MUTUAL FUNDS

■ Presentation by
Prof. Shweta Anand
‘AMC’ and ‘AUM’

■ An 'Asset Management Company' is an

investment management is an investment
management firm that invests the pooled funds of
retail investors in securities is an investment
management firm that invests the pooled funds of
retail investors in securities in line with the stated
investment objectives. For a fee, the investment
company provides more diversification is an
investment management firm that invests the pooled
funds of retail investors in securities in line with the
stated investment objectives. For a fee, the
investment company provides more diversification,
liquidity is an investment management firm that
invests the pooled funds of retail investors in
 Fund Manager
■ Fund Manager
The person(s) resposible for implementing a
fund's investing strategy and managing its
portfolio trading activities. A fund can be
managed by one person, by two people as co-
managers and by a team of three or more people.
Fund managers are paid a fee for their work,
which is a percentage of the fund's average
assets under management.

Also known as an "investment manager".

Source: [Link]
 INTRODUCTION

■A mutual fund is a pool of money managed by

a professional money manager.

■The objective and the risk level are outlined in

a document called a prospectus. The
prospectus provides detailed guidelines for
the types of investments the manager can
purchase.
 Characteristics
▪ Investors contributes to the
mutual fund.
▪ Professional managers
manage the affairs for a fee.
▪ The funds are invested in a
portfolio of marketable
securities, reflecting the
investment objective.
▪ Value of the portfolio and
investors’ holdings, alters with
change in market value of
investments.
Benefits of Mutual Fund Investment

▪ Professional Management ▪ Liquidity

▪ Diversification ▪ Flexibility

▪ Convenient Administration ▪ Transparency

▪ Return Potential ▪ Affordability

▪ Low Costs ▪ Choice of Schemes

▪ Special Services ▪ Well Regulated

What are the benefits of purchasing a
mutual fund? (con’td..)
■ Special Services – some examples…
■ 1. Saving Plans
■ Investor adds funds on a regular basis
■ 2. Automatic Reinvestment Plans
■ Dividends and capital gains are reinvested in additional shares
■ 3. Regular Income
■ Through withdrawal plans, the investor can receive periodic repayment or
income
■ Shares or Dollars
■ 4. Conversion Privileges/ Switching
■ Allows the investor the right to switch from one fund to another
■ a. Must confine switches within the same family of funds
■ b. Usually no transfer charges
■ 5. Check Writing Privileges
■ a. Shareholders have the right to write checks drawn on the Mutual Fund
account
■ b. Normally checks must be written for at least $500
■ c. Almost all Money Funds have this privilege
 Structure of Mutual Funds

■ Open-ended Funds
■ 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.
▪ Closed-ended Funds
▪ For certain periods the liquidity is through trading on
the stock exchange
▪ ETF Exchange traded funds
▪ These are generally index based and only listed on the
stock exchange. NAV is variable during trading hours
and allows the advantage of intra-day trading.
 Some Terms

■ Net Asset Value (NAV)

Net Asset Value = [(Mark-to-Market value of portfolio + cash-in-

hand) - Administration charge*1/365*(Mark-to-Market value of
portfolio + cash-in-hand)] / Number of Units Outstanding
NAV is calculated on a daily basis.
■ Sale Price
Is the price you pay when you invest in a scheme. It may include a
sales load/ front end load. It is also known as the ‘Ask Price’.
■ Repurchase Price
Is the price at which a scheme repurchases its units and it may
include a back-end load. This is also called ‘Bid Price’.
 Some Terms (Contd.)

■ Sales Load/ Entry Load/ FEL Front End Load

■Is a charge collected by a scheme when it sells the units.
Also called, ‘Front-end’ load. Schemes that do not charge
a load are called ‘No Load’ schemes.
■Subscriptions/ Investments can be made at the ‘Ask’ rate
which is NAV + FEL.
■ Repurchase /BEL Back End Load/Exit Load
■Is a charge collected by a scheme when it buys back the
units from the unit holders. This fees decreases on a
percentage basis every year the fund is held.
■Redemption / Liquidation of investments can be made at
the ‘Bid’ rate which is NAV – BEL.
Mutual Fund Units/Shares
■US calls Mutual fund Units as shares. They
also have various classes of each Fund
(A,B,C,..) based on Load Fee structure etc.
 What types of funds can I buy?
Major Asset Classes:
# Debt Fund # Specialty Funds
Money Market Funds # Equity Funds
Bond Funds Dividend Funds
Govt Securities Funds / Sectoral Funds
Guilt Funds Index Funds
Tax Saving Funds
# Balanced Funds International Funds
(Equity Debt Combo)
Small/ Large company fund
# Fund of Funds
Sample US Fund offers by Meyer Asset Management – Note Insurance funds
are a combination of Insurance and Mutual funds product.

