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Mutual Funds Overview

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A Mutual Funds is a kind of investment products that uses Money from Many investor to invest in stock, Bonds,gold and real estate .

A fund managers who is highly qualified and professional make the investment decisions relating to stock selection of stock, timing of investment, reviewing and rebalancing the portfolio periodically.

A mutual fund is set up by a sponsor, who is promoter

Eg HDFC AND STANDARD LIFE INVESTMENTS LTD

Trustees are appointed to take care of the interests of the investors in the varioys schemes

Eg

HDFC TRUSTEE COMPANY LTD

An AMC is appointed to manage the activities related to launching a scheme, marketing it , collecting funds, investing the funds according to scheme's objectives

Eg

HDFC ASSET MANAGEMENT COMPANY LTD.

The AMC creates product with the approval of the TRUSTEES & SEBI . Which includes the details regarding scheme , expenses and objectives.

Investment objectives

scheme is defined by its investment objectives which indicates what the schemes, which type of securities to be selected & way the fund will be managed.

Units

Amount invested by the investors will be in form of units like in stock mkt as a share

Net Assets

The assets of a MF scheme are the current value of the portfolio of securities held live , cash & receivables. Among this fees & expenses related to managing fund will be deducted

NAV

In simple terms price

The NAV per unit if scheme is calculated to

Net Assets/ No.of outstanding units of scheme.

The NAV of the scheme will change with the change in the ner assets of the scheme.

Open added fund

Open value fund is like melodrama serial.😉

Any time you can enter for buying and any time you can redeem.

Close ended fund

Close ended fund is like movie time .😉

You have to buy at fixed time with fixed price.

REGULATORY FRAMEWORK

SEBI

Primary regulator which guides on launching scheme, creating & managing portfolio, investor protection, investors services , rules & responsibilities of the constituents

RBI involved for separate atea which involves foreign exchange transaction

MUTUAL FUND products

1) Equity fund

2) Debt fund

3) Hybrid fund

4) Real Estate Fund

In Equity funds there are several types of fund available

Passive & Active funds'

Passive fund invest in the companies represent in an index such as nifty or sensex. In the same propotion as the company's representation in the index.

Diversified equity funds

Diversified equity funds invest across segment , sectors and size of companies.

Based on the segment of the market :

1) Large cap Invest in stock to large , liquid blue chip companies with stable performance & returns

2) Mid cap Invest in mid cap companies that have the potential for further growth & higher returns

3) small cap Invest in companies with small market capitalisation with intent of benefiting from the higher gain in price of stocks

4) Based on sectors & companies ::

Sector funds invest in companies yhat belong to a particular sector such as technology, banking or pharma.

Risk is higher since performance tend to be cyclical ...eg Reliance Banking fund

Sbi magnum sector funds

5) Based on theme

Theme based funds invest in multiple sectors and stocks that form part of theme..eg infrastructure theme Stock will be selected are construction, cement, banking and logistics etc

6) Based on investment style

The funds based on strategies and style for selection includes

  • Growth funds
  • Value funds
  • Dividend yield funds
  • Growth funds invest on those whose earnings are expected to grow at a rate higher than the average rate.
  • Value funds invest on those companies which are trading at prices below their inherent value are expected to increase
  • Dividend yield funds invest on those that have a high dividend yield

7) Equity Linked savings schemes(ELSS)

Elss is a special type of equity fund investment which gives yhe investor tax deduction benefits under section 80c of the ytaxact up to a limit of 1,50,000

DEBT FUNDS

Debt funds invest in a instruments such as government bonds, corporate bonds, and money market securities.

Debt instruments may also see a change in prices or values in response to change in interes rates in market.

1) Short term Debt fund

  • Money Market or Liquid funds invest in debt securities with less than 91 days to maturity.
  • Ultra short term plans invest in money market and other short term securities of maturity up to 365 days
  • short term plans combines short term debt securities with a small allocation to longer term debt securities. May provide a higher level of return than liquid funds and ultra short term funds but exposed to higher risks

2) Long term Debt Funds

Long term debt funds are structured to generate total returns made up of both interest income and capital appreciation from the securities held.

