MUTUAL FUNDS

Parul Rana C33

Pooja Singh C34
Pratik Sati C35
Rajesh Rana C36
Sagar Gupta C38
Sandeep K C39
Shantanu Saha C40
What is a Mutual Fund?
 A mutual fund is an investment vehicle made up of a pool of money
collected from many investors for the purpose of investing in securities such
as stocks, bonds, money market instruments and other assets.

 A mutual fund is also known as an open-ended investment fund, which

means the fund sells units (of this pool on money) upon request.

 It issues units (securities) to unit holders (investors) according to the

quantum of money invested by them.

 The profits/losses are shared by the unit holders in proportion of their

investments.

 As an investment intermediary, mutual funds offer a variety of

services/benefits to the investors: convenience, low risk through
diversification, expert management and lower cost due to economies of
scales
Mutual Fund
Is a Cyclical Process
HISTORY OF MUTUAL FUNDS
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of
the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly
divided into four distinct phases

 First Phase - 1964-1987

Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by the Reserve
Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of
India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took
over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit
Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets under management
 Second Phase - 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks and Life
Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund
was the first non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87),
Punjab National Bank Mutual Fund (Aug 89 etc. LIC established its mutual fund in June 1989 while GIC
had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores.
HISTORY OF MUTUAL FUNDS

 Third Phase - 1993-2003 (Entry of Private Sector Funds)

1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.
As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other mutual
funds.

 Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two
separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under
management of Rs. 29,835 crores as at the end of January 2003

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and
functions under the Mutual Fund Regulations.
Growth In Asset Under Management
Types of Mutual Fund
MF according to
Maturity
1) Open ended Mutual Fund (90% of funds)

 No limitations on the number of shares the investment

company can issue
 Shares are issued and redeemed by the investment
company
 Do not have fixed maturity period

2) Closed end fund (10% of funds)

 Limited number of shares issued initially

 Then can only purchase shares from another investor willing to

sell theirs
 It has stipulated maturity period e.g. 5-7 years
MF according to
Investments
Mutual fund according to Investment
objective
Equity fund is further divided into

Diversified Funds 01

02 Index Funds

Tax saving funds 03

04 Sectoral Funds
1) Diversified Equity Funds
A diversified equity fund invests in companies regardless of size and sector. It diversifies investmentsa
cross the stock market in a bid to maximize gains for investors. They are offered by unit-linked insurance
plans / ULIPs, mutual funds and other investment firmsA diversified equity fund invests in companies
regardless of size and sector. It diversifies investmentsacross the stock market in a bid to maximize
gains for investors. They are offered by unit-linked insurance plans / ULIPs, mutual funds and other
investment firms

2) Index Funds
Index funds are mutual funds that are designed to track the returns of a market index. An index is a
group of securities that represents a particular segment of the market (stock market, bond market, etc.).
Index funds will hold almost all of the securities in the same proportion as its respective index.

3) Tax Saving Funds

Tax saving mutual funds are just like any other mutual funds with the added bonus that investments
made in them are eligible for tax benefits under section 80C. Most of the tax saving mutual funds are
ELSS schemes and make investments in equity markets.

4) Sectoral Funds
A sector fund is a fund that invests solely in businesses that operate in a particular industry or sector of the
economy. Sector funds are commonly structured as mutual funds or exchange-traded funds (ETFs).Sector
funds allows investors to take targeted bets on the appreciation potential of a particular industry category.
A sector fund will have portfolio constraints requiring the portfolio manager to choose investment securities
for the fund that fall within the fund’s targeted objective.
 Advantages of Mutual Fund
 Portfolio Diversification
 Professional Management
 Minimization of Risk
 Return Potential
 Low cost Liquidity
 Tax Benefits
 Convenience and Flexibility
 Transparency
 NAV Calculation
Net asset value (NAV) represents a fund's per unit market value. This is
the price at which investors buy fund units from a fund company or sell it
back to the fund house. It is calculated by dividing the total value of all
the assets in a portfolio, minus all its liabilities.
Structure of Mutual Funds
 The Fund Sponsor
• Any person or corporate body that establishes the Fund and
registers it with SEBI.
• Form a Trust and appoint a Board of Trustees.
• Appoints Custodian and Asset Management Company either
directly or through Trust, in accordance with SEBI regulations.

SEBI regulations also define that a sponsor must contribute at least

40% to the net worth of the asset management company.
Trustees
•Created through a document called the Trust Deed that is executed by
the Fund Sponsor and registered with SEBI.
•The Trust-the mutual fund may be managed by a Board of Trustees- a
body of individuals or a Trust Company- a corporate body.
•Protector of unit holders interests.
•2/3 of the trustees shall be independent persons and shall not be
associated with the sponsors.
 Rights of Trustees:

• Approve each of the schemes floated by the AMC.