Real Estat
Offshore Funds Hedge Fu Mutual Fu Capital Protect e
nd nd ed Fund
Investment
Trust
What is a Money Market Fund?
■This type of fund's main objective is to hold
investment instruments that are liquid and
secure. This type of fund is usually held on a
short-term basis, and the NAV is often fixed at
$10. Examples: Treasury bills, banker's
acceptances, and short term notes.

■One thing an investor should be aware of is

that these funds are NOT guaranteed and
hold NO fixed return, but are low risk and do
pay interest.
What is a Bond Fund?
■ This type of fund's main objective is to provide a steady stream of
income, and holds bonds issued by either governments or corporations.

■ The risk level of this type of fund will be determined by the guidelines in
the prospectus, which will, in turn, determine what type of "rating" and
term (years to maturity) of bond the manager is allowed to purchase.

For example, a provincial bond will be rated "more risky" than a

government of Canada bond because rating systems determine that it
will be easier for the government of Canada to repay their debt easier
than for any provincial government.
■ Offers the individual investor access to high-yielding money market
instruments without having to pay $100,000 denominations
■ a. Bank CD’s
■ b. Treasury Bills
■ c. Commercial Paper
What is a Balanced Fund?
■This type of fund's main objective is to hold
an optimal mix of investments among cash,
equities, and income-producing securities.

■This type of fund usually has several

managers who specialize in a specific area.

■This type of investment is ideal for someone

who wants a better return than a fixed
income, but also wants less risk than equity.
 What is an Equity Fund?
■ This type of fund's main objective is to provide long-term growth through
equity/stock investments.
1. Growth
■ Goal is capital appreciation
■ 2. Maximum Growth
■ Highly speculative, seeking large profits from capital gains
■ a. Often buy stocks of small, unseasoned companies
■ b. Highly speculative
■ [Link] Company
■ Invest in small companies that usually have sales of $100 million or less.
■ 4. International
■ Can invest in one region or area of the world
■ Can invest in specific country
■ 5. Dividend Fund
■ This type of fund's main objective is to mainly hold preferred shares, which pay
out dividends. The manager may choose, however, to invest in common
shares, money market funds or bonds.
What is a Specialty Fund?
■This type of fund's main objective is to
concentrate its holdings in one particular
sector, geographic region, or in one capital
market.
■Examples: telecommunications, health care,
technology, financial services, European
markets or Japan.

* As you specialize, you minimize

diversification, and that results in increased
risk.
Mutual Fund Style Analysis:
■Growth Managers buy stocks in companies
whose earnings are growing rapidly.
■Value Managers are bargain hunters seeking
stocks with low prices compared to intrinsic
value.
■Company Size Managers specialize in small
companies or large cos.
Mutual Fund Style Analysis:
■Style determines 85-90% of a fund portfolio’s
return.
■The technique looks at the way funds perform
on a monthly basis against one of 12 different
indexes. The mix of indexes that are most
highly correlated determines the style of the
mutual fund manager.
What are the different investment
styles for equity investing?
Mutual Fund Style Analysis:
■The mutual fund universe can be divided into
six basic styles:
■Small cap growth funds
■Large cap growth funds
■Small cap value
■Large cap value
■Foreign funds
■Fixed income funds
So What is a Hedge Fund?
Hedge Fund Center's Definition of a Hedge
Fund
A hedge fund is a private investment limited
partnership that invests in a variety of
securities. There are two types of partners in
a hedge fund, a general partner and limited
partners. The term hedge fund is misleading
in that a hedge fund does not necessarily
have to hedge. The term "hedge fund" now
means any type of private investment
partnership.
Legal Structure
■ Limited Partnership
■As a limited partnership, they gain exemption
from Regulations Eg. SEC ICA 301 or AMFI in
India
■No More than 100 Partners who are
accredited and cannot advertise
■Minimum Investment of $200,000 (in US –
value varies country to country)
Strategy and Risk
■Bet on movements in markets, currencies,
interest rates or commodities. Higher
leverage and high derivative use.

■Survivorship Return: Only high performers

survive
■Survivorship Risk: Volatile funds tend to
disappear
Classifications
■ Futures Funds: Commodity pools. Take on positions
they hold in a single asset.
■ Emerging Markets: Bets on securities in foreign
markets. Volatile political and economic risk
■ Event Driven: Bets on events specific to a company
or security.
■ Distressed Funds: Invest in companies that could
possibly return to profitability
■ Arbitrage in M&A: Acquired company trades at a
discount to acquisition cost. Buys acquired and sells
acquirer.
Conclusion
Hedge fund is similar in objective to Mutual
funds (collective investing)

But can be
Riskier and more Volatile

Investors must add it to their portfolio with

caution!
Imp Links for further reading
■[Link]
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ThankYou