CA-FINAL SFM MUTUAL FUND

Transcription

1 CA-FINAL SFM MUTUAL FUND RAJESH RITOLIA, FCA HELPING HAND INSTITUTE G-80, 2 ND FLOOR, GUPTA COMPLEX, LAXMI NAGAR, DELHI-92 PH: , rritolia@correctingmyself.in; Web: correctingmyself.in YOU PAST MISTAKES ARE MEANT TO GUIDE YOU NOT DEFINE YOU If you think you are too small to make a difference. Try sleeping with mosquito in the room A man who conquers himself is greater than one who conquers a thousand men in battle. the miracle is not that i got success. The miracle is that i had the courage to start. The best fighter is never angry. There r three ways of handling anger. By expression, by suppression and by forgiveness. The right way to overcome anger is by forgiveness. Expect nothing and accept everything. THOSE WHO CAN NOT CHANGE THEIR MIND, CANNOT CHANGE ANYTHING RELATIONSHIP IS NOT HOLDING HANDS WHILE YOU UNDERSTAND EACH OTHER IT'S ABOUT HAVING LOTS OF MISUNDERSTANDINGS AND STILL NOT LEAVING EACH OTHER'S HANDS.

2 Chapter Analysis Theory M11 N11 M12 N12 M13 N13 M14 N14 M15 N15 PRACTICAL M11 N11 M12 N12 M13 N13 M14 N14 M15 N15 T P

3 Chap 9 SUMMARY OF MUTUAL FUND 9A.1 Index Particulars Summary of Topics Q No Exam RTP 9.1 Mutual Fund A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. A mutual fund is the most suitable investment for the cautious investor as it offers an opportunity to invest in a diversified professionally managed basket of securities at a relatively low cost How Mutual Funds work for you - The money collected from the investors is invested by a fund manager in different types of securities. - These could range from shares and debentures to money market instruments depending upon the scheme s stated objectives. - The income earned through these investments and capital appreciation realized by the scheme are shared by its unit holders in proportion to the units owned by them. - Mutual Fund could be the best avenue for risk averse 9.2 NAV and Return of Units of Mutual Fund - This is the value per unit of a scheme on a particular day called the valuation day. It is the value of net assets of the fund. The investors' subscription is treated as the capital in the balance sheet of the fund and the investments on their behalf are treated as assets. The NAV is calculated for every scheme of the MF individually. M-04 N-04 - There are three aspects which need to be highlighted: - (i) It is the net value of all assets less liabilities. NAV represents the market value of total assets of the Fund less total liabilities attributable to those assets. - (ii) NAV changes daily. The value of assets and liabilities changes daily. - (iii) NAV is computed as a value per unit of holding Calculation of Net Asset Value of Units of Mutual Fund - NAV per unit = (Net assets of the scheme)/ Number of units outstanding OR - NAV per unit = (MV of all Investment + other assets of the scheme - Liabilities of the scheme)/number of units outstanding under the scheme 1 Nov-14 - Net assets of the scheme = Market value of traded investments + Estimated value of non traded listed securities + Estimated value of unlisted securities + Receivables + Accrued Income + Other Assets - Accrued Expenses - Payables - Other liabilities Calculation of Return from MF There are three types of income from owning mutual fund units - Cash Dividend - Capital Gains distribution - Changes in NAV per unit [Unrealised capital gain] % Return on units of MF = (NAV 1 + Income distributed + Capital Gain Distributed NAV 0)/NAV M-15 M-13 M-10-O N-09-O M-09-O N-12 N-04 M Calculation of return from MF if Income is reinvested - NAV must be given or calculated as of the date of reinvestment of dividend - No of Units to be purchased from reinvestment = Dividend Received/NAV as on date of reinvestment - In this case Initial no of units and closing no of units will be different - % Return on units of MF = (Closing Investment Opening Investment)/Opening Investment - Closing Investment = No of units at Closing*NAV at Closing 5 N-11 M-11 M-06 M Calculation of NAV on the If NAV 0 and Return is given, then 6-7 N-15

4 Chap 9 SUMMARY OF MUTUAL FUND 9A.2 basis of Return NAV 1 = Return*NAV 0/100 + NAV 0 Dividend Capital Gain N Costs incurred by Mutual Fund Calculation of Issue Exp, Recurring Exp, Actual return of MF 9.4 Entry fees and Exit fees in MF Calculation of Return from units of MF in case of Entry or Exit Fees - There are 2 type of expenses incurred by Mutual Fund - Initial Expenses attributable to establishing a scheme under a Fund known as issue exp - Ongoing recurring expenses (Management Expense Ratio) which is made up of (a) Cost of employing technically sound investment analysts (b) Administrative Costs (c) Advertisement Costs involving promotion and maintenance of Scheme funds. - For Calculating Issue Exp or Recurring Exp, Following equation would be used. - Indifferent Point between Own Investment and Investment by MF - Return from own investment by Investor = Effective return provided by MF to Investor - Effective return provided by MF to Investor = (Return earned by Mutual Fund Recurring Exp p.a.)*(1-issue Cost) - Entry Fees is charged to investor at the time of Purchase of Units of MF by investor - Exist fees is charged to investor at the time of sale of units of MF by investor - Purchase Price of units of MF for Investor = NAV as on date of purchase + Entry Fees - Sale Price of units of MF for Investor = NAV as on date of purchase - Exit Fees Return = (Sale Purchase)/Purchase N-12 N-06 8 M-09 N-03 M Calculation of NAV after calculating Value of Assets of MF 9.6 Calculation of Premium/ Discount on NAV in compare to Market price of Units of MF 9.7 Calculation of Return of Various type of Scheme of MF Asset Values : Valuation Rule - Liquid Assets e.g. cash held - As per books - All listed and traded securities (other than those held as not for sale) - Last closing price quoted in a stock exchange immediately before the valuation day. - In case security is traded in more than one exchange, the price quoted in a exchange where the security is mostly traded. - Debentures and Bonds - Closing traded price or we can calculate Value of Debenture or BOND on YTM basis as we have learnt in Chapter Bond Valuation. - Valuation of Unlisted Equity Shares - = EPS of Company whose value is to be calculated*pe ratio of Comparable Company after adjustment for risk - Fixed Income Securities [Debenture, Bond] - Issue price + Intt Accrued for the period from date of issue to date of valuation - Value of Bond or Debenture may also be calculated as we have learnt in Chapter Bond Valuation - In case of listed Units, MP of Units may be different from its NAV. - If MP>NAV, then Units are said at Premium over NAV - If MP<NAV, then Units are said at Discount under NAV - Calculation of Premium/ Discount on NAV = (MP-NAV)*100/NAV - If MP and Premium/Discount is given then, NAV can be calculated as follows - NAV = MP/(1+Premium) or MP/(1-Discount) - Reinvestment of Dividend - Bonus Plan M-14 M-13 M-12 M-11 M-10 N N-10-O N-08-O N-14 N-13 N-11

