After reading this chapter, you will be able to: > Understand the meaning of NAV > Calculate NAV of a mutual fund > Know the types of loads involved in mutual funds > Invest in mutual funds > Recognise the role of AMFI in mutual fund industry > Interpret CRISIL rating of a mutual fund A mutual fund may be considered as a portfolio of securities. Hence the val- ue of a mutual fund unit depends not just on the value of a single security but on the value of all the securities comprising that fund. Every mutual fund in India is required to disclose Net Asset Value (NAV) on daily basis. In order to calculate return from a mutual fund we need to understand NAV and costs of mutual funds first. 10.1 NET ASSET VALUE (NAV) Net Asset Value refers to the amount which a unit holder would receive per unit if the scheme is wound up. As the name implies, it is the value of the net assets of the fund. The term net assets mean assets less liabilities. In balance sheet of the fund, the investors’ subscription is treated as the capital and the investments on their behalf are treated as assets. Net Asset Value of the Fund No. of Units Outstanding Where Net Assets = Market Value of Investments + Receivables + Accrued Income + Other Assets - Accrued Expenses - Payables - Other Liabilities 286 NAV per unit =i ‘ 987 NET ASSET VALUE Ven 40.1.1 Costs incurred by mutual fund 4n the mutual fund field, costs assume Jong-term investor. Other things held urns.’ - John Bogle, hbase a tremendous importance ty Ge qual, lower costs mean bighes Cost of mutual fund has two components: 1, Initial expenses attributable to establishing scheme 2. On-going recurring expenses por: (management expense) which @. Cost of employing expert investment analyst 6, Cost of administration ¢, Cost of advertisement, Management expense ratio may be expressed as a percentage of average assets under management during therelevant period. Itrelates to the extent ofassets used toruna mutual fund. Itincludes administrative expenses and advisory expenses and excludes brokerage fees. It is computed as below: Expenses Expense Ratio = Average assets under management 10.1.2 Return from mutual fund The return from a mutual fund may be of three types: 1. Dividends 2. Capital gains disbursement 3. Change in NAV over the period. Return from a mutual fund may be computed as follows: Div, +CG, + NAV, - NAV, NAV, . Return = 100 Where : Div, = dividends for the period CG, = Capital gains realised NAV, = NAV at the end of the year NAV, = NAV at the beginning of the year | 10.1.3 Performance Evaluation of Mutual Funds Once the return from a mutual fund is calculated, we can also determine ‘its total risk by calculating standard deviation of returns. Further beta of a "mutual fund can also be determined to capture the sensitivity of a mutual fund scheme to market mutual fund returns. Once we have actual return,Para 10.2 INVESTING IN MUTUAL FUNDS 288 an apply the following mea. risk and beta factor of the mutual fund, we ¢: | fund: sures for performance evaluation of a mutual i Absolute return ii Risk Adjusted Measures : 1, Sharpe ratio 2. Treynor's ratio i Absolute return measure - In absolute return measure, we compare the absolute returns of various mutual funds as well as benchmark mutual fund. There is no consideration of risk in case of performance evaluation using this measure. Mutual fund having highest return is the top performer while the one giving least return is the poorest performer. For example, if the returns on two mutual funds P andQ are24% and 17%respectively then mutual fund Pis abetter performer than mutual fund Q as per Absolute Return Measure. However the serious limitation of this measure is that it does not consider risk at all. It compares returns regardless of the underlying risks, It is not acceptable as different mutual funds may have differing degrees of risk. For example, if the risk of mutual fund P is very high say 30% while the risk of Mutual fund Q is very low say 5%, then the two mu- tual funds cannot be compared just on the basis of returns. Hence we need some risk adjusted measures to evaluate the performance of mutual funds. Risk Adjusted Measures - Risk adjusted measures