Faculty Development Programme
on Mutual Funds
The Concept of
Mutual Funds
Amit Trivedi
Consultant
Karmayog Knowledge Academy
Concept of Mutual Funds
A Mutual Fund is a trust
that pools the savings
of a number of investors
who share a
common financial goal
Concept of Mutual Funds
A Mutual Fund is a trust
that pools the savings
of a number of investors
who share a
common financial goal
Concept of Mutual Funds
A Mutual Fund is a trust
that pools the savings
of a number of investors
who share a
common financial goal
Concept of Mutual Funds
A Mutual Fund is a trust
that pools the savings
of a number of investors
who share a
common financial goal
Concept of Mutual Funds
A Mutual Fund is a trust
that pools the savings
of a number of investors
who share a
common financial goal
Where is the money invested?
The money is invested in a
portfolio of securities
that reflect
the common investment objective of
the fund and the investors
Mutual Fund Units
The investors’ contribution in a
mutual fund are denoted in
UNITS
Sharing of Benefits
The income earned through the investments and the
capital appreciation are shared by the investors
The value of the units (NAV) reflects the current value of
the portfolio and income earned on it
Unit holders participate in the benefits from the mutual
fund in proportion to the number of units owned by them
Returns from Mutual Funds
The return from the mutual fund will depend upon the
performance of the portfolio of securities held by the fund
There are no assured returns in a mutual fund investment
The NAV of the scheme reflects the income earned and
appreciation and depreciation in the value of the securities
held in a mutual fund
Returns from Mutual Funds
The nature of returns will depend upon the type of
securities held in the portfolio and the way it is managed
Equity, debt, gold, real estate and others differ on the level
and type of returns and the extent of fluctuation in returns
Product Variety
Mutual Fund Products
Classification on the basis of
Organization structure
Classification on the basis of Classification on the basis of Classification on the basis of
Management Style Investment Objectives Portfolio Composition
Classification by Organization Structure
Open-ended Schemes
Close-ended Schemes
Interval Schemes
Open-ended Schemes
Open-ended Schemes issue fresh units and repurchase units
from investors on a continuous basis at the current NAV
Close-ended Schemes
Close-ended Schemes have a fixed maturity date
They issue units at the time of the initial offer to investors
and repurchase them only on maturity
The units can be transacted on in the stock market where
they are mandatorily listed
Interval Schemes
Interval Schemes are listed close-ended funds that allow
purchase and redemption during specified transaction periods
The transaction period has to be for a minimum of 2 days
and there should be at least 15-day gap between two
transaction periods
Classification by Portfolio Management
Passive Funds
Active Funds
Classification by Portfolio Management
The strategy adopted for creating and managing the portfolio
will define the risk and return from the fund
Passive funds hold a portfolio that replicates a stated index or
benchmark to generate returns in line with it
Index Funds
Exchange Traded Funds
Active funds adopt different strategies and styles to create and
manage the portfolio
The investment strategy and style are described upfront in
the offer document of the scheme
Active funds expect to generate better returns than the index
Classification by Investment Objectives
Growth Funds
Income Funds
Hybrid Funds
Money Market Mutual Funds
Classification by Investment Objectives
Mutual Funds offer products that cater to the different
investment objectives of the investors
Capital Appreciation (Growth)
Capital Preservation
Regular Income
Liquidity
Mutual Funds also offer investment plans, such as growth and
dividend options, to help tailor the investment to the investors’
needs
Growth Funds
Funds that are designed to provide appreciation primarily
invest in growth assets, such as equity
Investment in growth-oriented funds require a medium to long-
term investment horizon
Investors must be able to take volatility in the returns in the
short-term
Growth schemes are ideal for investors having long-term
outlook, seeking growth over a period of time
Income Funds
The aim of income funds is to provide regular and steady
income to investors
Investors can choose from different dividend frequencies
offered such as monthly or quarterly
The fund will distribute the income provided the portfolio
generates the required returns. There is no guarantee of
income
Income Funds
The schemes generally invest in fixed income securities such as
bonds, corporate debentures and government securities
The fund’s return is from the interest income earned on
these investments as well as from any change in the value of
the securities
The returns will depend upon the tenor and credit quality of