5 Chap 9 SUMMARY OF MUTUAL FUND 9A DIVIDEND EQUALISATION - New investors are not entitled to any share of the income of a mutual fund scheme which arose before they bought their units. However, at the end of each distribution period the fund management allocates the same amount from the income of the fund to each unit. To compensate for this an equalisation payment is added to the cost of new units. This is the amount of income that has arisen up to the date of purchase of the unit. Because these payments are included in the amount available for distribution they are effectively repaid to the purchaser. The purchaser's dividend voucher at the end of the first distribution period should show the amount of the returned equalisation payment. N N Theory Explain briefly about net asset value (NAV) of a Mutual Fund Scheme. M-04 Explain briefly the advantages of investing in mutual funds. M-09 M-09 N-04 M-07 Briefly explain what is an exchange traded fund N-13 M-10 N-15 Distinguish between Open Ended and Close Ended Schemes M-15 N-10 Write short notes on the role of Mutual Funds in the Financial Market. M-03 Explain how to establish a Mutual Fund. N-03 What are the investors rights & obligations under the Mutual Fund Regulations? Explain different methods for evaluating the performance of Mutual Fund. N-05 What are the drawbacks of investments in Mutual Funds? N-08 Write short notes on Money Market Mutual Fund N-11 What are the signals that indicate that is time for an investor to exit a mutual fund scheme N-14

6 Chap 9 MUTUAL FUND 9B Mutual Fund A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. A mutual fund is the most suitable investment for the cautious investor as it offers an opportunity to invest in a diversified professionally managed basket of securities at a relatively low cost How Mutual Funds work for you The money collected from the investors is invested by a fund manager in different types of securities. These could range from shares and debentures to money market instruments depending upon the scheme s stated objectives. The income earned through these investments and capital appreciation realized by the scheme are shared by its unit holders in proportion to the units owned by them. Mutual Fund could be the best avenue for risk averse 9.2 NAV and Return of Units of Mutual Fund ICAI RTP ICWA ICSI May-03 M-04 Nov Nov-04 M-06 May-14 7 May-06 M-06 Nov-06 M-06 May-09-O M-04 Nov-09-O M-06 May-10-O M-05 May-11 M-08 Nov-11 M-05 Nov-12 M-05 May-13 M-10 Nov-13 M-05 Nov-14 M-04 May-15 M-04 Nov-15 M-08 [May-2004] [M-4] and [Nov-2004] [M-6] Explain briefly about net asset value (NAV) of a Mutual Fund Scheme. Solution Calculation of Net Asset Value of Units of Mutual Fund (a) This is the value per unit of a scheme on a particular day called the valuation day. It is the value of net assets of the fund. The investors' subscription is treated as the capital in the balance sheet of the fund and the investments on their behalf are treated as assets. The NAV is calculated for every scheme of the MF individually. (b) There are three aspects which need to be highlighted: (i) It is the net value of all assets less liabilities. NAV represents the market value of total assets of the Fund less total liabilities attributable to those assets. (ii) NAV changes daily. The value of assets and liabilities changes daily. (iii) NAV is computed as a value per unit of holding.

7 Chap 9 MUTUAL FUND 9B.2 (c) Calculation of NAV of units of Mutual Fund NAV per unit = (Net assets of the scheme)/ Number of units outstanding OR (Value of portfolio of the scheme + other assets of the scheme - Liabilities of the scheme) Number of units outstanding under the scheme Net assets of the scheme = Market value of traded investments + Estimated value of non traded listed securities + Estimated value of unlisted securities + Receivables + Accrued Income + Other Assets - Accrued Expenses - Payables - Other liabilities (d) NAV of M/F Scheme is published on a daily basis in the newspapers and electronic media and play an important role in investors' decision to enter or to exit. Ex: As on 01/01/2012 Liability Amt Assets Amt Units of Rs Cash As on 02/01/2012 Liability Amt Assets Amt Units of Rs Investment Cash NAV = /10000 = Rs.10 per Unit As on 03/01/2012 Liability Amt Assets Amt Units of Rs Value of Investment Profit on Investment 5000 Cash NAV = /10000 = Rs.10.5 per Unit As on 04/01/2012 Liability Amt Assets Amt Units of Rs Value of Investment Profit on Investment 8000 Cash NAV = /10000 = Rs.10.8 per Unit

