Concept of Mutual Funds

Dr. Fatema Salehbhai

Understanding Mutual Funds
Concept of Mutual Funds
A mutual fund is a professionally managed investment vehicle where investors can
access equities, bonds, money market instruments, and other securities through a
regulated system. When investing in a mutual fund, an investor gets a different way of
investing, professional portfolio management, and diversification.

Investing in Mutual Funds

Investors technically invest through mutual funds, gaining access to
diverse investment instruments. The scheme of a mutual fund is not in
competition with traditional investment instruments, but rather an avenue
for investing in them.

Professional Fund Management

Investing through mutual funds provides access to professional fund management
services offered by asset management companies, which may otherwise be
unavailable to individual investors.

Photos provided by Unsplash

Role of Mutual Funds

Professional Expertise Primary Role of Mutual Funds Investment Objectives

By availing professional fund Mutual funds play a key role in helping Various mutual fund schemes
management services, investors can investors earn income and build wealth, accommodate different investment
benefit from the expertise of mutual catering to diverse investment preferences and needs, with each
funds in navigating securities markets objectives. They structure schemes for scheme having a pre-announced
for optimal returns and risk different investment goals, providing investment objective aligned with
management. opportunities available in securities investor needs and preferences.
markets.
Economic Impact of Mutual Funds
Financial Mobilization
Money raised from investors through mutual funds benefits governments,
companies, and overall economic development by funding various projects and
expenses, promoting employment and income generation.

Corporate Governance
Mutual funds act as large investors, influencing investee companies' corporate
governance and ethical standards, contributing to market stability and overall
economic growth.

Economic Growth
The mutual fund industry stimulates higher employment, income, and output,
supporting economic development and nation-building, while acting as a market
stabilizer amidst fluctuations in foreign investor inflows.

Photos provided by Unsplash

Investment Objectives of Mutual Funds

Catering to Investor Preferences Diverse Investment Objectives

Mutual funds seek to mobilize money from diverse investors Each mutual fund scheme has a pre-announced investment
with varying investment preferences and needs, offering objective that reflects the investment needs and preferences
different schemes catering to safety, liquidity, and returns of investors, accommodating varying risk appetites and return
based on the basic needs of investors. expectations.

Scheme Alignment with Investor Needs

The investment objectives of mutual fund schemes are aligned
with the basic needs of investors, allowing them to invest in
line with their risk appetite and financial objectives.
Classification of Mutual Funds
Diverse Scheme Offerings
Mutual funds offer a variety of schemes to accommodate the needs of diverse
investors, with 'fund' and 'scheme' being used interchangeably in the industry,
ensuring consistency with market practices.

Categorization of Schemes
Various categories of mutual fund schemes, often referred to as 'funds',
address the requirements of different investor segments, providing
investment options ranging from equity to debt and hybrid instruments.

Industry Practice
The mutual fund industry labels various categories of schemes as 'funds', aligning
with market conventions while ensuring clarity in communication and understanding
of different investment options.

