MUTUAL FUNDS

Introduction
A mutual fund is a professionally managed type of collective investment Mutual funds have a fund manager who invests the money on behalf of the investors worldwide value of all mutual funds totals more than US 26 trillion investor needs to do research before investing which is cumbersome and time consuming

Structure Mutual Fund

3-tier structure
1. Sponsor (the First tier), who thinks of starting a mutual fund 2. Public Trust (the Second tier) as per the Indian Trusts Act, 1882 created by sponsor it is registered with SEBI after which this trust is known as the mutual fund 3. Asset Management Company (the Third tier) to manage investor's money

Roles Of The AMC

manage investors money on a day to day basis responsibility of preparing the OD Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks

ETFS
Exchange Traded Funds are mutual funds which investors buy/sell directly from the stock exchange. The AMC issues units to a few designated large participants. These participants are also known as Authorized Participants. Buying/Selling of ETFS is similar to buying/selling shares on the stock exchange. Prices are available real time and ETFS can be purchased from a stock broker. An important feature of ETFS is that there is a great reduction in cost. An ETFS has an expense ratio of around 0.75%.

GOLD ETFS(G-ETFS)
These are special types of ETFS which invests in gold and gold related securities. This investment will prevent the disadvantages which holding physical gold can possess.

Interest Rate Risk

If an investor expects interest rate to rise ,he should give short term loans.With that he will receive money back in short period of time.So,in a rising interest rate scenario,the interest can reduce interest rate risk.

Credit Risk
It refers to the situation where the borrower fails to honour either one or both of his obligations of paying regular interest and returning the principal on maturity. A bigger threat is that the borrower does not repay the principal. This risk can be avoided if the borrower has a very high credit rating. Credit Rating of borrowers is done by professional credit rating agencies like CRISIL.These agencies have to be registered with SEBI.

LIQUID FUNDS
The biggest contributor to mutual fund industry. Money market refers to that part of the debt market where papers with maturities less than one year is traded.

Market to Market Concept

It is that activity where a bonds/shares profit or loss is calculated on a daily basis. It is be done for all papers-> equity as well as debt.Debt papers with less than 1 yr maturity are exempted.

Cost Plus Interest Accrued Method

Example:Consider a bond,share is issued by a company for Rs 90.Its value on maturity becomes Rs 100.The maturity period is 60 days. So finally the earning is Rs 10 over 60 days which comes to Rs 0.16 per day but this amount does not go to the investor. It only gets accrued. Now if the investor wants to sell this share after 10 days the amount he should sell it is:Interest accrued for 10 days plus the original value of the bond which comes to 91.6 (90+10*1.6). So Rs 91.6 is the current value of the share.

Taxation in Mutual Fund

Taxation depends upon type of scheme 1. Equity scheme or Debt scheme 2. long term capital gain or short term capital gains

Income tax rate on short term gain is 15%

Equity scheme has minimum 65% of assets invested in indian equity All other schemes have to pay tax irrespective of the period For long term capital gain in non equity scheme , they have to pay tax based on indexation benefit or otherwise In case of non equity scheme ,for short term, capital gain is added to the income and taxed as per slab

Regulations
No scheme can invest more than 15% of its NAV in rated debt instruments of a single issuer. This limit may be increased to 20% with prior approval of Trustees. This restriction is not applicable to Government securities.

No scheme can invest more than 10% of NAV in unrated paper of single issuer Total investment by any scheme in unrated papers cannot exceed 25% of NAV No fund, under all its schemes can hold more than 10% of Co.s paid up capital No scheme can invest more than 10% of its NAV in a single company.