adjust the return from a mutual fund for the underlying risk. Two main measures are Sharpe ratio (or index) and Treynor’s Ratio ( or index). Detailed discussion on these measures is beyond the scope of this book. This can be done using: 10.2 TYPES OF LOADS. “Load” in the context of mutual funds means “charges” or “fee”. A load fund charges a percentage of NAV as entry or exit fees. The charge ranges from 4% to 8% of the amount invested or it could also be a flat fee. For example, if you invested @1,000 into a 5% load fund, you would actually be investing only % 950 with the remaining % 50 going to the company as a commission. Mutual fund can charge load in the following manner: Entry Load: This is charged at the time of ing units of th 12 purchasing units of the scheme (added to the prevailing NAV thereby allotting less units) ¢ Exit Load: This is charged at the time of redeeming uni its of the aie (deducted from the prevailing NAV while making paymen!) A no-load fund does not charge any fees for ent i 0 ‘try or exit. In case of no load funds, all transactions of purchase and sale are made at NAV only-9 1 28 INVESTING IN MUTUAL FUNDS Para 10.8 WLUSTRATION 10.1 Find out NAV per unit from the following information: Size of the scheme ©10,00,000 Face value of units 0) Number of outstanding units 1,00,000 Market value of fund's investment | %18,00,000 is receivable © 20,000 €10,000 SOLUTION: Total Assets = Market Value of Investment + Bills Receivable = © 18,00,000 ++ ® 20,000 = & 18,20,000 Liabilities = % 10,000 | nf NAV per unit 292 st — €18,20,000 - 210,000 No. of uniis EM = € 18.1 per share 10.3 INVESTING IN MUTUAL FUNDS 1, Deciding about the right asset allocation mix I ‘The first thing an aspiring investor in mutual funds units should do is to establish what type of portfolio he wants to build. In other words, he should decide about the right asset allocation. Asset allocation means how an investor invests his money in different investments with the proper mix of various asset classes. ‘The popular thumb rule is that whatever is the investor's age, he should keep that much percentage of his portfolio in debt instruments, For example, if an investor is 35, he should have 35% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances, situations and financial position for each individual may require different allocation. Asset allocation also depends upon various factors like age, occupation, number of dependants in the family, Usually the younger one is, the more riskier the investments one can hold for getting superior returns, Selecting the right mutual fund scheme and Mutual fund Selecting the right mutual fund scheme is of utmost importance. It depends upon the investment objective of the investor. Tf investor is investing rst get regular returns then debt funds or Income funds ee good. If investor is ‘investing for growth or capital gain then aah ty funds are the right choice. If one is investing for short Rarer ; _ then gilt funds or money market mutual funds are better. Similarly,Para 10.4 INVESTING IN MUTUAL FUNDS 290 ELSS (Equity Linked Savings if one is investing for tax benefits then wious choice. Balanced funds Scheme) or tax savings funds are the ob ct are suitable for those who are not comfortable with 100% exposure to equity. If selected properly, these equity and equity-oriented funds have the potential to deliver returns that could be far superior to other asset classes. For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and speciality funds. 3. Making investment Once the scheme is selected, amount or same amount at re; (Systematic Investment Plan). Investment in mutual fund can be done in two ways: @. Investor can buy units of mutual fund directly from the Mutual Fund. For this, the investor has to fill up the application form and deposit a cheque to the designated bank. b. An investor can also buy units of mutual funds from brokers as well as online. 