the securities held
Hybrid Funds
Balanced funds seek to find a balance between growth and
income by investing in both equity and debt
The regular income earned from the debt instruments provide
greater stability to the returns from such funds
Such funds periodically distribute a part of their earnings to its
investors as dividend
Hybrid Funds
The proportion of equity and debt that will be held in the
portfolio is indicated in their offer document
Equity oriented hybrid funds are ideal for investors looking for
growth in their investment with some stability
Debt-oriented hybrid funds are suitable for conservative investors
looking for a boost in returns with a small exposure to equity
Money Market Mutual Funds
Money market mutual funds or liquid funds is an investment
option for investors seeking liquidity and principal protection,
with commensurate returns
The funds invest in money market instruments with maturities not
exceeding 91 days
The return from the funds will depend upon the short-term
interest rate prevalent in the market
Money Market Mutual Funds
These are ideal for corporate and individual investors as a means to
park their surplus funds for short periods
Investors who use these funds for longer holding periods may be
sacrificing better the returns possible from products suitable for a
longer holding period
Classification by Investment Portfolio
Mutual Funds offer products can be classified based on their
portfolio composition
The first level of categorization will be on the basis of the
asset class the fund invests in, such as equity or debt or gold
or real estate
The second level of categorization is on the basis of strategies
and styles used to create the portfolio, such as, Income fund,
Dynamic bond fund, Infrastructure fund, Large-cap Equity
fund, Value fund, etc.
The portfolio composition flows out of the investment objectives
of the scheme
Equity Funds
Equity funds invest primarily in equity shares and equity-related
instruments
Equity instruments have the potential to generate higher
returns but come with greater risks too
Investors must have the risk tolerance and investment
horizon essential for equity investing
The stocks selected for the inclusion in a fund’s portfolio will
depend upon the stated investment objective and strategy
Sector funds will select stocks belonging to certain sectors
only, Value funds will invest in stocks that meet defined
requirements on valuation such as PE ratio and dividend
yield
Types of Equity Funds
Diversified equity funds invest across stocks of different sectors
and segments of the market
Diversification minimizes the risk of high exposure to a
few stocks, sectors or segment
Such fund can further be sub-classified on the basis of capitalization
of stocks they invest into as large, mid or small cap funds
Sector and thematic funds invest in a set of specific sector(s)
Equity funds may be categorized based on strategy and style
adopted in stock selection and portfolio concentration such as
growth or value stocks, holding a concentrated portfolio etc.
Debt Funds
Debt funds invest in short and long-term securities issued by
government, public financial institutions, companies
Treasury bills, Government Securities, Debentures,
Commercial paper, Certificates of Deposit and others
Debt funds can be categorized based on the tenor of the securities
held in the portfolio and/or on the basis of the issuers of the
securities or their fund management strategies
Short-term funds, long-term funds
Gilt fund, Treasury fund, Corporate bond fund, Infrastructure
debt fund
Floating rate funds, Dynamic bond funds, Fixed Maturity Plans
Short-Term Debt Funds
The tenor of the securities will define the return and risk of the
fund
Funds holding securities with lower tenors have lower
risk and return
Liquid funds invest in securities with not more than 91 days to
maturity
Ultra Short-Term Debt Funds hold a portfolio with a slightly higher
tenor to earn higher coupon income
Short-Term Plan combine coupon income earned from a pre-
dominantly short-term debt portfolio with a some exposure to
longer term securities to benefit from appreciation in price
Long-Term Debt Funds
Debt funds, such as Income Funds, earn higher coupon income
from investing in corporate bonds
Corporate bonds have a credit risk on account of possible
default
They also benefit from gains in the value of the securities when
interest rates fall
Gilt funds invest in long term government securities to benefit from
the appreciation in price with a fall in interest rates
The NAV of such funds tend to be more volatile from changes in the
price of the securities, and are suitable for investors willing to take a
little risk for better returns
Other Debt Funds
Fixed Maturity Plans are closed-ended funds which eliminate
interest rate risk and lock-in a yield by investing only in
securities whose maturity matches the maturity of the fund