Photos provided by Unsplash

Growth of Mutual Fund Industry in India

Investor Accessibility Economic Implications Market Impact

The growth of India's mutual fund The growth of the mutual fund industry in The development of the mutual fund
industry has enhanced investor India has significant implications for the industry in India has broadened
accessibility to diverse investment economy, impacting employment, investment opportunities, contributed to
options, professional fund management income generation, and overall capital market stability, and attracted diverse
services, and broader exposure to the market stability. investor participation, shaping the
securities markets. investment landscape.
ADVANTAGES OF INVESTING IN MUTUAL
FUNDS
Affordability & Convenience
Professional Management Risk Diversification (Invest Small Amounts)
Mutual fund is managed by Buying shares in a mutual fund is an For many investors, it could be
easy way to diversify your investments more costly to directly purchase all
full-time, professional money across many securities and asset of the individual securities held by a
managers who have the categories such as equity, debt and single mutual fund. By contrast, the
expertise, experience and gold, which helps in spreading the risk - minimum initial investments for
resources to actively buy, sell, so you won't have all your eggs in one most mutual funds are more
basket. affordable.
and monitor investments.
Liquidity Low Cost Well-Regulated
You can easily redeem (liquidate) An important advantage of mutual Mutual Funds are regulated by the
units of open ended mutual fund funds is their low cost. Due to huge capital markets regulator, Securities
schemes to meet your financial economies of scale, mutual funds and Exchange Board of India (SEBI)
needs on any business day (when schemes have a low expense ratio. under SEBI (Mutual Funds)
the stock markets and/or banks are Expense ratio represents the annual Regulations, 1996. SEBI has laid
open), so you have easy access to fund operating expenses of a down stringent rules and
your money. scheme, expressed as a percentage regulations keeping investor
of the fund’s daily net assets. protection, transparency with
appropriate risk mitigation
framework and fair valuation
principles.
. Tax Benefits
Investment in ELSS upto ₹1,50,000 qualifies for tax benefit under
section 80C of the Income Tax Act, 1961. Mutual Fund
investments when held for a longer term are tax efficient.
MUTUAL FUND NAV
• Mutual fund net asset value (NAV) represents a fund's per
share market value. It is the price at which investors buy (bid price)
fund shares from a fund company and sell them (redemption price) to
a fund company.
• A fund's NAV is calculated by dividing the total value of all the cash
and securities in a fund's portfolio, less any liabilities, by the number
of shares outstanding.
NAV CALCULATION
• A NAV computation is undertaken once at the end of each trading day
based on the closing market prices of the portfolio's securities. The formula
for a mutual fund's NAV calculation is straightforward:

• NAV = (Assets - Liabilities) / Total number of outstanding shares

• For example, let's say a mutual fund has $45 million invested in securities
and $5 million in cash for total assets of $50 million. The fund has liabilities
of $10 million. As a result, the fund would have a total value of $40 million.
• The total value figure is important to investors because it is from here that
the price per unit of a fund can be calculated. By dividing the total value of
a fund by the number of outstanding units, you are left with the price per
unit—the form of measurement in which NAV is usually quoted. As such,
the price of a mutual fund is updated around the same time as the NAVPS.
Mutual Fund NAV vs. Stock Prices
• The NAV pricing system for the trading of shares of mutual funds differs significantly
from that of common stocks or equities, which are issued by companies and listed on a
stock exchange.
• A company issues a finite number of equity shares through an initial public offering (IPO),
and possibly subsequent additional offerings, which are then traded on exchanges such
as the New York Stock Exchange (NYSE). The prices of stocks are set by market forces or
the supply and demand for the shares. The value or pricing system for stocks is based
solely on market demand.
• On the other hand, a mutual fund's value is determined by how much is invested in the
fund as well as the costs to run it, and its outstanding shares. However, the NAV doesn't
provide a performance metric for the fund. Because mutual funds distribute virtually all
their income and realized capital gains to fund shareholders, a mutual fund's NAV is
relatively unimportant in gauging a fund's performance. Instead, a mutual fund is best
judged by its total return, which includes how well the underlying securities have
performed as well as any dividends paid.
Example 1
• Calculate the NAV given the following information:
• Value of stocks: Rs. 150 crores
• Value of bonds: Rs. 67 crores
• Value of money market instruments: Rs. 2.36 crore
• Dividend accrued but not received: Rs. 1.09 crore
• Interest accrued but not received: Rs. 2.68 crore
• Fees payable: Rs. 0.36 crore
• No. of outstanding units: 1.90 crore
Example 2
• Calculate the NAV given the following information:
• Value of stocks: Rs. 230 crores
• Value of money market instruments: Rs. 5 crores
• Dividend accrued but not received: Rs. 2.39 crore
• Amount payable on purchase of shares: Rs. 7.5 crore
• Amount receivable on sale of shares: Rs. 2.34 crore
• Fees payable: Rs. 0.41 crore
• No. of outstanding units: 2.65 crore
 Example 3
• Investors have bought 20 crore units of a mutual fund scheme at Rs. 10 each. The scheme has thus mobilized
20 crore units X Rs. 10 per unit i.e., Rs 200 crore.
• An amount of Rs. 140 crores, invested in equities, has appreciated by 10 percent.
• The balance amount of Rs 60 crore, mobilized from investors, was placed in bank deposits.
• Interest and dividend received by the scheme is Rs 8 crore, scheme expenses paid is Rs 4 crore, while a
further expense of Rs 1 crore is payable.
• Calculate NAV.
Example 4
• Investors have bought 60 crore units of a mutual fund scheme at Rs. 100
each. The scheme has thus mobilized 60 crore units X Rs. 100 per unit i.e.,
Rs 6000 crore.
• An amount of Rs. 3400 crores, invested in equities, has appreciated by 20
percent.
• The balance amount mobilized from investors, was placed in debt
instrument.
• Interest and dividend received by the scheme is Rs 28 crore, scheme
expenses paid is Rs 9 crore, while a further expense of Rs 3 crore is
payable.
• Calculate NAV.
EXAMPLE 5 Mutual Fund Valuation with Dividends
• Given:

