MFS AND OTHER INVESTMENT
COMPANIES
Investment Companies
• Pool funds of individual investors and invest in a wide range of
securities or other assets
• Services provided:
• Administration & record keeping
• Diversification & divisibility
• Professional management
• Reduced transaction costs
Net Asset Value
Investors buy shares in investment companies, and ownership is
proportionate to the number of shares purchased. Value of each
share is NAV.
NAV = Market Value of Assets - Liabilities
Shares Outstanding
Types of Investment Companies
• REITs
• Hedge Funds
• Managed Investment Companies
Unit Trusts
• Pools of money invested in a portfolio that is fixed for the life of the fun
• A sponsor (brokerage firm) buys a portfolio of securities that are deposited into
a trust
• It then sells the public shares, or units (redeemable trust certificates)
• Little active management because, fixed for life-> unmanaged
• Low risk
• Sponsors earn profit by shares on premium to the public
Unit Trusts
• Premium Calculation:
A firm has purchased assets worth Rs. 5,00,000. It sells 5000 shares at Rs.103
per share. What is the premium?
Real Estate Investment Trusts (REITs)
• Invest in real estate or on loans secured by real estate
• Are bought and sold in the secondary market
• They raise capital by:
• Issuing Shares
• Borrowing from banks
Managed Investments Companies
• Mutual Funds
Mutual Funds
• A mutual fund is the trust that pools the savings of a number of investors
who share a common financial goal
• Anybody with an investible surplus of as little as a few hundred rupees can
invest in Mutual Funds.
• The money thus collected is then invested by the fund manager in different
types of securities. These could range from shares to debenture to money
market instruments, depending upon the scheme’s stated objective.
• It gives the market returns and not assured returns: In the long term market
returns have the potential to perform better than other assured return
products.
How does a MF work?
Types of Funds MF
By
By Structure Others
Investment
Growth Tax Savings
Open End
Scheme Scheme
Income Industry
Closed End
Scheme Specifics
Balance
Interval Index Funds
Scheme
Money Sectoral
Market Funds
ETFs
MFs: By Structure
• Open End
• Funds which sell shares on a continuous basis, purchased from, and
redeemed by, the fund (or through a broker for the fund);
• Closed End
• Funds which sell a fixed number of shares at one time (in an initial public
offering) that later trade on a secondary market or through brokers like
stocks; their prices can differ from NAV
• Interval Funds
• Combine the features of open-ended and close-ended schemes. They are
open for sale or redemption during pre-determined intervals at NAV related
prices
MF: By Investment
• Growth Funds
• Provide capital appreciation over medium to long- term. Such schemes
normally invest a majority of their corpus in equities
• Income Funds
• Invest in fixed income securities such as bonds, corporate debentures and
Government securities. Income Funds are ideal for capital stability and
regular income
• Balanced Funds
• Periodically distribute a part of their earning and invest both in equities and
fixed income securities in the proportion indicated in their offer documents
MF: By Investment
• Money Market funds
• These schemes generally invest in safer short-term instruments such as
treasury bills, certificates of deposit etc.
• Ideal for corporate and individual investors as a means to park their surplus
funds for short periods
MF: Others
• Tax Saving
• These schemes offer tax rebates to the investors under specific provisions
of the Indian Income Tax laws as the Government offers tax incentives for
investment in specified avenues
• Industry Specific
• Industry Specific Schemes invest only in the industries specified in the offer
document
• Index Funds
• Index Funds attempt to replicate the performance of a particular index such
as the BSE Sensex or the NSE
MF: Others
• Sectoral Funds
• Sectoral Funds are those, which invest exclusively in a specified industry or
a group of industries or various segments such as Blue Chip Group shares
or initial public offerings.
• ETFs
• Also track indexes, like Index Funds
ETFs
• Like mutual funds, ETFs are investment companies that offer investors a way
to pool their money in a fund that makes investments in stocks, bonds, other
assets or some combination of these investments and, in return, to receive an
interest in that investment pool
• Unlike MFs, which can be bought or sold only at the end of the day when NAV
is calculated, ETF shares are traded throughout the day on national stock
exchanges and at market prices that may or may not be the same as the NAV
of the shares
Types of Funds
• There are three basic types of mutual funds—stock (also called equity), bond,
and money market
Why invest in a Mutual Fund?
• Professional Management
• Where to invest?
• Diversification
• Funds of many investors are pooled and used to purchase a variety of
investments
• Variety
• Various investment options
• Low Cost
What are the fees?
• MFs can be purchased through a:
• Front-end load: An investor pays a fee upfront (usually, a percentage of the
total investment
• Back-end load: An investor doesn't pay an initial fee, but they are locked into
the fund family for a predetermined period of time (outlined in the prospectus).
If the investor holds the fund to "maturity"of the "contract," they will never pay
a fee. But, if they choose to redeem early, they will have to pay a redemption
fee, which decreases on a percentage basis every year the fund is held
MFs Returns
• Rate of return is measured as the increase or decrease in NAV plus income
distribution, such as dividends or distributions of capital gains expressed as a
fraction of NAV at the beginning of the investment.
• Rate or return= NAV1- NAV0 + Income and capital gain distributions
NAV0
MFs Returns
• A fund has an initial NAV of Rs. 20 at the start of the month, makes income
distributions of Rs. 0.15 and capital gain distributions of Rs. 0.5. The NAV at
the end of the month is Rs. 20.10. The monthly rate of return is?
