days Investment Held

MF A MF B MF C
Period of Holding 8.00 -3.80 8.00
× 365 = 300 × 365 = 124 × 365 = 195
(Days) 9.733 -11.185 15.00
days days days
(iv) Date of Original Investment 04.06.21 27.11.21 17.09.21
(v) Total Yield = × 100 = 2.636%
(vi) If past of all three schemes will continue for next one year, the investor should redeem
the units of MFs `A` and `B` and invest the proceeds in MF `C`. The expected return

..................................................................... 102 ...............................................................

 KHETAN EDUCATION MUTUAL FUNDS_FT
next will be 15%.
(vii) If the Mutual funds are charging exit load of 5%, if investment is redeemed within one
year, then investor should get redeemed units of MF `B` now and units of MF `A` after
65 days.

3. Following is the information related to three mutual funds:

Year MF-A MF-B MF-C
2020 10% 5% 14%
2021 8% 10% 10%
2022 12% 8% 18%

Correlation between market and mutual fund:

MF-A MF-B MF-C
Correlation with market 0.45 0.25 0.65
Variance of the market is 9% and rate of return of government bond is 7%.
You are required to Rank the Mutual fund using Sharpe`s ratio and Treynor’s ratio.
(8 Marks)
Sol.
(i) Calculation of Standard Deviation of Funds
Year MF-A Dev. Dev.2 MF-B Dev. Dev.2 MF-C De v. Dev.2
(%) (%) (%)
2020 10 - - 5 -2.67 7.13 14 - -
2021 8 -2 4 10 2.33 5.43 10 -4 16
2022 12 2 4 8 0.33 0.11 18 4 16
30 8 23 12.67 42 32
Avg. Var. Avg. Var. Avg. Var.
30 8 23 12.67 42 32
= = = =
3 3 3 3 3 3
= 10 = 2.67 = 7.67 = 4.22 = 14 = 10.67
σA σB σC
= 1.63 = 2.05 = 3.27

(ii) Calculation of Beta of MFs

r σM σi Var. of βi
Market
MF-A 0.45 3 1.63 9 0.244
MF-B 0.25 3 2.05 9 0.171
MF-C 0.65 3 3.27 9 0.709

..................................................................... 103 ...............................................................

MUTUAL FUNDS_FT KHETAN EDUCATION

Reward to Variability (Sharpe Ratio)

Mutual Rp Rf Rp – Rf σp Reward to Ranking
Fund Variability
MF-A 10.00 7.00 3.00 1.63 1.84 2
MF-B 7.67 7.00 0.67 2.05 0.33 3
MF-C 14.00 7.00 7.00 3.27 2.14 1

Reward to Volatility (Treynor Ratio)

Mutual Rp Rf Rp – Rf βp Reward to Ranking
Fund Volatility
MF-A 10.00 7.00 3.00 0.244 12.30 1
MF-B 7.67 7.00 0.67 0.171 3.92 3
MF-C 14.00 7.00 7.00 0.709 9.87 2

4. Based on the following information, determine the NAV of a regular income scheme on
per unit basis : ` Crores
Listed shares at Cost (ex-dividend) 20
Cash in hand 1.23
Bonds and debentures at cost 4.3
Of these, bonds not listed and quoted 1
Others fixed interest securities at cost 4.5
Dividend accrued 0.8
Amount payable on shares 6.32
Expenditure accrued 0.75
Number of units (` 10 face value) 20 Lacs
Current realizable value of fixed income securities of face value of ` 106.5
100
The listed shares were purchased when Index was 1,000
Present Index is 2,300
Value of listed bonds and debentures at NAV date 8
There has been a diminution of 20% in unlisted bonds and debentures. Other fixed interest
securities at cost.

..................................................................... 104 ...............................................................