4. Tracking investment Keeping a track of the investment is as important as making an investment. Investors are advised to review their mutual funds portfolio’s performance from time to time, at least once a quarter ‘and make necessary changes. For example, if a fund is consistently reporting poor numbers, then it is time to bid adieu to it. Secondly, if the scheme doesn't fit into investor's strategy, then he should find a substitute of the scheme. Lastly, as an investor grows older, his risk-appetite reduces, objectives change, fund availability changes, etc, and it calls for a portfolio rejig. the investor can invest a lump sum gular interval in the form of a SIP 10.4 FACTORS AFFECTING CHOICE OF MUTUAL FUNDS Selection of mutual funds is a crucial decision for any investor. The choice of fund, from the plethora of schemes available in the market, is depen dent on various factors like investor's risk appetite, investment objective, stream of regular income, values and ethics of the investor, etc. However the importance of each and every factor would be different for different investors, Some of the factors are explained below- i. Investment objective: The selection of the mutual fund scheme de- 4 pa to a great extent of investment objective. Different investo" ‘different investment goals, Common financial goals can be ~ marriage, children education, vehicle, house, retirement RRS Tie ebo> yt itt 2 vi. ea = viii. FACTORS AFFECTING CHOICE OF MUTUAL FUNDS Para 10.4 Plan, regular income etc. If the investor's investment Beyective is regular income then growth funds are not suitable, Such an investor should consider debt funds or income funds. Risk appetite: There is an inverse relationship between risk and return, Risk is the Probability of a negative outcome, while return is ‘ing on that risk. For example, a bond fund typically carries relatively lower risk and therefore a lower rate of return. A young investor who can take higher risk should consider investment in growth funds, Liquidity: Open ended funds are highly liquid while closed ended funds have a fixed maturity and hence arg less liquid. So if the in- vestor wants to have more liquidity then he should invest more in Open ended funds as well as liquid funds. Loads and Fee structure: Several mutual f exit load. Different mutual funds also hay Loads and management fees reduce th ‘unds have entry load and ve different fee structure. ‘¢ returns available to the investor in mutual funds. Hence it is important to analyse load and fee structure of the mutual funds before selecting one. Past performance of the fund: It is important to consider Past per- formance of the fund while making investment in it, One should Investment Horizon: Sel: lection of a particular mutual fund scheme also depends upon the investment horizon ie. the time period for which investment is made. If the investment Wants to park his mon- ey in mutual fund only for short term then liquid funds or money market mutual funds are appropriate. Growth funds are more suit- able if investment horizon is fairly long, Balanced funds are more appropriate for investors having medium term investment horizon, Ethical Values of the Investor: Another important factor tobe keptin mind while selecting a particular mutual funds schem, is investor's values and ethics, There are a number of ethical uncle ical fund, Tauras ethical fund which mal i like Tata Eth, ke investment on feted of Shariah Law. f income: Investors seeking a regular stream of Nan half-yearly or annual basis would ¢ fi ay which invests about 90% of their tot: east so as to provide regular incom income on al funds inte gee? income ed e to the unit holders mePara 10.5 INVESTING IN MUTUAL FUNDS: 292 investors can also go for the dividend option (quarterly or half-yearly payouts) of growth or balanced funds. ix. Social consciousness of investors: With a growing consciousness among public regarding socially responsible business, mutual fund industry too has launched a new fund category - socially responsi. ble funds. Fortis Sustainable Development Fund (FSDF) was India’s first socially responsible investing mutual fund (MF) scheme. These funds avoid investing in companies that pollute the environment, ignore minority employees, avoid tobacco and liquor companies, ae However, socially responsible mutual funds and ethical mutual funds are yet to gain popularity or become mainstream investment option in India. x. Focused investment