8 Chap 9 MUTUAL FUND 9B.3 Question-1 [ICWA-Ch-2-2] Name of the Scheme Size of the Scheme Face Value of the Share Number of the outstanding shares Market value of the fund's investments Receivables Accrued Income Receivables Liabilities Accrued expenses Money Plant Rs.100 Lacs Rs Lacs Rs.180 Lacs Rs.1 lakhs Rs.1 lakhs Rs.50,000 Rs.50,000 Find NAV per unit? [Ans: Rs Per unit] Solution-1 NAV per unit = (Investment + Recoverable + Accrued Income Liabilities Accrued exp)/no of units (mutual fund) = (180 lacs + 1 lacs lacs 0.50 lacs)/10 Lacs = Rs per unit Question-1A [Nov-2014] [M-4] Cinderella mutual Fund Has the following assets in scheme Rudolf at the close business on 31 st march,2014. Company No. of Shares Market Price Per Share Nairobi Ltd Rs 20 Dakar Ltd Rs 300 Senegal Ltd Rs 380 Cairo Ltd Rs 500 The total number of units of scheme Rudolf are 10 Lacks. The Scheme Rudolf Has accrued expenses of Rs 2,50,000 and other Liabilities of Rs 2,00,000. Calculate the NAV per unit of the scheme Rudolf Calculation of Return from MF (a) There are three types of income from owning mutual fund units - Cash Dividend - Capital Gains distribution - Changes in NAV per unit [Unrealised capital gain] (b) % Return on units of MF = (NAV 1 + Income distributed + Capital Gain Distributed NAV 0 )/NAV 0 Question-2 [ICWA-Ch-2-8] A mutual fund had a net asset value (NAV) of Rs.50 at the beginning of the year. During the year a sum of Rs.4 was distributed as income (dividend) besides Rs.3 as capital gains distribution. At the end of the year NAV was Rs.55, calculate total return for the year. [Ans: 24%] Suppose further the aforesaid Mutual Fund in the next year gives a dividend of Rs.5 as income distribution and no capital gains distribution and NAV at the end of second year is Rs.50. What is the return for the second year. Ans: 0%] Question-2A [May-2003] [M-4] [May-2010-O] [M-5] [SM] [Similar in ICWA-Ch-2-11] [SP] A Mutual fund that had a NAV of Rs.20 at the beginning of month made income and capital gain distribution of Re and Re.0.03 per share respectively during the month, and then ended the month with a NAV of Rs Calculate monthly return. [Ans: 7.65%]

9 Chap 9 MUTUAL FUND 9B.4 Question-2B [SM-2] [ICWA-Ch-2-4] Question-2C [May-2009-O] [M-4] Question-3 [SP] An investor bought units of a mutual fund for Rs At the end of the year, the worth of his holding was Rs and he had received a dividend of 17.5%. Using the simple total return method, compute his return. [Ans: %] Question-4 [Nov-2004] [M-6] [Same Question in ICWA-Ch-2-9] A has invested in three Mutual Fund Schemes as per details below: MF-A MF-B MF-C Date of Investment Amount of investment Rs.50,000 Rs.1,00,000 Rs.50,000 Net Asset Value (NAV) at entry date Rs Rs.10 Rs.10 Dividend received up to Rs.950 Rs.1,500 Rs. Nil NAV as at Rs Rs Rs.9.80 Required: What is the effective yield on schemes to Mr. A up to ? [Ans: %; 10%; -24%] Question-4A [Nov-2009-O] [M-6] [RTP-Nov ] [SP] Mr. Sinha has invested in three Mutual fund schemes as per details below: SCHEME X SCHEME Y SCHEME Z DATE OF INVESTMENT AMOUNT OF INVESTMENT Rs Rs Rs NET ASSET VALUE AT ENTRY DATE Rs Rs Rs DIVIDEND RECEIVED UPTO Rs.9,500 Rs.1,500 NIL NAV AS AT Rs Rs Rs.9.80 You are required to calculate the effective yield on per annum basis in respect of each of the three schemes to Mr. Sinha upto Question-4B [May-2013] [M-10] Question-4C [May-2015] [M-4] Calculation of return from MF if Income is reinvested (a) NAV must be given or calculated as of the date of reinvestment of dividend (b) No of Units to be purchased from reinvestment = Dividend Received/NAV as on date of reinvestment (c) In this case Initial no of units and closing no of units will be different (d) % Return on units of MF = (Closing Investment Opening Investment)/Opening Investment Closing Investment = No of units at Closing*NAV at Closing Question-5 [May-2006] [M-6] [RTP-May ] [RTP-May ] [Same in ICWA- Ch-2-14] A Mutual Fund having 300 units have shown its NAV of Rs.8.75 and Rs.9.45 at the beginning and at the end of the year respectively. The Mutual Fund has given two options: (a) Pay Rs.0.75 per unit as dividend and Rs.0.60 per unit as a capital gain. Or [Ans: 23.43%] (b) These distributions are to be reinvested at an average NAV of Rs per unit. [Ans: %] (c) What difference it would make in terms of return available and which option is preferable?

