What are Mutual Funds?

Transcription

1 What are Mutual Funds?

2 Concept For your best friend Shiv s birthday, you want to buy the following things for him Rs.400 Rs.30 Rs.100 Rs.500 You need approximately Rs.1000 to buy all the things but you have only Rs.200 You are not sure what gift to buy You do not want to compromise on the quality of the gift nor do you want to drop out any of the things WHAT WOULD YOU DO???

3 Concept You are not the only one who is facing this dilemma there are 4 common friends of Shiv and you who are facing the same situation One of the 4 friends suggest that if each one contributes his share of Rs.200, we will have Rs.1000 with which we can together buy all the things! You all collectively chose the bouquet, card, gift and cake Shiv is very happy to receive the gift. The same concept works in a mutual fund!

4 Concept Investing directly Investing through a fund You need more money if you want to buy multiple securities You should have the expertise to chose the right security Your portfolio might be limited to shares of 4 or 5 companies You need to give a lot of time to monitor your investments and keep a track of the market You get an exposure to an entire portfolio by pooling your money into the fund even with limited resources A fund manager who has en expert manages the portfolio Diversification across various sectors mitigation of risk The fund manager takes care of churning of the portfolio

5 How a fund works? Investors Passed back to.. Pool their money with.. Returns Fund Manager Generate.. Invest in.. Securities

6 Concept of Unit? What is a UNIT? When the investors invest money in the mutual fund, they are issued units No. of units allotted = Amount invested / NAV Units are like the shares of the fund As the value of investment grows, the price of every unit also grows. This is indicated by NAV (Net Asset Value) If you invest Rs.10,000 and the NAV is Rs.10; you get 1000 units

7 Concept of NAV NAV Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date NAV = (Total Assets Total Liabilities) / Total no. of units In a simple language NAV is nothing but the price of 1 unit at the end of that day. NAV of a fund is declared daily (on all working days)

8 Let us do some calculation A fund has a Total Asset of 10 crore as on 1st June The liabilities are Rs.1Lac on that day; Total number of units are 10 Lac. Calculate the NAV. Ans: NAV = (10 crore 1 Lac) / 10 Lac = 99.9 On 1st Nov 2007 the Total Assets grow to 11 crore. Let us assume that the liabilities are Rs.1 lac. Calculate the NAV. Ans: NAV = (11 crore 1 Lac) / 10 Lac = If an investor had invested Rs on 1st june, what were the no. of units allotted to him? Ans: No. of units = / 99.9 = If he sells these units on 1st Nov, what would be their value? Ans: Value of units = * = 22,002 Profit of Rs.2,002

9 Classification of Mutual Funds Based on Investment Philosophy Based on Investor Participation Based on Investment Plan Equity Open Ended Growth Balanced Debt Liquid Closed Ended Income Dividend Reinvestment Systematic Investment Plan Systematic Withdrawal Plan

10 RISK MF Risk Return Matrix EQUITY FUND BALANCED FUND DEBT FUND LIQUID FUND RETURN

11 Advantages of a Mutual Fund Portfolio diversification Professional management Reduction / diversification of risk Convenient Administration Return potential Reduction of transaction costs Liquidity Transparency Convenience and flexibility Choice of schemes Tax benefits

12 Disadvantages of a Mutual Fund No control over costs No tailor-made portfolios, but family of schemes Managing a portfolio of funds Daily NAV pressure Corporate Money rather than retail

13 Tax Saving Mutual Funds Equity Linked Saving Schemes (ELSS) are Tax Saving Mutual Funds Features ELSS are equity funds with tax benefits offered u/s 80C Investments upto Rs.1,50,000 qualify for exemption Lock in period is 3 years Returns in ELSS depend on the market and fund performance hence returns are not assured and fluctuate widely, in line with the stock markets These funds are available round the year and can be taken as lump sum investments or through SIPs

14 Thank You