strategy: Sometimes, an investor wants to bet ona specific sector which is expected to perform better than rest of the economy. Such a focused jnvestment strategy would impact the choice of mutual fund by an investor. The idea is to reap the benefit of the sector or industry cycles. If an industry is going through good times, these schemes offer good returns to the investors. For instance, there are infrastructure funds, pharma funds, banking sector funds, etc. prineipalindiacom Money Managers Limited www.quant-mutual.com um Asset Management Company Private Ltd. www, QuantumAMC.com India Mutual Fund www.nfnipponindiaim.com Asset Management Company Private Ltd. www.saharamutual.com Management Private Ltd, www.sbimf,com294 ‘www shriramame.com Shriram Asset Mat L. SREI Mutual Fund Asset Management Pvt. Ltd. wewwsreimf.com ‘Sundaram Asset Management Company Ltd. eee ‘www tatamutualfund.com Tata Asset Management Ltd. Taurus Asset Management Company Ltd. ‘www.taurusmutualfund.com www.unionkbe.com Union Asset Management Company Private Limited UTI Asset Management Company Ltd. ‘wwwatimf.com Source: AMFI 10.6 AMFI (ASSOCIATION OF MUTUAL FUNDS IN INDIA) of SEBI regis AMET is an association Management all the registered Asset August 22, 1995. Currently, tl which are members of AMFI. AM! the Indian Mutual Fund Industry interests of mutu: Objectives of AMFI* Todefine and maint areas of operation ol # Torecommend duct to be followe: @ To interact and to represent to SEBI on industry. bodies on all mi To undertak Pape Piore conduct of distrib RN) for violations of Code tors/unit holders. ret of inves! here are 44 Asset (FI operates wit! as well as pro al funds and their unit hi ain high professional and e! f mutual fund industry. and promote best business d by members and of mutual fund and asset managemen' or involved in the field of capital marl t with the Securities and Exchange all matters concerning the mutual fund t to the Government, Reserve Bank of India atters relating to the Mutual Fund Industry. ¢ nationwide investor awareness programme so as derstanding of the concept and workin teinformationon Mutual Fund Industry and to undert ‘and research directly and/or in tered mutual funds in India run by nies. It was incorporated on Management Companies han objective of developing tecting and promoting the olders. Compé thical standards in all and code of con- others engaged in the activities t including agencies connected kets and financial services. Board of India (SEB) practices and other to gof mutual ake association with other bodies disciplinary actio”® Conduct. tors inche 295 AMFI following table shows the cat: i ini egory-wise data id schemes existing in india Poa Para 10.6 TABLE 10.2 ASSETS UNDER MANAGEMENT AS ON SEPTEMBER 30, 2020 [Bopes ot Schemes, AUM (7 Cr)| % to Total Liguid Fund/Money Market Fund/ Floater Fund 544099.71| 20.26% Gilt Fund/ Glit Fund with 10 year constant duration 18629.02 0.69% {Remaining Income/ Debt Oriented Schemes 77872119 28.9996 |Growth/ Equity Oriented Schemes 793660.29 | 29.55% Hybrid Schemes 293539.81| 10.93% Solution Oriented Schemes 19428.58 0.72% Index Funds 12581.37| 0.47% Gold ETF 13589.99| 0.51% ETFs(other than Gold) 205234.94| 7.64% Fund of Funds investing Overseas 6496.98 0.24% TOTAL 2685981.89| 100.0% Source : AMFI ‘TABLE 10.3 EXISTING MUTUAL FUND SCHEMES A ae ended Schemes {1 | Income/Debt Oriented Schemes 326 2 | Growth/Equity Oriented Schemes 325 3. | Hybrid Schemes Bs Solution Oriented Schemes: (Retirement Fund / Children ea 4 | Fund) 5 | Index Funds $3 6 |GOLDETE - 7 | Other ETFs ; IF E % | Fund of funds investing overseas 28 ——Frrotal A-Open ended Schemes Ended Schemes : come/Debl Oriented Schemes as | Se eer wn Oriented Schemes 22 # tb Debt Fund 9Para 10.7 INVESTING IN MUTUAL FUNDS No. of Mutual Fund schemes during as of S.No. ‘Scheme Name iv Other Debt Sub Total (i+ii+iti+iv) 2 | Growth/Equity Oriented Schemes i ELSS ii Others. Sub Total (i+ii) ‘Total B - Close ended Schemes (1+2+3) Interval Schemes Income/Debt Oriented Schemes Growth/Equity Oriented Schemes Other Schemes Total C Interval Schemes Grand Total (A+B+C) Source : AMFI Quarterly July-Sept 2020. 