10 Chap 9 MUTUAL FUND 9B.5 Question-5A [Nov-2011] [M-5] [SP] Orange purchased 200 units of Oxygen Mutual Fund at Rs.45 per unit on In 2010, he received Rs.1 as dividend per unit and a capital gains distribution of Rs.2 per unit. (i) Calculate the return for the period of one year assuming that the NAV as on was Rs.48 per unit. (ii) Calculate the return for the period of one year assuming that the NAV as on was Rs.48 per unit and all dividends and capital gains distributions have been reinvested at an average price of Rs.46 per unit. Ignore taxation. Question-5B [May-2011] [M-8] Calculation of NAV on the basis of Return (a) If NAV 0 and Return is given, then NAV 1 = Return*NAV 0 /100 + NAV 0 Dividend Capital Gain Question-6 [Nov-2012] [M-5] The following information is extracted from steady Mutual Fund s Scheme: Assets Value at the beginning of the month Rs Annualised Return 15% Distribution made in the nature of Income and Capital Gain (Per Unit) You are required to: (a) Calculate the month end NAV of the mutual fund scheme. (b) Provide a brief comment on the month end NAV Rs.0.50 and Rs.0.32 Question-7 [Nov-2015] [M-8] Mr X on , during the initial offer of some Mutual Fund invested in 10,000 units having face value of Rs.10 for each unit. On the dividend operated by the MF was 10% and Mr X found that his holding period return was 115%. On , 20% dividend was given. On Mr X redeemed all his balance of 11, units when his holding period return was %. What are the NAV as on , and ? Question-7A [Nov-2006] [M-6] [ICWA-Ch-2-6] [SP] Mr X on , during the initial offer of some Mutual Fund invested in 10,000 units having face value of Rs.10 for each unit. On the dividend operated by the MF was 10% and Mr X found that his annualized yield was %. On , 20% dividend was given. On Mr X redeemed all his balance of 11, units when his annualized yield was 73.52%. What are the NAV as on , and ? Question-7B [Nov-2013] [M-5] 9.3 Costs incurred by Mutual Fund ICAI RTP ICWA ICSI N-03 M-04 M M-09 M-02 (a) There are 2 type of expenses incurred by Mutual Fund (i) Initial Expenses attributable to establishing a scheme under a Fund known as issue exp

11 Chap 9 MUTUAL FUND 9B.6 (ii) Ongoing recurring expenses (Management Expense Ratio) which is made up of (a) Cost of employing technically sound investment analysts (b) Administrative Costs (c) Advertisement Costs involving promotion and maintenance of Scheme funds. The Management Expense Ratio is measured as a % of average value of assets during the relevant period Calculation of Issue Exp, Recurring Exp, Actual return of MF (a) For Calculating Issue Exp or Recurring Exp, Following equation would be used. Indifferent Point between Own Investment and Investment by MF Return from own investment by Investor = Effective return provided by MF to Investor Effective return provided by MF to Investor = (Return earned by Mutual Fund Recurring Exp p.a.)*(1-issue Cost) Question-8 [Same in ICWA-Ch-2-13] You can earn a return of 14% by investing in equity shares on your own. You are considering a recently announced equity mutual fund scheme where the initial issue expenses are 6%. You believe that the mutual fund scheme will earn 16.5%. At what recurring expenses (in percentage terms) will you be indifferent between investing on your Own and investing through the mutual fund? [Ans: 1.617%] Question-8A [Nov-2003] [M-4] [RTP-May ] [Same in ICWA-Ch-2-10] Mr. A can earn a return of 16% by investing in equity shares on his own. Now he is considering a recently announced equity based mutual fund scheme in which initial expenses are 5.5% and annual recurring expenses are 1.5%. How much should the mutual fund earn to provide Mr. A return of 16%. [Ans: 18.43%] Question-8B [May-2009] [M-2] [N] Mr. X earns 10% on his investments in equity shares. He is considering a recently floated scheme of a Mutual Fund where the initial expenses are 6% and annual recurring expensed are expected to be 2%. How much the Mutual Fund scheme should earn to provide a return of 10% to Mr. X? 9.4 Entry fees and Exit fees in MF ICAI RTP ICWA ICSI (a) Entry Fees is charged to investor at the time of Purchase of Units of MF by investor (b) Exist fees is charged to investor at the time of sale of units of MF by investor (c) Purchase Price of units of MF for Investor = NAV as on date of purchase + Entry Fees (d) Sale Price of units of MF for Investor = NAV as on date of purchase - Exit Fees Question-9 The NAV of ABC Fund on January 6, 2002 was Rs If the fund charged 1.75% as entry load and 0.50% as exit load, what are the sale and repurchase prices to the investor?

12 Chap 9 MUTUAL FUND 9B.7 Question-9A [SP] The NAV of MF is Rs.15. The entry load is 2.25%. What amount of investment is required to purchase 100 units? Question-10 The NAV of an equity fund was The fund charged 2.25% as entry load and 0.25% as exit load. If an investor wants to invest Rs into this fund, what is the number of units he will get? [Ans: Units] Calculation of Return from units of MF in case of Entry or Exit Fees (a) Return = (Sale Purchase)/Purchase Question-11 You are considering investing in one of following 2 NFOs of 2 Mutual Funds, issue price per unit = Rs.10. A: Entry load 2.25%. No exit load B: Entry load 0.90%, Exit load as per the following table: Redemption on before the expiry of 1 year 0.50% Redemption after expiry of 1 year but before the expiry of 2 years 0.40% Redemption on or after expiry of 2 years but before the expiry of 3 years 0.30% Redemption on or after expiry of 3 years but before the expiry of 4 years 0.20% Redemption on or after expiry of 4 years 0.10% In which mutual fund will you invest if your time horizon of the investment is 1 year, 4 years? Assume the rate of ROI of the mutual fund will be 12% p.a. (Net of expenses) Question-12 [SP] Mr. A invest Rs.1000 in MF, the entry load fees is 2.25%. He got 50 units. What is the NAV at the time of investment? His investment time is 6 months. MF charges exit load of 0.50% if the redemption is done on or after the 6 months but before 1 year. What is the annualized return to the investor if he gets his investment redeemed on expiry of 6 months assuming that NAV at that time is Rs.25 per unit. 9.5 Calculation of NAV after calculating Value of Assets of MF ICAI RTP ICWA ICSI N-09 M-08 N-11 N-09 M-08 N M-10 M-06 N M-11 M-05 M-12 M-08 M-13 M-08 M-14 M-08 Asset Values : Valuation Rule Nature of Assets Liquid Assets e.g. cash held All listed and traded securities (other than those held as not for sale) Debentures and Bonds Valuation Rule As per books Last closing price quoted in a stock exchange immediately before the valuation day. In case security is traded in more than one exchange, the price quoted in a exchange where the security is mostly traded. Closing traded price or we can calculate Value of Debenture

