Basics of Mutual Funds-By HDFC AMC

A presentation by
Joint Venture with Standard Life Investments

Mutual Funds
Conceptual Framework
What is a Mutual Fund ?
A mutual fund is a collective investment that

allows many investors, with a common objective,
to pool individual investments and give to a
professional manager who in turn would invest
these monies in line with the common objective.
Operation flow chart
INVESTORS
RETURNS FUND MANAGER
SECURITIES
Characteristics of Mutual Funds
 Investors own the mutual fund.
 Professional managers (AMC) manage the fund for a
small fee.
 Fees charged is specified by SEBI and is expressed as a
percentage of assets managed
 The funds are invested in a portfolio of marketable
securities in accordance with the investment
objective.
 Value of the portfolio and investors’ holdings, alters
with change in the market value of investments.
Mutual Funds:
A Packaged Product
Professional
Management Diversification
Convenience
Liquidity
Tax Benefits
Diversification
Portfolio of investments spreads out Risk
 Attempts Minimises value erosion
Potential losses are shared with other investors

Liquidity
Open-ended: Close-ended:
 Assures liquidity  Buying and selling
 As liquid as the can be done through
banks the stock exchange
 Periodic redemption
by Mutual Funds
Convenience
Easy Way to Invest
Reduces excessive paperwork
Outsourcing of expertise
Affordability
Provides an opportunity for a small investor
Minimum investment is approx.

 Rs.5000/Rs.500 and in multiples of Rs.1000/100
depending on the Scheme
Provision to apply using SIP

Wide Choice
Offers a VARIETYOF SCHEMES
 Meet the investment needs of all Investors

Disadvantages of a Mutual Fund
 No control over costs for an investor

 No tailor made portfolios for an investor
 Issues relating to management of a portfolio
of mutual funds
Note: These are just disadvantages of the

concept of mutual fund. SEBI has taken
adequate measures to overcome few of
them.
Classification of Mutual Funds
 Open-ended funds
 Closed-ended funds
&
 Load fund
 No load fund
&
 Equity fund
 Debt fund
 Balanced fund
 Fund of funds
Open-ended vs Closed-ended
Funds
OPEN-ENDED CLOSED-ENDED
 No fixed maturity  Fixed Maturity
 Variable Corpus  Fixed Corpus
 Not Listed  Generally Listed
 Buy from and sell to  Buy and sell in the
the Fund Stock Exchanges

 Entry/Exit at NAV  Entry/Exit at the
related prices market prices
Sub-classification of equity mutual
funds
Equity fund:
 Pre-dominantly invest in equity markets
 Diversified portfolio of equity shares

 Select set based on some criterion
 Diversified equity funds
 ELSS as a special case
 Primary market funds
 Small stock funds
 Index funds
 Sector specific funds (sectoral funds)

Sub-classification of debt mutual
funds
 Pre-dominantly invest in the debt markets.
 Diversified debt funds
 Select set based on some criterion
 Income funds or diversified debt funds
 Gilt funds
 Liquid or money-market funds
 Serial plans or fixed term plans
Balanced Funds
 Investment in more than one asset class:
 Debt and equity in predefined proportions

 Pre-dominantly debt with some exposure to equity
 Pre-dominantly equity with some exposure to debt
 Education plans and children’s plans

Fund of Funds
 Investment of its corpus in other mutual fund

schemes
 Schemes of same mutual fund house
 Schemes of other mutual fund house
 Is considered like a Debt scheme for tax
purposes
 The effective expenses become higher as the
investors have to bear the expenses of the
invested schemes as well
Investment Options
 Investors can achieve income and growth objectives

in al funds
 Dividend pay-out option
 Regular dvidend
 Ad-hoc dividend
 Growth option
 Re-investment option
 Most funds provide multiple options and the facility to

switch between options
Basics of Classification
 Risk
 Sectoral funds are most risky; money market funds are least risky
 Tenor
 Equity funds require a long investment horizon; liquid funds are for
the short term liquidity needs
 Investment objective
 Equity funds suit growth objectives; debt funds suit income
objectives
The Risk Return Trade-off
Hedge Funds
Growth Funds Sectoral Funds

Potential
Aggressive, Value,
for Growth
return
Debt
Funds Balanced Funds
Gilt Funds, Bond Ratio of Debt : Equity
Funds, High
Yield Funds
Liquid Funds
Risk
Who can invest ?
 Resident Indian Individuals/HUF
 Indian Companies/Partnership Firms
 Trusts / charitable institutions / PFs
 Banks/ FIs / NBFCs
 Insurance Companies
 NRIs/ FIIs
 Partnership firms etc.

Distribution Channels
Individual Agents
Distribution Companies
Banks and NBFCs
Direct marketing channels
NAV - COMPUTATION
NAV = Net assets of scheme / No of units Outstanding
i.e. Market value of investments+ Receivables+

Other accrued income+ Other assets- accrued
expenses- Other Payables- Other liabilities
No. of units outstanding as at the NAV date
Imp :
Day of NAV Calculation is known as valuation day
NAV is computed for each business day
HOW NAV IS COMPUTED
Market value of Equities - Rs.100 crore - Asset

Market value of Debentures - Rs.50 crore - Asset
Dividends Accrued - Rs.1 crore -Income
Interest Accrued - Rs.2 crore - Income
Ongoing Fee payable - Rs.0.5 crore - Liability
Amt.payable on shares purchased -Rs.4.5 crore - Liability
No. of units held in the Fund : 10 crore units
NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10
= [153-5]/10
= Rs. 14.80
NAV - Other information
Open end funds to declare NAV daily
NAV to be published at least weekly
Close end Schemes (which are not listed) may publish