 KHETAN EDUCATION MUTUAL FUNDS_FT
Ans.
Computation of NAV
` 20
Value of shares = × 2300 46.00 Cr
` 1,000
+ Bonds not listed and quoted (1Cr – 20%) 0.80 Cr
+ Bonds listed and quoted 8.00 Cr
+ Dividend accrued 0.80 Cr
Amount payable on shares (6.32)
Expenditure accrued (0.75)
+ Value of fixed income securities (@ Cost) 4.50
+ Cash in hand 1.23
54.26 Cr
` 54.26
∴ NAV = = ` 271.30
0.2

5. The following are the details of three mutual funds of MFL:

Growth Balanced Regular Market
Fund Fund Fund
Average Return (%) 7 6 5 9
Variance 92.16 54.76 40.96 57.76
Coefficient of
Determination 0.3025 0.6561 0.9604
The yield on 182 days Treasury Bill is 9 per cent per annum.
You are required to:
(i) Rank the funds as per Sharpe's measure.
(ii) Rank the funds as per Treynor's measure.
(iii) Compare the performance with the market. (8 Marks)
Sol.
Conversion as on 30-09-2020 0.013 ` 220.7692
Gain ` 20.7692
The equivalent amount is same in both the options so ICL is indifferent.
However, USD is more stable, and Treasury Bills are risk free, so investment in Treasury
Bills (USD) is suggested.

..................................................................... 105 ...............................................................

MUTUAL FUNDS_FT KHETAN EDUCATION
Growth Fund Balanced Regular Fund Mark
Fund et
Average Return (%) 7 6 5 9
Variance 92.16 54.76 40.96 57.76
Std. Deviation 9.60 7.40 6.40 7.60
Coefficient Determination of 0.3025 0.6561 0.9604
Coefficient Correlation of 0.55 0.81 0.98
Beta (β) 9.60 7.40 6.40
× 0.55 = × 0.81 = × 0.98 =
7.60 7.60 7.60
0.695 0.789 0.825

(i) Ranking of Funds as per Sharpe Ratio

Expected Return - Risk Free Rate of Return
Sharpe Ratio =
Standard Deviation
Growth Fund Balanced Fund Regular Fund
Sharpe Ratio 7-9 6-9 5-9
= - 0.208 = - 0.405 = - 0.625
9.60 7.40 6.40
Ranking 1 2 3

(ii) Ranking of Funds as per Treynor Ratio

Expected Return - Risk Free Rate of Return
Treynor Ratio =
Beta
Growth Fund Balanced Fund Regular Fund
Treynor Ratio 7-9 6-9 5-9
= - 2.878 = - 3.802 = - 4.84
0.695 0.789 0.825
Ranking 1 2 3

(iii) Comparison of performance with the Market

Sharpe Ratio 9-9
=0
7.60
Treynor Ratio 9-9
=0
1
Thus, the performance of funds is very poor since all values are negative as compared to
market performance.

..................................................................... 106 ...............................................................

 KHETAN EDUCATION MUTUAL FUNDS_FT
6. Mr. Potential has made investments in two mutual funds. The 8 following information is
available :
Mutual Fund Smart Growth

Jensen Alpha 1.10% 1.50%

Treynor`s Ratio 0.0714 0.0775 *

Actual Return 8.50% 9.10%

Risk Premium 4%
You are required to calculate :
(i) Beta (P) for both the funds
(ii) Risk free Rate
(iii) Security Market Line (8 Marks)

7. Govind invested ` 1,000 in a mutual fund the entry load of which is 2.25%. He got 50
units. What is the NAV at the time of investment? His investment time horizon is 6
months. The mutual fund charges exit load of 0.50% if the redemptions is done on or after
the 6 months but on or before 1 year. What is annualized return to the investor if he gets
his investment redeemed on expiry of 6 months assuming that NAV at that time is ` 25
per unit.
Ans. Amount = ` 1000
Entry load = 2.25%
No. of units = 50 units
` 1, 000
⇒ Cost or buy price = = ` 20
` 50
Buy price = NAV0 (1 + Entry load)
` 20 = NAV0 (1 + 2.25%)
NAV0 = ` 19.56
Closing NAV = ` 25 (given)
Sell price/ exit price = 25 – 0.50% = ` 24.875
Closing amount = 24.875 × 50 units = ` 1,243.75
1,243.75 - 1,000
6m return = × 100 = 24.375% for 6m
1,000
Annual return = 24.375 × 2 = 48.75%

..................................................................... 107 ...............................................................