13 Chap 9 MUTUAL FUND 9B.8 or BOND on YTM basis as we have learnt in Chapter Bond Valuation. Valuation of Unlisted Equity Shares = EPS of Company whose value is to be calculated*pe ratio of Comparable Company after adjustment for risk For example, equity share of X Ltd are non traded security. Its EPS is Rs.20. EP ratio of Y s Ltd equity shares (Which is comparable traded securities) is 10%. For the purpose of valuation of equity shares EP ratio should be taken more than 10% [because of lower liquidity of equity shares of X Ltd] say 12.5%. The value of equity shares of X Ltd may be taken as 20/0.125 = 160 Fixed Income Securities [Debenture, Bond] Issue price + Intt Accrued for the period from date of issue to date of valuation Value of Bond or Debenture may also be calculated as we have learnt in Chapter Bond Valuation Question-13 A mutual fund holds a 91 day treasury bill, issued at Rs Redeeming at Rs.100. If there are 34 days to maturity, what is the value of the instrument on its books? [Ans: Rs ] Question-13A [SP] A mutual fund holds a 90 days commercial paper. issued at Rs , redeeming at Rs days later. What is the value of the instrument on its books? [Ans: Rs.96.36] Question-14 A mutual fund scheme has 1 m units outstanding. As on , its assets and liabilities regarding the scheme are as follows: (a) Market value of listed and traded shares and debentures Rs.50m (b) Unlisted shares: equity shares of Rs.10 each of ABC Ltd. EPS of ABC is Rs.10. PE ratio of a similar listed and traded company (say XYZ) is 12. (c) Listed but not traded debentures: % debentures of ABC Co Ltd, face value Rs.1000, YTM of similar listed and traded debenture (say XYZ) is 9.5% (d) Cash and cash equivalent Rs.3m (e) Outstanding expenses Rs.0.10m Question-15 [Nov-2009] [M-8] [ICWA-Ch-2-3] A mutual fund made an issue of 10,00,000 units of Rs.10 each on January 01, No entry load was charged. It made the following investments. Rs. 50,000 Equity shares of Rs. 100 Rs ,00,000 7% Government Securities 8,00,000 9% Debentures (Unlisted) 5,00,000 10% Debentures (Listed) 5,00,000 98, During the year, dividends of Rs.12,00,000 were received on equity shares, Interest on all types of debt securities was received as and when due, At the end of the year equity shares and 10% debentures are quoted at Rs.175 and Rs.90 respectively. Other investments are at par. Find out the Net Asset Value (NAV) per unit given that operating expenses paid during the year amounted to Rs.5,00,000, Also find out the NAV, if the Mutual fund had distributed a dividend of Re per unit during the year to the unit holders.

14 Chap 9 MUTUAL FUND 9B.9 Question-16 [May-2010] [M-6] Based on the following information, determine the NAV of a regular income scheme on per unit basis: Rs. 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 Other fixed interest securities at cost 4.5 Dividend accrued 0.8 Amount payable in shares 6.32 Expenditure accrued 0.75 Number of units (Rs.10 face value) 20 lacs Current realizable value of fixed income securities of face value of Rs 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 are at cost. Question-16A [May-2014] [M-8] [SP] Based on the following data, estimate the net assets value (NPV) on per unit basis of a Regular Income Scheme of a Mutual Fund: Rs.(in lakhs) Listing Equity shares at cost (ex-dividend) Cash in hand 2.76 Bond & Debentures at cost of these, Bond not listed & Not quoted Other fixed interest securities at cost 9.75 Dividend accrued 1.95 Amount payable on shares Expenditure accrued 1.76 Current realizable value of fixed income securities of the face value of Rs. 100 is Rs Number of units (Rs.10 face value each) : All the listed equity shares were purchased at a time when market portfolio index was 12,500. On NAV date, the market portfolio index is 19,975. There has been a diminution of 15% in unlisted bonds and debenture valuation. Listed bonds and debentures carry a market value of Rs. 7.5 lakhs, on NAV date. Operating expenses paid during the year amounted to Rs lakhs. Question-16B [SM-1] Question-17 [May-2011] [Accounts] [M-5] Calculate the NAV of a mutual fund from the following information outstanding units 1 crore of Rs.10 each Rs.10 crores [NAV Rs.16 crores] Other information (i) 20 lakhs units were sold during the year at Rs.24 per unit