NAV monthly/qt with prior approval from SEBI (MIP)
NAV has to consider up to date transactions
Non - recorded transactions not to affect NAV

calculation by more than 2%
NAV
Nav is influenced by
Purchase and sale of Investment

Valuation of Investment
Other assets and Liabilities
Units sold or redeemed.
CHANGE IN NAV
FORMULA :
For NAV change in absolute terms =

(NAV at end of period - NAV at beginning of period) * 100
NAV at beginning of period
For NAV change in annualised terms =

( NAV change in % in absolute terms) * (365 / No. of days )
Loads
 Entry Load or front ended load
Paid at the time of purchase
Sale Price = NAV * (1+ Sales Load, if any)
 Exit Load or back ended load
Paid at the time of exit
Redemption Price = NAV*(1- Exit Load)
 Contingent Deferred Sales Load (CDSL)
 Deferred exit load depending on the period
 Also known as deferred load
PRICING OF UNITS
Sale price not greater than 107% of the NAV
Re-purchase price to be not lower than 93%

(95% for close-end funds) of the NAV
Difference between the repurchase & sale price

can not be more than 7% of the sale price
For example…
 If the NAV is Rs 10,

 Sale price cannot be higher than Rs 10.7
 Repurchase price cannot be lower than Rs 9.3
 However, the mutual fund cannot charge both these
prices
 If the sale price is Rs 10.7, the repurchase price
cannot be lower than Rs 9.95 (10.7*0.93)
 If the repurchase price is Rs 9.3, the sale price
cannot be higher than Rs 10.00 (9.3/0.93)
Sale Price
Sale Price is the price at which units are sold to

investors.
Sale Price = NAV + Entry load
Formula for computation of Sale Price =
NAV*(1+Load)
Assuming an entry load of 2% in the earlier
NAV computation example
Sale Price = 14.80*(1+ 0.02)
= 15.10
Repurchase Price
Repurchase Price is the price at which units are
repurchased from investors.
Sale Price = NAV – Exit load
Formula for computation of Sale Price =
NAV*(1-Load)
Assuming an exit load of 2% in the earlier
NAV computation example
Sale Price = 14.80*(1- 0.02)
= 14.50
Capital markets and Mutual
Funds
 Equity
 Market and products
 Asset classes
 Investment styles
 Value indicators
 Debt
 Debt markets
 Terminology
 Yield and duration
 Investment styles
 Investment restrictions
Equity investment
 Options
 Ordinary shares
 Pref. shares
 Equity warrants
 Convertible Debentures
Investment Strategies
 Growth and value
 Active and passive
 Large and small cap
 Cyclical stock
 Stock selection
 P/E ratio
 Dividend yield
 Undervalued companies
 Fundamental analysis
 Technical analysis
 Quantitative analysis
Debt Markets
 Tenor
 Short and long
 Put and call options
 Interest payment
 Fixed and floating
 Periodic vs discounted
 Credit quality
 Gilt, guaranteed and others
 Traded and non-traded
Debt instruments
 Commercial Deposits
 Corporate Debentures
 Zero coupon bond
 Floating rate bonds

Debt instruments
 Commercial papers (CPs)
 Govt Securities
 T - bills (7- 364 days)
 Banks/ FIs/ PSU Bonds

Risk in a Debt Fund
 Interest Rate Risk
 Credit Risk (Asset quality)
 Reinvestment Risk
 Call Risk
 Liquidity
 Inflation
All the Best !!!!!!
Thank You

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A presentation by

Joint Venture with Standard Life Investments

A mutual fund is a collective investment that

RETURNS FUND MANAGER

Portfolio of investments spreads out Risk

 Attempts Minimises value erosion

Potential losses are shared with other investors

Easy Way to Invest

Reduces excessive paperwork

Provides an opportunity for a small investor

Minimum investment is approx.

Provision to apply using SIP

Offers a VARIETYOF SCHEMES

 Meet the investment needs of all Investors

 No control over costs for an investor

Note: These are just disadvantages of the

 Variable Corpus  Fixed Corpus

 Not Listed  Generally Listed

 Buy from and sell to  Buy and sell in the

the Fund Stock Exchanges

 Diversified portfolio of equity shares

 Diversified equity funds

 ELSS as a special case

 Primary market funds

 Small stock funds

 Sector specific funds (sectoral funds)

 Investment in more than one asset class:

 Debt and equity in predefined proportions

 Education plans and children’s plans

 Investment of its corpus in other mutual fund

 Investors can achieve income and growth objectives

 Most funds provide multiple options and the facility to

Growth Funds Sectoral Funds

 Indian Companies/Partnership Firms

 Trusts / charitable institutions / PFs

 Banks/ FIs / NBFCs

 Partnership firms etc.

NAV = Net assets of scheme / No of units Outstanding

i.e. Market value of investments+ Receivables+

Market value of Equities - Rs.100 crore - Asset

NAV to be published at least weekly

Close end Schemes (which are not listed) may publish

NAV has to consider up to date transactions

Non - recorded transactions not to affect NAV

Purchase and sale of Investment

For NAV change in absolute terms =

For NAV change in annualised terms =

Sale price not greater than 107% of the NAV

Re-purchase price to be not lower than 93%

Difference between the repurchase & sale price

 If the NAV is Rs 10,

Sale Price is the price at which units are sold to

 Zero coupon bond

 Floating rate bonds

 Commercial papers (CPs)

 T - bills (7- 364 days)

 Banks/ FIs/ PSU Bonds

 Credit Risk (Asset quality)