10.7 CRISIL (CREDIT RATING INFORMATION SERVICES OF INDIA LTD.) In India Credit ratings started with the setting up of the Credit Rating In- formation Services of India Ltd. (CRISIL) in 1987. Promoted by premier financial institutions like ICICI, HDFC, UTI, SBI, LICand Asian Development Bank in its initial years, CRISIL is now an S&P company headquartered in Mumbai, India. CRISIL is now India’s leading rating agency and a global analytical company providing ratings, research and risk and policy advisory services. CRISIL has divided its business into 4 categories which include Ratings, Research & Analytics, Research & CRISIL Risk and finally Infre- structure solutions, So for CRISIL has provided rating for 4,7 Crworthol Indian debt, holds more than 50% of total bank Joan ratings, and provides coverage across 86 industries. CRISIL provides debt or credit rating as well as ranking of mutual funds in India. Bial|ejo CRISIL Rankings for mutual funds Given the plethora of mutual fund schemes availablein India, itmay beco™® very confusing for an amateur investor to select the best suitable scheme for himself. Searching amongst a lot of approximately 2300 schemes isn0 mean task, So, there are research and ratings agencies like CRISIL, ICR etc, which provide ample data and analysis to support an investor it decision making.z= a ee 27 CRISIL, Para 10.7 CRISIL is a global anal and tisk and policy ady CRISILis an independ for mutual fund sche lytical company which provides ratings, research, isory services. It is a leading rating agency in India. ent provider of transparent and independent ratings ‘mes in the Indian mutual fund industry. 10.7.1 Ranking Methodology CRISIL has developed a method ranking mutual funds in India. dence and acceptance ay lology, based on global best practices, for CRISIL rankings command a huge confi- mong investors, intermediaries, and asset man- agement companies, Rankings are based on both quantitative measures like risk adjusted returns . = urns as well as on qualitative characteristics like fund portfol io characteristics, industry concentration, company concentration, liquidity, etc. CRISIL Mutual Fund Ranking takes following parameters into account: Superior Return Score: It is the relative measure of the schemes’ returns and risk (volatility) compared with their peer group. # Mean Return and Volatilit turns based on the scheme’s NAV for the period under analysis and Volatility is the standard deviation of these returns. * Portfolio Concentration Analysis: It measures the risk arising out of improper diversification. Putting too much money in one sector only can be risky for a mutual fund, @ Liquidity Analysis: It measures the ease with which a portfolio can be liquidated. The lower the score, the better it is. Asset Quality: It measures the probability of default by the issuer of a debt security to honour the debt obligation in time. Modified Duration/average maturity: It captures the interest rate risk of the portfolio. The lower the value, the better it is. Tracking Error: The tracking error is an estimation of the variability ascheme’s performance vis-a-vis the index that it tracks. The lower e tracking error, the better it is. It is used only for index schemes, istoric CRISIL Mutual Fund Ranking Performance ie above parameters are given appropriate weightage and the eighted performance measure is used for ranking the mutual fund mes. CRISIL categorises all schemes into five ranks from rank scheme is the top performer in vank 5. The rank 1 mutual fund S category oF fund type, while ranks inet soe performing tual fund.Para 10.7 INVESTING IN MUTUAL FUNDS 298 4: CRISIL MUTUAL FUND RANKING Smaart To fimterpretation Ca 7 CRISILFundRank1| Very Good performance in the | The top 10 percentite category CRISIL FundRank2 | Good performance in the category CRISILFundRank3 | Average performance in the cat- ego! CRISILFundRank4 boa ved performance in the | 71st to 90th percentile | category CRISILFundRank5 | Relatively weak performance in | Last 91st to 100th the category percentile TABLE 10.5: CRISIL RANK FOR LARGE CAP EQUITY MUTUAL FUNDS TABLE 10. e 11th to30th percentile 31st to 70th percentile 1) 2@) | 2@) 2@) | 1@) 4 20) 20) | 20 | 26) : 30) | 1@ 30) : 30130] 