Way to Riches

Mutual Fund
 What is a Mutual Fund?
• A mutual fund is a pool of money managed by a professional
money manager.

• The objective and the risk level are outlined in a document

called a prospectus. The prospectus provides detailed
guidelines for the types of investments the manager can
purchase.

• A mutual fund is also known as an open-ended investment fund,

which means the fund sells units (of this pool on money) upon
request.
 What are the benefits of
purchasing a mutual fund?
1 Professional Management: The fund company hires talented
money managers who have many resources behind them
(including a team of people dedicated to researching, tracking,
determining trends, and doing thorough analysis), and who work
full time on your behalf.

2 Diversification: Lowers the risk because, regardless of the size

of your investment, each unit purchased is made up of many
different investments.

3 Liquidity: Mutual funds can be sold anytime, and easily

4 Flexibility: Mutual funds allow you to purchase as much or as

little as you want, and offer a variety of purchase plans.
 What are the fees?
Mutual funds can either be purchased through a:

1 Front-end load: An investor pays a fee upfront (usually, a

percentage of the total investment).

2 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.
 What types of funds can I buy?
Major Asset Classes:

1 Money Market Funds

2 Bond Funds

3 Balanced Funds

4 Dividend

5 Equity Funds

6 Specialty Funds
What is a Money Market Fund?
• This type of fund's main objective is to hold investment
instruments that are liquid and secure. This type of fund is
usually held on a short-term basis and invests in money market
securities. Examples: Treasury bills, banker's acceptances, and
short term notes.

• One thing an investor should be aware of is that these funds are

NOT guaranteed like a Fixed deposit, and hold NO fixed return,
but are of low risk.
 What is a Bond Fund?

• This type of fund's main objective is to provide a steady stream of

income, and holds bonds issued by either governments or
corporations.

• The risk level of this type of fund will be determined by the

guidelines in the prospectus, which will, in turn, determine what type
of "rating" and term (years to maturity) of bond the manager is
allowed to purchase.
 What is a Balanced Fund?
• This type of fund's main objective is to hold an optimal mix of
investments among cash, equities, and income-producing
securities.

• This type of fund usually has several managers who specialize

in a specific area.

• This type of investment is ideal for someone who wants a better

return than a fixed income, but also wants less risk than equity.
 What is an Equity Fund?
• This type of fund's main objective is to provide long-term growth
through equity/stock investments.

Different types of equity funds:

1 Diversified Equity Funds

2. Sector specific Funds
3. Index Funds
4. Middle Capitalization Funds
5. International Equity Funds
6. Others
 What is a Specialty Fund?

• This type of fund's main objective is to concentrate its holdings

in one particular sector, geographic region, or in one capital
market.
• Examples: telecommunications, health care, technology,
financial services, European markets or Japan.

* As you specialize, you minimize diversification, and that results in

increased risk.
 What are the three
different investment styles
for equity investing?
• Fund managers have different styles of investing. Their style
affects the type of stocks they will purchase, and the price they
are willing to pay. This, in turn, affects your future returns.

1 Value: A manager purchases stocks that offer value at a time

when the price of the stock is low, relative to the actual book
value. In other words, the company is selling for less than it is
worth.
* Note: This is the most conservative approach.
 What are the three
different investment styles
for equity investing?
2 Growth: A manager purchases stocks that are deemed to have
growth potential, which, in turn, could generate above average
returns in the future.
* Note: Growth investments are usually small- to medium-sized
companies, thereby increasing the risk exposure.
 What are the three
different investment styles
for equity investing?
3 Momentum/Sector rotation: A manager purchases sectors that
are, or that they think will soon be, "hot." The choices are
determined by the manager's anticipation of where the greatest
potential rests.
* Note: This is a high-risk way of investing.

Other investments with structures similar to a mutual fund

include clone funds, and segregated funds.
 GROWTH IN ASSETS UNDER MANAGEMENT

Growth of Mutual Funds In

India
MUTUAL FUNDS -
ORGANISATION
 Some facts for the growth of
mutual funds in India
• Huge growth in the last 6 years.
• Our saving rate is over 23%, highest in the world. Only channelizing these
savings in mutual funds sector is required.
• 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are
concentrating on the 'A' class cities. Soon they will find scope in the growing
cities.
• SEBI allowing the MF's to launch commodity mutual funds.
• Emphasis on better corporate governance.
• Introduction of Financial Planners who can provide need based advice
 Performance Measure
• The Treynor Measure
• The Sharpe Measure
• Jenson Model
• Fama Model
 The Treynor Measure
• Treynor’s Index (Ti) = (Ri - Rf)/Bi.

Where, Ri represents return on fund, Rf is risk free rate of

return and Bi is beta of the fund.
 The Sharpe Measure

• Sharpe Index (Si) = (Ri - Rf)/Si

Where, Si is standard deviation of the fund.
 Jenson Model

• Required return of a fund at a given level of risk (Bi) can be

calculated as:
Ri = Rf + Bi (Rm - Rf)

Where, Rm is average market return during the given period.

 Fama Model
• Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)

Where, Sm is standard deviation of market returns. The net

selectivity is then calculated by subtracting this required return
from the actual return of the fund.
 Use of Models
• Among the above performance measures, two models namely,
Treynor measure and Jenson model use systematic risk based
on the premise that the unsystematic risk is diversifiable. These
models are suitable for large investors like institutional investors
with high risk taking capacities as they do not face paucity of
funds and can invest in a number of options to dilute some risks.
For them, a portfolio can be spread across a number of stocks
and sectors.
• However, Sharpe measure and Fama model that consider
the entire risk associated with fund are suitable for small
investors, as the ordinary investor lacks the necessary skill and
resources to diversified.