• Total Assets: $25,000,000

• Total Liabilities: $2,500,000

• Number of Shares Outstanding: 2,000,000

• Dividends to be distributed: $1,000,000
• Given:
• Total Assets:
o Equity Investments: $100,000,000
o Bond Investments: $50,000,000
o Cash and Cash Equivalents: $10,000,000
• Total Liabilities: $20,000,000
• Number of Shares Outstanding: 12,000,000
• Dividends to be distributed: $5,000,000
• Market Returns (before dividends):
• Equity Investments increase by 8%
• Bond Investments increase by 3%
• Cash and Cash Equivalents remain the same
Example 7: Mutual Fund Valuation with Market Fluctuations

• Given:

• Initial Total Assets: $30,000,000

• Initial Total Liabilities: $2,000,000

• Number of Shares Outstanding: 3,000,000

• Market value of assets decreases by $3,000,000

 Example
• Given:

• Total Assets:
o Equity Investments: $50,000,000
o Bond Investments: $20,000,000
o Cash and Cash Equivalents: $5,000,000

• Total Liabilities: $10,000,000

• Number of Shares Outstanding: 8,000,000

• Market Fluctuations:

• Equity Investments decrease by 10%

• Bond Investments increase by 5%

• Cash and Cash Equivalents remain the same

Mutual Fund Valuation with New Share Issuance

• Given:
• Total Assets: $50,000,000
• Total Liabilities: $5,000,000
• Number of Shares Outstanding: 4,000,000
• New shares issued: 500,000 at $12 per share
Example

• Given:

• Total Assets: $40,000,000

• Total Liabilities: $4,000,000

• Number of Shares Outstanding: 3,600,000

• New shares issued: 400,000 at $10 per share

Example 2

• Given:

• Total Assets: $50,000,000

• Total Liabilities: $5,000,000

• Number of Shares Outstanding: 5,000,000

• New shares issued: 1,000,000 at $12 per share

Problem 3:
• A mutual fund has the following:

• Cash: $2 million

• Equities: $80 million

• Bonds: $30 million

• Liabilities: $3 million

• Outstanding shares: 5 million

• Calculate the NAV per share.

Example 3

• Given:

• Total Assets: $75,000,000

• Total Liabilities: $10,000,000

• Number of Shares Outstanding: 6,500,000

• New shares issued: 500,000 at $11 per share

Problem 2:
• A mutual fund has a NAV per share of $25. If an investor invests
$10,000, how many shares will they receive?
Example
• A mutual fund's NAV increased from $20 to $22 per
share over a year. If an investor invested $50,000
initially, what is the value of their investment after
one year?