20 38) LIC MF Large Cap Fund 2@) | 2@ | 3@ | 3@ | 2@ | 2@ | 3@ 2 | 3@ |. [2@ | 28 Essel Large Cap Equity Fund | 3(4) | 34) | 4(4) 44] 4@ | 4@) 10) }3@) | $30 ]3@ | 2@ | 3@ | 4 IDBLndis Top 100Equity Fund} 3,2) | 3 3Q | 3) | 38] 3@ | 3@) Le 1a) | 128)/-3@), aSOs [o20) LACT India Large Cap Fund | 33) | 33) | 33) | 3a) | 3 | 3@ 1 3@ | 3@ | 3@ I, pra aca “ 4@ | ‘fae [se POIM India Large Cop Fund | 3) | 33) 1 30) | 30) | 4 | a | se | s@ | 20 UTIMastershare Unit Scheme} 3(3) | 33) | 30) | 3@) | 2@) CRISIL, : (0 leading mutual fund information repositories - CRISIL and AMFI formulated CRISIL-AMFI Mutual Furd Performance Indice! performance of the mutual funds across various categories 2@ | 2m | 2@ | += rs SOLVED PROBLEMS. 972 Usage of Mutual fund Rankings thousands of funds to choose from, man agencies to select the best by CRISIL, are helpfi y investors depend on rating performers. Mutual fund rankings like those ul in following ways: ¢ These rankings help a layman take an investment decision in mutual funds. Since not all investors understand the accounts and reports of mutual fund companies, these ratings simplify the task for naive investors by interpreting relevant information and reflecting it in the rank allotted to a fund. ¢ Mutual fund ratings provide a comprehensive measure of fund's per- formance. They include both quantitative and qualitative measures. ¢ Rankings facilitate easy comparison of various mutual funds schemes across companies and therefore, chose the best scheme whichmatches the investor’s objectives. ¢ They make year on year performance evaluation of a fund more convenient. However, these ratings should be used very carefully. Any blind reliance may prove harmful for the investor. Mutual fund rankings give very few answers about future performance of a fund. Thisis because the key metric used to assess funds is past performance, which is not necessarily a good indicator of future performance. At times, some investors take these rat- ings on their face value, without investigating any deeper. A rank 1 fund _ iSa winner and rank 5 is to be avoided. It is important to understand how sound is the methodology used for ranking the schemes. M 10.1 Mutual Fund made an issue of 10,00,000 units of % 10 each on 01.01.2014. No load was charged. It made the following investments: 1000 Equity Shares of 2100 each @ 160 %80,00,000 Government Securities %8,00,000 5,00,000 Debentures (Listed) 5,00,000 %98,00,000 the year, dividends of %12,00,000 were received on equity shares, Interest types of debt securities was received as and when due. At the end of the year shares and 10% debentures are quoted at 175% and 90% respectively, Other are quoted at par, Find out the Net Asset Value (NAV) per unit givenINVESTING IN MUTUAL FUNDS that the operating expenses during the year amounted to @ 5,00,000. Also fing the NAV, ifthe Mutual Fund had distributed a dividend of € 0.80 per unit gu the year to the unit holders, ; SOLUTION: I. Cash balance at the end of the period Opening balance (7100 lakhs-98 lakhs) 200,000 Dividends received 2.00000] Interest income: | + 7% Government Securities 56,000] 9% Debentures (Unlisted) 45,000] 10% Debentures (Listed) 50,000) Total 15,51,000| Less: operating expenses 5,00,000] Closing cash balance 1051,000] Il. Calculation of NAV Closing cash balance %10,51,000] iH 50,000 Equity Shares of @ 100 each @ 175% or % 87,50,000 i 175 each | 7% Government Securities 8,00,000) 9% Debentures (Unlisted) at cost 5,00,000 10% Debentures (Listed) at 90% 4,50,000 Total assets (before dividend) 1,15,51,000 Dividend distribution @ % 0.80 per unit 8,00,000 Total assets (after dividend) =1,15,51,000-8,00,000 1,07,51,000 No. of units 10,00,000 NAV per unit (before dividend) 11.55 NAV per unit (after dividend) 1075} PROBLEM 10.2 In case of an open ended Mutual Fund scheme the market price (ex-dividend) we % 75. A dividend of 715 has just been paid and ex-divided price is 5. What return has been earned over the past year? “erie SOLUTION: 7 = Div +CG, +NAV|-NAV, _ 15+(95-75) es ee hg gee = 46.67% Et& 30l SOLVED PROBLEMS pROBLEM 10.3 Amutual fund had a Net Asset Value (NAV) of %65 ai ini \ it the beginning of the During the Year a sum