• The right to request any necessary information from the AMC.
• May take corrective action if they believe that the conduct of
the fund's business is not in accordance with SEBI Regulations.
• Have the right to dismiss the AMC,
• Ensure that, any shortfall in net worth of the AMC is made
up.
 Truste
Obligations of the Trustees:
es
• Enter into an investment management agreement with the AMC.
• Ensure that the fund's transactions are in accordance with the Trust
Deed.
• Furnish to SEBI on a half-yearly basis, a report on the fund's
activities
• Ensure that no change in the fundamental attributes of any scheme or the
trust or any other change which would affect the interest of unit holders is
happens without informing the unit holders.
• Review the investor complaints received and the redressal of the same by
the AMC.
 Asset Management Company

• Acts as an invest manager of the Trust under the Board

Supervision and direction of the Trustees.
• Has to be approved and registered with SEBI.
• Will float and manage the different investment schemes in the
name of Trust and in accordance with SEBI regulations.
• Acts in interest of the unit-holders and reports to the trustees.

• At least 50% of directors on the board are independent

of the sponsor or the trustees.
Asset Management Company

Obligation of Asset Management Company:

• Float investment schemes only after receiving prior approval
from the Trustees and SEBI.
• Send quarterly reports to Trustees.
• Make the required disclosures to the investors in areas such as
calculation of NAV and repurchase price.
• Must maintain a net worth of at least Rs. 10 crores at all times.
• Will not purchase or sell securities through any broker, which is
average of 5% or more of the aggregate purchases and sale of
securities made by the mutual fund in all its schemes.
• AMC cannot act as a trustee of any other mutual fund.
• Do not undertake any other activity conflicting with managing
the fund.
Custodian
•A custodian is responsible for the safekeeping of the securities of the Mutual Fund.
• They manage the investment account of the Mutual Fund, ensure the delivery and
transfer of the securities.
•They also collect and track the dividends & interests received on the Mutual Fund
investment.

Transfer Agents
These are the entities who provide services to Mutual Funds.
RTAs are more like the operational arm of Mutual Funds.
Their services include
• Processing investors’ application
• Keeping a record of investors’ details
• Sending out account statements to the investors
• Sending out periodic reports
• Processing the payouts of the dividends
• Updating the investor details i.e. adding new members and removing those who have
withdrawn from the fund.
Performance Measure of Mutual Funds
• The Treynor Measure
• The Sharpe Measure
• Jenson Model
• Fama Model
The Treynor Measure
• Treynor’s Index (Ti) = (Ri - Rf)/Bi.

• Where, Ri represents return on fund, Rf is risk free rate of

return and Bi is beta of the fund.
• The ratio is quite similar to he sharp ratio but it considers the
Beta as volatility measure.
• Higher Treynor ratio suggest the better performance of the
fund, so investor are advised to pick the investment with trynor
ratio
The Sharpe Measure
• Sharpe Index (Si) = (Ri - Rf)/Si
Where, Si is standard deviation of the fund.

• Sharpe ratio evaluates the performance of the fund with the

risk taken by it. Therefore, the Sharpe ratio is also known as
risk to variability ratio

• The greater is an investment’s Sharpe Ratio, the better its risk-

adjusted performance.
Jenson Model
• Required return of a fund at a given level of risk (Bi) can be
calculated as:
Ri = Rf + Bi (Rm - Rf)
• Where, Rm is average market return during the given
period.
• Out-performance is measured by Jenson's Alpha. It shows the
risk-adjusted return generated by a mutual fund scheme
relative to the expected market return predicted by the Capital
Asset Pricing Model (CAPM). Higher Alpha indicates that the
portfolio performance has outstripped the returns predicted by
the market.
Fama Model
• Required return can be calculated as: Ri = Rf + Si/Sm*(Rm -
Rf)

Where, Sm is standard deviation of market returns. The net

selectivity is then calculated by subtracting this required return
from the actual return of the fund.
Use of Models
• Among the above performance measures, two models namely, Treynor
measure and Jenson model use systematic risk based on the premise
that the unsystematic risk is diversifiable. These models are suitable for
large investors like institutional investors with high risk taking capacities
as they do not face paucity of funds and can invest in a number of options
to dilute some risks. For them, a portfolio can be spread across a number
of stocks and sectors.
• However, Sharpe measure and Fama model that consider the entire risk
associated with fund are suitable for small investors, as the ordinary
investor lacks the necessary skill and resources to diversified.
Thank You