15 Chap 9 MUTUAL FUND 9B.10 (ii) No additional investments were made during the year and as at the year end 50% of the investments held at the beginning of the year were quoted at 80% of book value. (iii) 10% of the investments have declined permanently 10% below cost. (iv) At the year end outstanding liabilities were Rs.1 Crore. (v) Remaining investment were quoted at Rs.13 crores. Question-17A [Nov-2009] [M-8] [N] [Accounts] A Mutual fund raised 100 lakh on April 1, 2009 by issue of 10 lakhs units of Rs. 10 per unit. The fund invested in several capital market instruments to build a portfolio of Rs. 90 lakhs. The initial expenses amounted to Rs. 7 lakhs. During April, 2009, the fund sold certain securities of cost Rs.38 lakhs for Rs.40 lakhs and purchased certain other securities for Rs lakhs. The fund management expenses for the month amounted to Rs lakhs of which Rs lakhs was in arrears. The dividend earned was Rs.1.20 lakhs. 75% of the realized earning were distributed. The market value of the portfolio on was Rs lakh. Determine NAV per unit. Question-18 [May-2013] [M-8] [RTP-Nov ] On ABC Mutual Fund issued 20 lakh units at Rs.10 per unit. Relevant initial expenses involved were Rs.12 lakhs. It invested the fund so raised in capital market instruments to build a portfolio of Rs.185 lakhs. During the month of April 2012 it disposed off some of the instruments costing Rs.60 lakhs for Rs.63 lakhs and used the proceeds in purchasing securities for Rs.56 lakhs. Fund management expenses for the month of April 2012 were Rs.8 lakhs of which 10% was in arrears. In April 2012 the fund earned dividends amounting to Rs.2 lakhs and it distributed 80% of the realized earnings. On the market value of the portfolio was Rs.198 lakhs. Mr. Akash, an investor, subscribed to 100 units on and disposed off the same at closing NAV on What was his annual rate of earning? Question-19 [May-2012] [M-8] [RTP-Nov ] Mutual Fund Co. has the following assets under it on the close of business as on: Company No of Shares Market price per shares Market price per shares L Ltd Rs.20 Rs M Ltd Rs Rs N Ltd Rs Rs P Ltd Rs Rs Total no if units (i) Calculate Net Assets Value (NAV) of the Fund. (ii) Following information is given: Assuming one Mr. A, submits a cheque of Rs.30,00,000 to the Mutual Fund and the Fund manager of this company purchases 8,000 shares of M Ltd; and the balance amount is held in Bank. In such case, what would be the position of the Fund? (iii) Find new NAV of the Fund as on 2nd February Question-19A [RTP-Nov-2011] [SP] On 1 st following assets and prices at 4.00 p.m. Shares No. of Shares Market Price Per Share (Rs.) A Ltd B Ltd C Ltd D Ltd E Ltd April 2009 Fair Return Mutual Fund has the No of Units fund = Please calculate:

16 Chap 9 MUTUAL FUND 9B.11 (a) NAV of the Fund. (b) Assuming Mr. X, a HNI, send a cheque of Rs.50,00,000 to the Fund and Fund manager purchases shares of C Ltd and the balance is held in bank. Then what will be position of fund. (c) Now suppose on 2 April 2009 at 4.00 p.m. the market price of shares is as follows: Shares Rs. A Ltd B Ltd C Ltd D Ltd E Ltd Then what will be new NAV. 9.6 Calculation of Premium/ Discount on NAV in compare to Market price of Units of MF ICAI RTP ICWA ICSI (a) In case of listed Units, MP of Units may be different from its NAV. (b) If MP>NAV, then Units are said at Premium over NAV (c) If MP<NAV, then Units are said at Discount under NAV (d) Calculation of Premium/ Discount on NAV = (MP-NAV)*100/NAV (e) If MP and Premium/Discount is given then, NAV can be calculated as follows NAV = MP/(1+Premium) or MP/(1-Discount) Question-20 A close ended MF is listed at BSE. Its market price is Rs.50 per unit. The assets under the management of the MF are worth Rs.480m and the liabilities are Rs.1m. The number of units outstanding are 10m. What is NAV of the unit of MF? What is premium or discount over NAV? Question-21 Mr A invested Rs.1000 in close ended MF. NAV at the time of investment was Rs.15 and it was being traded in the stock exchange at a premium of 1%. During the year the fund paid a dividend of Rs.2 per unit. The investor sold the investment in the stock exchange after receiving the dividend. His return is 20% p.a. Assume that at the time of sale in the stock exchange i.e six months after the date of investment, the units were being traded in the market at 2% discount. What was the NAV at the time of sale. 9.7 Calculation of Return of Various type of Scheme of MF ICAI RTP ICWA ICSI N-05 M-12 N-08-O M-08 N-10-O M-10

17 Chap 9 MUTUAL FUND 9B.12 Question-22 [Nov-2005] [M-12] [ICWA-CH-2-27, 28] Sun Moon Mutual Fund (Approved Mutual Fund) sponsored open-ended equity oriented scheme "Chanakya Opportunity Fund". There were three plans viz. 'A'-Dividend Re-investment Plan, 'B'-Bonus Plan & 'C'-Growth Plan. At the time of Initial Public Offer on , Mr. Anand, Mr. Bacchan & Mrs. Charu, three investors invested Rs.1,00,000 each & chosen 'B', 'C & 'A' Plan respectively. The History of the Fund is as follows: Date Dividend % Bonus Ratio Net Asset Value per Unit Plan A Plan B Plan C : : : On 31 st July all three investors redeemed all the balance units. Calculate annual rate of return to each of the investors. Consider: (a) Long-term Capital Gain is exempt from Income tax. (b) Short-term Capital Gain is subject to 10% Income tax. (c) Security Transaction Tax 0.2 percent only on sale/redemption of units. (d) Ignore Education Cess. Question-22A [Nov-2008-O] [M-8] [SP] T Ltd. has promoted an open-ended equity oriented scheme in 1999 with two plans Dividend Reinvestment Plan (Plan-A) and a Bonus Plan (Plan-B); the face value of the units was Rs.10 each X and Y invested Rs.5,00,000 each on respectively in Plan-A and Plan-B, when the NAV was Rs for Plan A and Rs for Plan- B. X and Y both redeemed their units on Particulars of dividend and bonus declared on the units over the period were as follows: Date Dividend Bonus NAV Ratio Plan A Plan B : : : : Consider: (a) Long-term Capital Gain is exempt from Income tax. (b) Short-term Capital Gain is subject to 10% Income tax. (c) Security Transaction Tax 0.2 percent only on sale/redemption of units. Question-22B [Nov-2010-O] [M-10]