Dynamic Bond funds alter the tenor of the securities in the portfolio
in line with expectation on interest rates
The tenor is increased if interest rates are expected to go and
vice versa
Floating rate funds invest in bonds whose interest are reset
periodically so that the fund earns coupon income that is in line with
current rates in the market, and eliminates interest rate risk to a large
extent
Hybrid Funds
Hybrid funds have a portfolio that hold a combination of
equity and debt securities
The proportion of equity and debt will depend upon the
investment objectives of the scheme
Funds with a greater allocation to debt are suitable for the
income requirement of investor
Funds with greater allocation to equity are suitable for the
growth needs of investors
The risk and return of the fund will be defined by the equity
exposure taken by the portfolio
Higher the allocation, greater is the risk
Types of Hybrid Funds
Equity-oriented hybrid funds hold at least 65% in equity
Balanced funds are equity-oriented funds
The debt holding provides stability to the returns
Debt-oriented funds hold predominantly debt securities with
equity ranging from 5% to 35% depending upon the nature of
the fund
Monthly Income Plans are debt-oriented funds
Asset allocation funds have the flexibility to hold any proportion in
equity and debt depending upon the fund manager’s view on the
asset class’ expected performance
Capital Protection Funds
Capital Protection Funds are close-ended hybrid funds that
create a portfolio of debt and equity derivatives
The portfolio is structured to provide capital protection and is
rated by a credit rating agency on its ability to do so
The debt component of the portfolio has to be invested in
instruments with the highest investment grade rating
A portion of the amount brought in by the investors is invested
in debt instruments that is expected to mature to the par value
of the capital invested by investors into the fund
The capital is therefore protected
The remaining portion of the funds is used to invest in equity
derivatives to generate higher returns
Other Funds
Mutual Funds offer products that provides access to new
investment opportunities or provide a specific benefit
Gold ETF
International Funds
Infrastructure Debt Funds
Arbitrage Funds
Equity Linked Savings Schemes
RGESS
Gold Exchange Traded Funds
Gold ETFs are funds with gold as the underlying asset
The scheme will issue units against gold held. Each unit will
represent a defined weight in gold, typically one gram
The scheme will hold gold in form of physical gold or gold
related instruments
Schemes can invest up to 20% of net assets in Gold Deposit
Scheme of banks
The price of ETF units moves in line with the price of gold on
metal exchange
After the NFO, units are issued to intermediaries called authorized
participants against gold or funds submitted
They can also redeem the units for the underlying gold
Benefits of Gold ETFs
Investors have the option of holding gold electronically instead
of physical gold
Safer option to hold gold since there are no risks of theft or
quality
Provides easy liquidity and ease of transaction
Gold ETFs are treated as non-equity oriented mutual funds for
the purpose of taxation
Eligible for long-term capital gains benefits if held for three
years
No wealth tax is applicable on Gold ETFs while it is applicable
on physical gold
International Funds
International funds enable investments in markets outside India,
by holding in their portfolio one or more of the following
Equity of companies listed abroad
ADRs and GDRs of Indian companies
Debt of companies listed abroad
ETFs of other countries
Units of passive index funds in other countries
Units of actively managed mutual funds in other countries
International equity funds may also hold some of their portfolios in
Indian equity or debt
They can hold some portion of the portfolio in money market
instruments to manage liquidity
Equity Linked Savings Scheme (ELSS)
ELSS are special equity funds investments in which are eligible
for tax deduction under Section 80C of the Income Tax Act
The investment has a 3-year lock-in
They cannot be redeemed, pledged, transferred or switched in
that period
Investment in ELSS can be done using SIPs
Each installment will have a 3 year lock-in
Any redemption will be done on first-in-first-out basis
Rajiv Gandhi Equity Savings Scheme (RGESS)
RGESS provides a deduction from taxable income for eligible
investors up to 50% of the amount invested in eligible schemes
Investment limit of up to Rs. 50,000 per year
Persons earning up to Rs. 12 lakh a year
The benefit can be availed for three consecutive financial
years from the initial year
The investment will be under a fixed and flexible lock-in period
No sale or pledge is possible in the fixed lock-in period
The investor can churn the portfolio in the flexible lock-in
period, subject to conditions
Rajiv Gandhi Equity Savings Scheme (RGESS)
RGESS provides a deduction from taxable income for eligible