  • An income fund is a debt fund which invests in both short and long term debt securities of the government, public sector and private sectors with a view to generate income.
  • Gilt funds invest in government securities of medium and long term maturities.
  • Dynamic Debt funds is flexible and dynamic management of interest rate risk and credit risk

Floating Rate funds invest primarily in floating rate debt funds

Fixed Maturity plans (Fmps) are close ended funds that invest in debt securitires with maturities that match the term of the scheme.

HYBRID FUNDS

Hybrid funds invest in a combination of debt and equity securities.

Debt oriented hybrids : invest minimum of 70% to 95% in a debt portfolio..Taxed as a debt fund.

Equity oriented hybrids invest in the equity markets but invest up to 35% indebt.They are taxed as equity funds.

Asset Allocation funds invest in both equity and debt but without pre specified allocation. Fund manager take a call which investment will do well an accordingly it vl be done.

Capital protection funds are close ended hybrid funds.

Other funds

  • A fund of funds (FOF) is a MF that invest in other MF. Equity FOF do not enjoy the tax concessions available for equity funds on dividends and LTCG.

Exchange Traded Funds(Etfs)

Hold a portfolio of securities that replicates an index and are listed and traded on the stock exchange.

Gold Etf each etf represents 1 gm gold

International funds invest in markets outside india, by holding certain foreign securities in portfolio.

Arbitrage Funds aim at taking advantage of the price differential between the cash and the derivative markets

Real estate funds

Invest in real estate either in the form of physical property or in the form of securities of companies engaged in real estate business. Infrastructure Debt schemes are close ended scheme with a tenor if atleast 5 years invest in debt securities and securitized debt of infrastructure companies.

Now Taxation of Mutual Fund products

Tax on Dividend

Dividend received by investors from mutual funds are exempt from tax i.e. investors do not

pay a tax on any dividend income received from mutual funds.

Tax on Capital Gain

Capital gains tax applies to the gains realized on redemption or sale of units. The rate of tax depends on the nature of capital gains: short-term or long-term.

Mutual Fund Investment Options

Dividend option

Growth option

The dividend option

That the funds will payout the returns generated in the form of periodic dividends.

There is a dividend re-investment option too where the dividend declared is not paid out but reinvested in the scheme.

Who can invest in a mutual fund scheme in India?

This includes Resident individuals, NRIs, PIOs, Foreign nationals, Institutions, Trusts.

The exceptions to this are micro investments who can not invest more than Rs.50000 per year

KYC Is also compulsory but

SEBI has mandated that the KYC done with one entity is applicable to transactions with the others.

Fresh Purchase of Mutual Fund Unit

A fresh purchase of units is made by submitting an application form in which mandatory information has to be provided such as name, date of birth, status, occupation of the first holder, PAN details, address and contact details, signature and bank account details of the first holder. it can be in single or in joint name either two or three also possible

The investment details such as the name of the scheme, option and payment mode have to be filled in. The investor can also make nominations in the application form.

The applicable NAV will depend upon a) type of scheme, b) day of transaction, c) time of making the application, d) availability of clear funds to the mutual fund for all liquid fund purchases and for non-liquid purchases if the application value is Rs.2 lakhs or more. The cut-off time fixed by SEBI for purchase of units is 3.00 pm except for liquid fund purchases where the cut-off time is fixed at 2.00 pm.

Additional Purchases in a Mutual Fund

Additional investment will be added to the existing folio number( which was provided after first application) Payment Instruments for Mutual Fund Purchases

Local Cheques

Demand drafts

Third-party cheques A) if Grandparent investing for grandchild for a sum not exceeding Rs. 50,000.

B) Employer making payments on behalf of employee through payroll deductions.

ECS,

RTGS,

ETS,

Swift,

Direct transfer.

Cash investments (not exceeding Rs. 20,000 per investor per mutual fund each financial year.)

ASBA (Application Supported by Blocked Amount)

NRI investors can make payments through their NRO, NRE or FCNR account or also through a draft drawn on a foreign bank and supported by foreign inward remittance certificate (FIRC).

NSE’s Mutual Fund Services System

(MFSS) and BSE (BSE star MF) Platform for Allotment and Redemption of Mutual Funds can be used.

Redemptions from a Mutual Fund

The redemption amount is sent either through a cheque with pre-printed details of the first holder or credited to the bank account of the first holder registered with the mutual fund. The cut-off time for redemption from all types of mutual fund schemes is 3.00 pm.

