Introduction to

Mutual Funds
By:
Dr Lalit Goyal
 Flow of Presentation
 What is a Mutual Fund ?  How to invest in Mutual Funds?
 Structure of Mutual Fund  Centralized KYC
 What is an Asset Management  Mutual Fund investment procedure
Company (AMC)?
 Investment Modes in Mutual Funds
 How does a Mutual Fund Work?
 Mutual Funds
 Classification of Mutual Funds
 Plans – Growth vs Dividend Options
 Based on Structure
 How to check information about the
 Based on Investment Objective Mutual Funds (Offer Document)?
 Investment Portfolio  Risk-o-Meter
 Risk vs Return
 Categorization of Mutual Funds

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What is a Mutual Fund (MF)?

Common pool of funds contributed by investors and

invested in accordance to the objectives.

Investments are held in a trust of which

the
investors alone are the joint beneficial owners.

Trustees oversee the management by investment

manager.

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Structure of Mutual Fund

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 What is an Asset Management Company (AMC)?

• Investment manager of the mutual fund.

• Appointed by the trustees, with SEBI approval.

• Trustees and AMC enter into an investment management agreement.

• Required to invest seed capital of 1% of amount raised subject to a maximum of Rs.50 lakh in all
open-ended schemes.

• Should have a net worth of at least Rs.50 crore at all times.

• At least 50% of members of the board of an AMC have to be independent.

• AMC of one mutual fund cannot be an AMC or trustee of another fund.

• AMCs cannot engage in any business other than that of financial advisory and investment
management

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How does a Mutual Fund Work?

• Pool of
investors money.
• Invested according
to pre-specified
investment objectives.
• Benefits accrue to those
that contribute to this
pool.
• There is thus mutuality in
the contribution and the
benefit.
• Hence the name
‘mutual’ fund.

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 Classification of Mutual Funds

Classification of Mutual Funds

Based on Based on Based on

Investment Investment
Structure
Objective Style

Open
Debt Passive
Ended
Funds Funds
Funds
Closed
Equity Active Funds
Ended
Funds
Funds

Interval Hybrid
Funds Funds
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 Classification - Based on Structure

• No fixed maturity date.

Open Ended • Accept continuous sale and re-purchase requests.
•
Funds •
Transactions are NAV-based.
Unit capital is not fixed.

• Run for a specific period.

Closed • Offered in an NFO but are closed for
Ended Funds purchases
further after NFO.
• Unit capital is kept constant.

Interval • Variant of closed-ended funds.

• Becomes open-ended at specific intervals.
Funds • Have to be mandatorily listed.

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Classification - Based on Investment Objective

Debt • Invest in short and long term debt instruments.

• Aim to provide regular income.
Funds
Equity • Invest in equity securities.
• Aim to provide growth and capital appreciation over
Funds long term.

Hybrid • Invest in a combination of equity and debt securities.

• Proportion of equity and debt may vary.

Funds
• Aim to provide for both income and
appreciation.
capital

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 Classification - Based on Investment Style

Passive
• Replicate a market index.
• Invest in same securities and in same proportion as that of
index.
• No active selection of any stock / sector.

Funds • Expenses are lower.

• Portfolio is modified every time index composition changes.

Active
• Invests in securities and sectors that may offer a better return than
the index.
• Actively manage the allocation to market securities and cash.
• May perform better or worse than the market index.

Funds • Incur a higher cost than passive funds.

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 Categorization of Mutual Fund Schemes
 Categorization of open-end mutual funds:
- To ensure uniformity in characteristics of similar type of schemes launched
by different mutual funds.
- Helps investors to evaluate different options available before making
informed decision to invest.
Hybrid
Schemes

Debt
Scheme Solution oriented
s Schemes

Categorization of
Equity
Scheme Mutual Fund Other
Scheme
s Schemes s

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 How to invest in Mutual Funds?

Via Physical Mutual Via Online Mode

Fund Application (Website of Mutual
Form Fund)

Via AMFI Registered

Via Mobile App of Mutual Fund
Mutual Fund Distributor (using
physical form/ online/
mobile app)

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 Centralized KYC (C-KYC) in Securities Market
 KYC registration is centralized through KYC
Registration
Agencies (KRAs) registered with SEBI.
 Each investor to undergo KYC process only once in securities
market and details would be shared with other intermediaries by the
KRAs.
 Standard Account Opening form (AOF) has 2 parts:
- Part I : Basic and uniform KYC details of the investor
- Part II : Additional KYC information as may be
sought
separately by the Mutual Fund

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 Mutual Funds investment procedure

Indicate whether you are a First Time Investor/ Existing Investor.

Visit official website of KRA and check whether you are KYC compliant or not.
You must submit this KYC status.

Provide your details like name, address, etc.

Submit Bank account details and copy of “Cancelled Cheque”.

Once documents are accepted by Mutual Fund Company, you may start
making investment.

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 Investment Modes in Mutual Funds

Lump-sum • One time investment.

• Usually, large sum of money is invested in one go.
Investment • Investor faces risk of volatility in markets.

Systematic •
•
Staggered Investment.
Period of commitment - 6 months, 1 / 3 / 5 years.
Investment •
•
Specific intervals - monthly, quarterly, half-yearly.
Made on specific dates e.g. 1st, 5th, 10th, 15th of
Plan (SIP) every month.

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 Investment Modes in Mutual Funds

Direct Mutual Fund Regular Mutual Fund

• Directly offered by fund house. • Bought through
• No involvement of third party an intermediary.
agents – brokers or distributors. • Intermediaries can be brokers,
• No commissions and advisors or distributors.
brokerage. • Commissions and
• Have low Expense brokerage
ratio paid.
(because of no commissions). • High Expense ratio as
• Have high NAV. there
• Return is higher due to a lower are commissions to pay.
expense ratio • Low NAV.
• Return is lower due to a higher
expense ratio
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 Mutual Fund Plans – Growth vs Dividend
Options
• Gains made in portfolio are retained and reflected in NAV.
Growth • Realized profit/loss is treated as capital gains or loss.
Option • No increase or decrease in number of units, except if units are
purchased or sold, by the investor.

• Fund declares dividend from realized profits.

Dividend • Amount and frequency varies and depends upon distributable
Payout surplus.
Option • NAV falls after dividend payout to the extent of dividend paid.

• Dividend is re-invested in same scheme by buying additional units

Dividend at ex-dividend NAV.
Reinvestment • Number of units standing to the credit of the
Option increases
investor, each time a dividend is declared, and reinvested
back into the scheme.

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 How to check information about
the Mutual Funds (Offer Document)?

Statement of • Contains generic and statutory information

additional of
mutual fund.
information • Contains financial information of mutual fund.
• Lays down rights of investor.
(SAI) • Other additional information.

• Scheme type (open or closed end).

Scheme • Investment objective.
•
information •
Asset allocation.
Investment strategies.
document • Terms with regard to liquidity.
•
(SID) •
Fees and expenses.
Other information relating to the scheme.

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 Risk-o-Meter and its importance

Six levels of risk for mutual Importance of Risk-o-meter :

fund schemes:
- Helps align risk that a fund carries with
i. Low Risk the risk profile of the investor.
ii. Low to Moderate Risk
iii.Moderate Risk - Equity as asset class: Volatile: High risk
iv. Moderately High Risk - Debt as asset class: Stable: Low risk
v. High Risk and - Hybrid: Moderate: Depends
vi. Very High Risk allocation
on and concentration
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Thank You

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