MUTUAL FUNDS

Prepared by Pratik Manani

What is Mutual Fund?

Pool of funds from investor who share

similar objectives
The money collected is invested by the
fund manager in different types of
securities
The income earned by the scheme are
shared by its unit holders in proportion
to the number of units owned by them.

Mutual Fund Flow Chart

History of Mutual Funds

Phase 1. Establishment and Growth of Unit Trust

of India - 1964-87
1963- UTI established
Enjoyed monopoly till 1978
Control transferred to IDBI
UTI Scheme 1964 (US 64)
Launched ULIP in 1971
Six more Scheme in 1981-84
By end of 1987 AUM was 6700 Crores

 Phase II. Entry of Public Sector Funds -

1987-1993
Public sector fund entered in the market
SBI First non-UTI fund
Followed by LIC, Canara Bank, Bank of

India
UTI was market leader by 80% share
AUM 47004 crores

 Phase III. Emergence of Private Sector

Funds - 1993-96
Permission given to private sector funds
Most of them entered by way of joint

venture with Indian promoters

Competition in industry
11 private sector funds by end of 1994-95

 Phase IV. Growth and SEBI Regulation -

1996-2004
Tax benefits offered by govt.
SEBI(Mutual Fund) Regulation introduced

for uniform standards

1999 budget dividend income exempted
from tax in the hands of investors
Awareness programmes were organized

 Phase V. Growth and Consolidation -

2004 Onwards
Mergers and acquisition took place Birla

Sunlife
International fund players entered - Fidelity,
Franklin Templeton Mutual Fund etc
43 mutual funds at the end of march 2013

REASONS TO INVEST IN MUTUAL

FUNDS
Expert on your side
Limited risk
Easy investing
SIP
Investor protection
Quick access to your money (Liquidity)
Transparency
Low transaction costs
Tax benefits

TYPES OF MUTUAL FUNDS

1. Open ended, close ended and interval
2.
3.
a)
b)

3.
4.
5.

funds
Equity Funds
Debt Funds
Fixed Income/Bond Funds
Money Market/Liquid Funds
Balanced/Hybrid Funds
Funds of Funds
Specialty Funds

1. Equity Funds
Growth Funds

Value Funds
Blend Funds
Sector Funds
Large Cap, Mid Cap and Small Cap

Funds
Focused Funds
Contra Funds
Arbitrage Funds

Contra Funds
Similar to equity but difference lies in

style of investing
Invest in out of flavor stocks
Manager picks under performing stocks
which are likely to perform well in long
run
E.g.: IT Sector buy stocks when value
of rupee weaken and sell when value of
rupee becomes strong

Things to be consider while investing

Investor should look at this as diversified

opportunity
Invest only 10-15% of portfolio not more
than that
Fund invest in out of flavor stocks so
may not perform in short run
Riskier than regular funds
Analyze risk appetite

How to choose contra funds

Unlike equity funds, we cant take

investment decision based on past

returns
Look at the stocks/mandate of stocks it
invests in
Invest in funds that have been around
for long and not in new funds

Arbitrage Funds
It takes advantage of the mispricing

between cash market and future market

USP Risk free return
How it works:
For e.g.:
Cash Market

100

Derivatives Market

110

Investor can earn risk free return

irrespective of price of shares at expiry

On the day of settlement

Price of XYZ
Profit/Loss on
sale of Equity
Profit/Loss on
Purchase of
stock future
Profit/Loss

Scenario 1
150
50

Scenario 2
70
(30)

(40)

40

10

10

Investing in Equity Funds

Errors
Invest in only top performing funds
These cannot go wrong
Replicate past performance in future
Appropriate way
Right Mix of equity MFs (Top 3-4 funds, may all be mid-cap funds)
Have variety of funds like diversified funds, mid-cap funds and sector funds
in right proportion.
Beginner- it makes sense to begin with a diversified fund
Gradual exposure to sector and specialty funds.
Look at performance of various funds with similar objectives for

at least 3-5 years (managed well and provides consistent returns)

2.(A) Fixed Income Funds

Invests in fixed income instruments

Bonds, Debentures, Govt Sec (Gilt) etc

Less riskier than equity
Generate fixed return
Inverse relationship between interest

rates and price of fixed income

instruments
Returns are higher than traditional
avenues like FD

When to invest
Fall in interest rates
Slowdown in GDP
Rising Inflation

Decline in IIP ( Index of Industrial

Production)

2.(B) Money Market Funds

Invests in short term debt instruments

like treasury bills, call money etc

Less risky and less volatile
Maturity up to 91 days
Generally invests in instrument with high
credit rating (P1+)
Lock in period maximum 3 days

Features of liquid funds

No entry and exit loads

Low annual fees

Easy liquidation
Great tax benefit

- Dividend reinvestment tax free

- short term capital gain are taxed

3. Balanced Funds
Combination of equity and debt

funds
Moderate risk and good returns
Objective fixed income and

capital appreciation

4. Funds of Funds
Invests in other investment funds
Greater diversification
Less volatile

Higher charges

5.Specialty Funds
Sector Funds

Regional Funds
Socially responsible funds

Very high risk and high return

Highly volatile

TAXATION
All dividends declared by debt / equity oriented schemes are
tax free in the hands of the investor
Dividend distribution tax @ 25% (Plus 5% surcharge and
3% cess) for corporates under debt oriented schemes
No DDT under equity schemes
Long term capital gain in equity schemes exempt from tax

Indexation benefit available for long term non equity

schemes(10% without indexation, 20% with indexation,
whichever is lower)
Equity short term capital gain @15%(plus 3% cess)
STCG in Debt funds Rates applicable for the investor
Deduction of Rs. 1 lac under section 80C

Before declaration of dividend / bonus

Growth

Dividend
payout

Dividend
reinvestment

Bonus

NAV

20

20

20

20

Units

100

100

100

100

Value (Rs)

2,000

Rs 2,000

Rs 2,000

Rs 2,000

After declaration of dividend / bonus

NAV

20

19

19

18.1818

Units

100

100

105.2631

110

Value (Rs)

2000

1900

2000

2000

Dividend
received in
cash

Rs 100

Additional
units

5.2631

10

Investing Checklist
Draw up your asset allocation
Financial goals & Time frame (Are you investing for retirement? A
childs education? Or for current income? )
Risk Taking Capacity
Identify funds that fall into your Buy List

Obtain and read the offer documents

Match your objectives
In terms of equity share and bond weightings, downside risk protection,
tax benefits offered, dividend payout policy, sector focus
Check out past performance
Performance of various funds with similar objectives for at least 3-5
years (managed well and provides consistent returns)

Checklist Contd
Think hard about investing in sector funds
For relatively aggressive investors
Close touch with developments in sector, review portfolio

regularly
Look for `load' costs
Management fees, annual expenses of the fund and sales loads
Does the fund change fund managers often?
Diversify, but not too much
Invest regularly, choose the S-I-P
MF- an integral part of your savings and wealth-building plan.