18 Chap 9 MUTUAL FUND 9B DIVIDEND EQUALISATION ICAI RTP ICWA ICSI M-09 M-06 N-15 M-08 New investors are not entitled to any share of the income of a mutual fund scheme which arose before they bought their units. However, at the end of each distribution period the fund management allocates the same amount from the income of the fund to each unit. To compensate for this an equalisation payment is added to the cost of new units. This is the amount of income that has arisen up to the date of purchase of the unit. Because these payments are included in the amount available for distribution they are effectively repaid to the purchaser. The purchaser's dividend voucher at the end of the first distribution period should show the amount of the returned equalisation payment. In the case of an open ended scheme, when units are sold an appropriate part of the sale proceeds should be credited to an Equalisation Account and when units are repurchased an appropriate amount should be debited to Equalisation Account. The net balance on this account should be credited or debited to the Revenue Account. The balance on the Equalisation Account debited or credited to the Revenue Account should not decease or increase the net income of the fund but is only an adjustment to the distributable surplus. It should, therefore, be reflected in the Revenue Account only after the net income of the fund is determined. Question-23 [SM] On April 1, 2009 a mutual fund scheme had 9 lakh units of face value Rs. 10 outstanding. The scheme earned Rs. Rs. 81 lakh in , out of which Rs. 45 lakh was earned in first half year. 1 lakh units were sold on at NAV Rs.60. Show important accounting entries for sale of units and distribution of dividend at the end of Question-23A [May-2009] [M-6] [N] [Accounts] On , a mutual fund scheme had 18 lakhs unit of face value of Rs.10 each was outstanding. The scheme earned Rs.162 lakhs in , out of which Rs.90 lakhs was earned in the first half of the year. On , 2 lakhs units were sold at a NAV of Rs.70. Pass journal entries for sale of units and distribution of divided at the end of Question-24 [Nov-2015] [M-8] On 1st April, an open ended Scheme of Mutual Fund had 300 Lakh units outstanding with Net Assets Value (NAV) of Rs At the end of April, it issued 6 Lakh units at Opening NAV plus 2% load, adjusted for Dividend Equalization. At the end of May, 3 Lakh units were repurchased at Opening NAV less 2% Exit Load adjusted for Dividend Equalization. At the end of June, 70% of its available Income was distributed. In respect of April June Quarter, the following additional information are available: Rs. in Lacs Portfolio Value Appreciation Income of April Income of May Income of June You are required to calculate 1. Income available for Distribution, 2. Issue Price at the end of April, 3. Repurchase Price at the end of May, and 4. Net Asset Value (NAV) as on 30th June.

19 Chap 9 MUTUAL FUND 9B Theory ICAI RTP ICWA ICSI M-03 M-06 N-15 N-03 M-06 M-04 M-04 N-04 M-06 N-05 M-08 M-07 M-04 N-08 M-04 M-09 M-05 M-10 M-04 N-10 M-04 N-11 M-04 N-13 M-04 N-14 M-04 M-15 M-04 Question-1 [May-2004] [M-4] [Nov-2004] [M-6] Explain briefly about net asset value (NAV) of a Mutual Fund Scheme. Solution Calculation of Net Asset Value of Units of Mutual Fund (a) This is the value per unit of a scheme on a particular day called the valuation day. It is the value of net assets of the fund. The investors' subscription is treated as the capital in the balance sheet of the fund and the investments on their behalf are treated as assets. The NAV is calculated for every scheme of the MF individually. (b) There are three aspects which need to be highlighted: (i) It is the net value of all assets less liabilities. NAV represents the market value of total assets of the Fund less total liabilities attributable to those assets. (ii) NAV changes daily. The value of assets and liabilities changes daily. (iii) NAV is computed as a value per unit of holding. (c) Calculation of NAV of units of Mutual Fund NAV per unit = (Net assets of the scheme)/ Number of units outstanding OR (Value of portfolio of the scheme + other assets of the scheme - Liabilities of the scheme) Number of units outstanding under the scheme Net assets of the scheme = Market value of traded investments + Estimated value of non traded listed securities + Estimated value of unlisted securities + Receivables + Accrued Income + Other Assets - Accrued Expenses - Payables - Other liabilities (d) NAV of M/F Scheme is published on a daily basis in the newspapers and electronic media and play an important role in investors' decision to enter or to exit.

20 Chap 9 MUTUAL FUND 9B.15 Question-2 [May-2009] [M-5] [May-2007] [M-4] Explain briefly the advantages of investing in mutual funds. Solution The advantages of investing in mutual funds are as under: 1. Professional Management Investors can avail of the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses performance and prospects of companies to select suitable investments. 2. Diversification Mutual funds invest in a number of companies across a broad cross section of industries and sectors. Investors achieve this diversification with far less money and risk they could do on their own. 3. Return potential Over a medium to long term, mutual funds have the potential to provide,a higher return as the investments are diversified.. 4. Low costs Mutual funds are a less expensive way to invest as compared with direct investment in the capital market. 5. Liquidity In open-ended schemes, investors get money promptly at NAV from the mutual fund itself. In close-ended schemes, investors- can sell units on a stock exchange at the prevailing market price or avail of direct repurchase at NAVrelated prices which some such schemes offer periodically. 6. Transparency Investors get regular information on the value of their investments. Question-3 [May-2010] [M-4] [Nov-2013] [M-4] [RTP-Nov-2015] Briefly explain what is an exchange traded fund Solution Exchange traded Funds(EFTs) were introduced in US in 1993 and came to india around ETF is a hybrid product that combines the features of an index fund and stock and hence, is also called index shares. These funds are listed on the stock exchanges and their prices are linked to the underlying index. The authorized participants act as markers for ETFs. ETF can be bought and sold like any other stock on exchange. In other words, they can be bought or sold any time during the market hours at prices that are expected to be closer to the NAV at the end of the day. NAV of an EFT is the value of the underlying component of the benchmark index by held by the EFT plus all accrued dividends less accrued management fees. There is no paper work involved for investing in an ETF. These can be bought like any other stock by just placing an order with a broker. Some other important features of ETF are as follows: (a) It gives an investor the benefits of investing in a commodity without physically purchasing the commodity like gold,silver, sugar etc. (b) It is launched by an asset managment company or other entity. (c) The investor doesnot need to physically store the commodity or bear the costs of upkeep which is part of the administrative costs of the fund. (d) An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net assets value, with the tradability feature of a closed end fund, which trades throughout the trading day at prices that may be more or less than its net assets value. Question-4 [May-2015] [M-4] [Nov-2010] [M-4] Distinguish between Open Ended and Close Ended Schemes Open Ended Scheme do not have maturity period. These schemes are available for subscription and repurchase on a continuous basis. Investor can conveniently buy and sell unit. The price is calculated and declared on daily basis. The calculated price is termed as NAV. The key feature of the scheme is liquidity. Close ended scheme has a stipulated maturity period normally 5 to 10 years. The scheme is open for subscription only during the specified period at the time of launce of the scheme. Investor can invest of at the time of initial issue and there after they can buy or sell from stock exchange where the scheme is listed. To provide an exit rout some close ended schemes give an option of selling bank (repurchase) on the basis of NAV. The NAV is generally declared on weekly basis. Question-5 [May-2003] [M-6] Write short notes on the role of Mutual Funds in the Financial Market. Solution Role of mutual funds in the financial market : (a) Mutual funds have opened new vistas to investors and imparted much needed liquidity to the system In this process, they have challenged the hitherto dominant role of the commercial banks n the financial market and national economy. (b) IN 997, the share of mutual funds in house-hold financial assets was over 5% in USA, 8% in Germany, 3% in Japan, 3% in Italy and about 5% in India. In India, there has been a steady increase in the share of mutual funds in house-