Maintaing personal information

Any change in information has to be updated using the KRA change form.

Like

Change in name, (certificate issued by a regulatory authority, a copy of the gazette announcement of the new name or a marriage certificate are documents that needs to accompany the change request.)

Change of address (official document giving the new address, such as the passport, or utility bill or other accepted documentary proof.)

A change in status from resident to non-resident or vice versa.

Joint holding

A mutual fund folio can be held jointly by up to three holders.

The first holder is the primary investor and all financial transactions including payment for the investment, credit of redemption proceeds and dividends will be made through the account of the first holder. All communication of the mutual fund will also be conducted with the first holder.

Bank Account

The bank account details account number and type, bank name and branch, IFSC code and MICR code.) of the first holder has to be mandatorily provided for dividend and redemption payments.

Nomination

Nominee is a person who will receive the benefits of the investment made in the event of the death of the investors.

A maximum of three nominees can be there

Minor investment

The financial transactions of minors are conducted by guardians their behalf. The date of birth of the minor investor has to be mandatorily provided along details of the guardian.

Power of Attorney

Some folios may be operated by persons authorized to do so by the investor by executing a power of attorney (PoA).

Transmission

In the event of the death of a mutual fund investor, If the folio was jointly held, the order of holders’ moves up with second holder now becoming the first holder. If there was no joint holding but there is a nomination made in the folio, then the units are passed on to the nominee.

Statement of Account

The statement of account (SoA) is the proof of investment for an investor who has purchased units in a mutual fund scheme. It is computer generated and unsigned and is not a certificate that can be traded.

The SoA will provide scheme-wise information on the units held, the current NAV and market value of the investments.

Investors can also ask for a physical statement if they so require.

Systematic Investment Plan (SIP)

In a systematic investment plan, investors commit to invest a fixed sum of money at regular intervals over a period of time in a mutual fund scheme. It enables investors to build a corpus over time even with small sums invested.

The investment is made at different prices over the term chosen and this allows investors to benefit from the volatility in the market.

Since the same amount is being invested in each installment, investors buy more units when the price is low and less units when the price is high.

Overtime, the average cost of acquisition per unit comes down.

This is called rupee cost averaging.

The investor can invest minimum 500 to unltd.

Investment can be made, say weekly, monthly or quarterly.

The investor can choose SIP date.

Time horizon has to be selected.

Payment can be made via post dated cheque or ECS.

Systematic Withdrawal Plan (SWP)

Investors can redeemed a regular payout from the corpus held in a mutual fund investment by registering for a systematic withdrawal plan.

Exit Load will apply to each redemption transaction and there will be tax implications for the investor on redemption in the form of capital gains.

Following to be noted while filling slip for SWP

Mutual fund scheme, plan & option.

Amount to be redeemed

Frequency of withdrawal such as monthly, quarterly and so on.

Date of redemption.

The period over which the redemption will be done.

Date of commencement of the SWP.

Exit loads and tax implications apply to each redemption transaction.

Systematic Transfer Plan (STP)

A systematic transfer plan combines redemption from one scheme and an investment to another scheme of the same mutual fund.

The scheme from which units are redeemed is called the source scheme and the scheme into which investments are made is called the target scheme.

While registering for STP point to be noted::

Source and target scheme

The amount to be redeemed and invested in each installment.

The frequency of the STP has to be done weekely , monthly...

The commence date for the STP has to be specified.

Switch Transaction

A switch is a single transfer from one scheme or option of a scheme to another scheme, or option of the same scheme.

In a switch, an investor can transfer all or a portion of the funds held in the investment.

The applicable NAV for the switch-out (redemption) from the source scheme and switch-in (purchase) into the target scheme will depend upon the type of schemes.

Exit loads and taxes will apply.

Questions time

1. What is the full form of Amfi

2 What is the ideal holding period for a liquid fund?

3. what is the cut off time for purchase transactions in liquid funds?

4.The maximum load that fund can charge is determined by ??

5 For the purpose of taxation, international MF are treated as equity / debt funds?

6. FoF stands for ___

7.When NAV of each scheme should be updated on AMFI'S website ?

8. Can a partnership firm invest in MF? Yes / No

9. Is TDS charged by MFs?

Related Lessons

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