of €8 was distributed as dividend Desides €5 aa capital gains distribution. At the end of the year NAV was 273. Calculate total return for the year. SOLUTION: Div, +CG, +NAV, -NAV, _ 8+5+(73-65) NAY, Mm 65 fo Renn Fe = 32.31% PROBLEM 10.4 Amutual fund had a Net Asset Value (NAV) of %68 at the beginning of the year-At the end of the year it gives a dividend of %5 and no capital gains distribution and NAV at the end of the year is 73. What is the return for the year? SOLUTION: Return = a = 54047368) — 471% 68 PROBLEM 10.5 Ram invested in a Mutual Fund when the Net Asset Value was 7 12.65. Sixty days later the Asset Value per unit of the fund was & 12.25. In the meantime, Ram had received a cash dividend of ¥ 0.50 and a Capital Gain distribution of % 0.30. Compute the monthly return. SOLUTION: Div, +CG,+NAV,~NAV, __ 050+0:30+(12.25-12.65) _ 3 169, pean NAV, 12.65 This 3.16% return is for 60 days or for 2 months only. Simple Annualisedreturn = Return X365 days/ Period= 3.16% X365/60=19.22%p.a. pound annualised return = (1+0.0316)°- 1 = 0.205 = 20.5% thly return = 205/12 = 1.7% per month. BLEM 10.6 mutual fund has an NAV of % 26 int ‘of the same period. During the perio unit, Find out the expense ratio. he beginning of the period and. %30 at the <, it incurred expenses at the rate of 70.80 Ns a 0. 5 Expenses, 100 = xu Ratio = Average assets under management e+ 30/72 = 28. 100 = 2.86% 28 00INVESTING IN MUTUAL FUNDS 302 PROBLEM 10.7 A mutual fund has an NAV of & 50 in the beginning of the period and £70 atthe end of the same period. During the period, it incurred expenses at the rate of t 5 per unit. Find out the expense ratio. SOLUTION: 3 : Expenses 100 cf xpenses_| x Expense Ratio = 77 cage assets under management Ree 0! 8530 G0#70)/2 PROBLEM 10.8 The following particulars relating to a mutual fund are given to You! ‘Management Advisory Fees %275lakhs_| ‘Administration Expenses (including Fund Manager Remuneration) _| ¢ 350 lakhs Publicity and Documentation 2.80 lakhs | ‘Opening NAV % 108 crore _| Closing NAV %170crore | Ascertain the Expense ratio. SOLUTION: Totalexpenses= Management Advisory Fees+ Administration Expenses+ Publicity and Documentation=% 275 lakhs+¥ 350 lakhs+¥ 80 lakhs=% 705 lakhs or 7.05 crores “Average assets = (Opening NAV+ Closing NAV)/2, = (€108 crore + 170 crore)/2 = 2139 crore 5 se Expenses 4c 100 = TODO. 199 = 5.07% ‘Average assets under management 139 crore mutual fund has launched a new scheme in which the initial expenses are 4 annual recurring expenses are 1%. The required rate of return in the market 12%, What should be the annual return earned by mutual fund so as to satisfy estors expectations. ON us assum. oti 4. tie ey 95s Heth Non Pg os 7.0.96 per unit ly invested. Hence recurring expenses is 1% of €% the return expected by the unit holder is 12% ie. €12, = ig expenses return required =% 12.96303 SOLVED PROBLEMS Amount invested = % 96 Retum in % = 12.96/96 =0.135 or 13.5% Thus in order to provide a, earn a return of 13.5% ann PROBLEM 10.10 Mr. K expects a return of 15% by investing on his own in the equity shares. He is considering a mutual fund scheme which has the issue expenses of 5.59 and ex- pected to earn 17%, How much should be the recurring expenses of mutual fund to provide a return of 15% to Mr. K. SOLUTION Letus assume that the Face value of the unit is € 100. Initial expense of 5.5% means investible funds are only % 94,5 (Le. 100- 5.5% of 100). Let us assume that recurring expenses are @ y. Hence 0.17 = (1S+y)/94.5 Y= 1.065 Recurring Expenses in % are 1.065/94.5 = 1.12% Hence the recurring expenses must be 1.12% to provide a return of 15% to Mr. K. PROBLEM 10.11 return of 12% to the investors, the mutual fund must ually. The following information is available in respect of a mutual fund. Find out the NAV per unit: Cash and bank balance %5,50,000 Bonds and debentures (unlisted) %7,00,000 Equities (current market value) %12,50,000 Quoted Govt. Securities %10,05,000 es incurred 75,000 of units outstanding 2,00,000 and bank balance %5,50,000 nds and debentures ( unlisted) %7,00,000 (current market value) %12,50,000 % 10,05,000 %35,05,000 & (75,000) % 34,30,000 20,00,00 USS) Net assets/No. of units