Mutual Funds
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siva sankar21BBAAT361: SECURITY
ANALYSIS AND PORTFOLIO VI Semester
MANAGEMENT
SYLLABUS
Unit 5: Mutual Funds
Mutual Funds, net asset value, SIP, types of
mutual fund schemes, mutual fund returns –
dividend payment plan, dividend reinvestment
plan, bonus plan and growth plan. Evaluation of
mutual fund – Sharpe’s measure, Treynor’s
measure, Jensen’s measure.
MUTUAL FUNDS
Definition
As per section 2(q) of Securities and Exchange
Board of India (SEBI) (Mutual Funds)
Regulations, 1996, "Mutual Fund" means a fund
established in the form of a trust to raise monies
through the sale of units to the public or a
section of the public under one or more schemes
for investing in securities, including money
market instruments or gold or gold related
instruments or real estate assets.
MUTUAL FUNDS
The following flow chart describes broadly the
working of a mutual fund:
QUIZ
"Mutual Fund" means a fund established in the
form of a trust
True
False
CONCEPT OF NAV
NET ASSET VALUE (NAV) OF A SCHEME
The performance of a particular scheme of a
mutual fund is denoted by Net Asset Value
(NAV).
Mutual funds invest the money collected from
the investors in securities markets.
In simple words, Net Asset Value is the market
value of the securities held by the scheme.
Since market value of securities changes every
day, NAV of a scheme also varies on day to day
basis.
CONCEPT OF NAV
The NAV per unit is the market value of
securities of a scheme divided by the total
number of units of the scheme on any particular
date.
For example, if the market value of securities of
a mutual fund scheme is Rs. 200 lakhs and the
mutual fund has issued 10 lakhs units of Rs. 10
each to the investors, then the NAV per unit of
the fund is Rs.20. NAV is required to be
disclosed by the mutual funds on a regular basis
- daily or weekly - depending on the type of
CONCEPT OF NAV
NET ASSET VALUE = VALUE OF ASSET –VALUE
OF LIABILITIES
Where:
Value of assets is the value of all the securities
in the portfolio
Value of liabilities is the value of all liabilities
and fund expenses (such as staff salaries,
management expenses, operational expenses,
audit fees, etc.)
CONCEPT OF NAV
NAV CALCULATION – WHAT IS IT?
The Net Asset Value (NAV) is the market value of
a share in a specific mutual fund and is
frequently linked to investments in mutual
funds.
By dividing the difference between a company's
assets and liabilities by the number of
outstanding shares, you can get NAV.
Investors can determine whether a fund is
undervalued or overvalued using NAV.
It determines how much of a specific fund you'll
QUIZ
NET ASSET VALUE = VALUE OF LIABILITIES–
VALUE OF ASSETS
True
False
CONCEPT OF SIP
A Systematic Investment Plan (SIP), also known
as AIP or Automatic Investment Plan, is a
disciplined investment approach that will allow
you to invest a fixed amount at regular intervals
in mutual funds.
It can be a great way to create wealth as you
can start investing with Rs. 100 till however
much you are willing to invest every month.
A systematic investment plan (SIP) is a vehicle
offered by mutual funds to help investors save
regularly.
CONCEPT OF SIP
It is just like a recurring deposit with the post
office or bank where you put in a small amount
every month.
The difference here is that the amount is
invested in a mutual fund.
Systematic investment plan (SIP) is a method of
investing in mutual funds wherein an investor
chooses a mutual fund scheme and invests the
fixed amount his choice at fixed intervals.
ADVANTAGES OF SIP
Disciplined Investing:
SIPs encourage regular and disciplined investing
as investors commit to making fixed
investments at regular intervals.
This approach helps in avoiding emotional and
impulsive investment decisions, enabling
individuals to stay invested for the long term.
ADVANTAGES OF SIP
Flexibility
SIPs offer flexibility in terms of investment
amount and duration.
Investors can start with a small amount and
gradually increase their investment as their
financial situation improves.
Additionally, SIPs can be started and stopped at
the investor's convenience, allowing them to
adapt their investment strategy to changing
circumstances.
ADVANTAGES OF SIP
Power of Compounding:
SIPs provide the benefit of compounding, as the
returns generated from investments are
reinvested to generate additional returns.
Over a long- term horizon, compounding can
significantly enhance the growth potential of
investments, leading to wealth creation.
ADVANTAGES OF SIP
Diversification:
SIPs allow investors to diversify their
investments across different asset classes and
securities.
By spreading investments across a range of
instruments, such as mutual funds, stocks, or
bonds, investors can reduce the risk associated
with investing in a single security or asset class.
ADVANTAGES OF SIP
Professional Fund Management
SIPs provide access to professionally managed
mutual funds, where experienced fund
managers make investment decisions for you
based on in-depth research and market analysis.
Saves time:
It is the easiest way of investing for you as an
investor due to various reasons like lack of time
to give in researching individual stocks.
It can save you a lot more time and meanwhile,
you can focus on your core business or job.
ADVANTAGES OF SIP
Auto deduct facility
You can opt for an auto deduct facility of
banking through which your SIP amount will
automatically deduct from your bank account at
a pre-decided date.
DISADVANTAGES OF SIP
Market Risk:
SIPs are exposed to market risks, and the value
of investments can fluctuate based on market
conditions.
If the market experiences a downturn, the value
of investments made through SIPs may
decrease, potentially resulting in temporary
losses.
DISADVANTAGES OF SIP
Possibility of Missing Gains:
Timing the market involves buying and selling
investments at the best possible time based on how the
market is performing.
This strategy is usually suggested for experts who
understand the know-how of markets.
However, beginners who usually invest in Systematic
Investment Plans (SIPs), invest regularly at specified
intervals, no matter how the market is doing.
This means you don’t get to choose the perfect time to
invest based on market trends.
As a result, you could miss out on the right time to
strike rich.
DISADVANTAGES OF SIP
Over dependence on Fund Manager:
In the case of mutual fund SIPs, investors rely
on the expertise and decision-making of the
fund manager.
If the fund manager's performance declines or if
there are changes in the fund's management
team, it can impact the overall returns
generated from the SIP.
DISADVANTAGES OF SIP
Limited Control:
SIPs offer limited control over the timing and
pricing of investments.
Investors have to adhere to the predetermined
investment schedule, which may not align with
their personal financial circumstances or market
expectations.
DISADVANTAGES OF SIP
Expense Ratios:
The expense ratio is the annual fee that you pay
to the Asset Management company (AMC) when
you invest in a mutual fund scheme.
It is a percentage of the fund’s total value and
includes cost such as administration, marketing,
legal fees, etc.
The maximum expense ratio that can be
charged for an equity scheme is 2.25% and that
for a debt scheme is 2%.
QUIZ
Auto deduct facility is available in SIP
True
False