21 Chap 9 MUTUAL FUND 9B.16 hold savings since , i.e. after the entry of public sector mutual funds. The most significant growth during to was in respect of UTI. (c) According to Centre for Monitoring Indian Economy, "Mutual Funds" cornered 12% of the total market capitalization, the share of the UTI being 9.4% of the total market capitalization of Indian stock markets in (d) According to the flow of funds statistics published by the RBI, the share of banking sector in filling the resource gap of the corporate sector has declined from 54.42% in to 2.3% in , while of the other financial sector (including mutual funds) has increased from '39.9% to %. Question-6 [Nov-2003] [M-6] Explain how to establish a Mutual Fund. Solution: Establishment of a Mutual Fund: A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI) before it can collect funds from the public. All mutual finds are governed by the same set of regulations and are subject to monitoring and inspections by the SEBI. The Mutual Fund has to be established through the medium of a sponsor. A sponsor means any body corporate who, acting alone or in combination with another body corporate, establishes a mutual fund after completing the formalities prescribed in the SEBI s Mutual Fund Regulations. The sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions. The Mutual Fund has to be established as either a trustee company or a Trust, under the Indian Trust Act and the instrument of trust shall be in the form of a deed. The deed shall be executed by the sponsor in favour of the trustee named in the instrument of trust. The trust deed shall be duly registered under the provisions of the Indian Registration Act, The trust deed shall contain clauses specified in the Third Schedule of the Regulations. An Asset Management Company, who holds an approval from SEBI, is to be appointed to manage the affairs of the Mutual Fund and it should operate the schemes of such fund. The Asset Management Company is set up as a limited liability company, with a minimum net worth of Rs. 10 crores. The sponsor should contribute at least 40% to the networth of the Asset Management Company. The Trustee should hold the property of the Mutual Fund in trust for the benefit of the unit holders. SEBI regulations require that at least two-thirds of the directors of the trustee company or board of trustee must be independent, that is, they should not be associated with the sponsors. Also, 50 per cent of the directors of AMC must be independent Question-7 [Nov-2005] [M-8] What are the investors rights & obligations under the Mutual Fund Regulations? Explain different methods for evaluating the performance of Mutual Fund. Solution: Investors right and obligations under the Mutual Fund Regulations: Important aspect of the mutual fund regulations and operations id the investors protection and disclosure norms. It serves the very purpose of mutual fund guidelines. Due to these norms it is very necessary for the investor to remain vigilant. Investor should continuously evaluate the performance of mutual fund Following are the steps taken for improvement and compliance of standards of mutual fund: All mutual funds should disclose full portfolio of their schemes in the annual report within one month of the close of each financial year. Mutual fund should either send it to each unit holder or publish it by way of an advertisement in one English daily and one in regional language. The Asset Management Company must prepare a compliance manual and design internal audit systems including audit committee of the launch if any schemes. The trustees are also required to constitute an audit committee of the trustees, which will review the internal audit systems and the recommendation of the internal and statutory audit reports and ensure their rectification. The AMC shall constitute an in-house valuation committee constituting of senior executives including personnel from accounts, fund management and compliance departments. The committee would on a regular basis review the system practice of valuation of securities. The trustee shall review all transactions of the mutual fund with association on a regular basis. Investors Rights: Unit holder have propionate right in the beneficial ownership of the schemes assets as well as any dividend or income declared under the scheme. Receive dividend warrant with in 42 days. AMC can be terminated by 75% of the unit holders. Right to inspect major documents i.e. material contracts, Memorandum of Association and Articles of Association (M.A. & A.A) of the AMC, Offer document etc. 75% of the unit holders have the right to approve any changes in the close-ended scheme. Every unit holder have right to receive copy of the annual statement. Legal limitations to investors rights: Unit holders cannot sue the trust but they can initiate proceedings against the trustees, if they feel that they are being cheated. Except in certain circumstances AMC cannot assure a specified level of return to the investors. AMC cannot be sued to make good any shortfall in such schemes. Investors Obligations: An investor should carefully study the risk factors and other information provided in the offer document. Failure to study will not entitle him for any rights thereafter.