investors up to 50% of the amount invested in eligible schemes
Investment limit of up to Rs. 50,000 per year
Persons earning up to Rs. 12 lakh a year
The benefit can be availed for three consecutive financial
years from the initial year
The investment will be under a fixed and flexible lock-in period
No sale or pledge is possible in the fixed lock-in period
The investor can churn the portfolio in the flexible lock-in
period, subject to conditions
RGESS – Product Features
Eligible schemes include 3-year close-ended scheme or ETFs
investing in stocks from a certain universe of eligible stocks
The scheme should invest in eligible securities which include
stocks belonging to the CNX100 and BSE 100 indices and
stocks of PSUs categorized as Maharatna, Navratna and
Miniratna
The scheme should be listed and traded on a stock exchange
The units/stocks will be held in a Demat account opened /
designated for RGESS
Investors not seeking tax benefits can hold the units in physical
form
Fund of Funds (FoF)
Fund of funds schemes are mutual fund products that invests in
the units of other schemes of the same mutual fund or other
mutual funds
The schemes selected for investment will be based on the
investment objective of the FoF
The FoF will have two levels of expenses: that of the scheme whose
units the FoF invests in and the expense of the FoF itself
Regulations limit the total expenses that can be charged across
both levels at 2.5%
Arbitrage Funds
Arbitrage funds invest in the cash and the derivatives markets to
generate returns from the difference in the price of a security in
the two markets
The fund takes equal but opposite positions in both the
markets, thereby locking in the difference
The positions have to be held until expiry of the derivative
cycle and both positions should be closed at the same price to
realize the difference
Since mutual funds invest own funds, the difference is fully the
return
Price movements do not affect initial price differential because the
profit in one market is set-off by the loss in the other market
Real Estate Mutual Funds
REMF are close-ended mutual fund schemes that will be listed
on a stock exchange
Redemption of the units may be done in a staggered manner
At least 35% of the net assets shall be invested directly in real estate
The REMF must invest at least 75% of its net assets as follows
Real estate as defined earlier, Mortgage backed securities, equity
and debentures of real estate companies, Balance in other securities
NAV will be calculated each business day based on the current
valuation available
The real estate assets shall be valued every 90 days by an
approved valuer
Infrastructure Debt Scheme
An infrastructure debt scheme may be launched by an existing
mutual fund or a new fund set up for this purpose
The sponsor & key personnel must have adequate experience
in the sector
The fund will be launched as a closed-ended scheme with a tenor of
at least five years or an interval scheme with a lock-in of five years
The units will be listed on a recognized stock exchange
Infrastructure Debt Scheme
The scheme shall have a minimum of five investors and no single
investor shall hold more than 50% of the net assets of the scheme
The minimum investment size shall be Rs. 1 crore and the
minimum size of the unit shall be Rs. 10 lakhs
Strategic investors will give commitment for at least Rs. 25 crores
The units may also be privately placed with less than 50 investors
Product Labeling in Mutual Funds
Mutual Funds are required to label their products to give investors a
snapshot of the scheme
Nature of the scheme, such as create wealth or provide income,
along with the suitable investment horizon
Investment objective in a single line
Level of risk indicated by colour coded boxes with text on the side
Blue: Principal at low risk
Yellow: Principal at medium risk
Brown: Principal at high risk
The product label should be prominently visible in all scheme related
documents and advertisements
Making and Managing Investments:
Variety in Options
Flexibility in Investments
Mutual funds offer the flexibility to make and mange investments to
suit the investor’s requirements and investment objectives
Investors can make lump sum investment or periodic
investments of smaller amounts
Investors can choose how they want to receive the returns from
their investment, periodic dividends or capital appreciation,
according to their specific requirements
Investors can rebalance their investments by using facilities to
switch between asset classes
Investors can manage market volatility while making and
redeeming investments using systematic transactions
Investment Options
Investors can structure their returns from the mutual fund investment
using investment options
Growth option: The returns generated is not paid out but retained
by the fund and reflects in the appreciating NAV
Dividend option: The fund declares a dividend out of realized gains
and income
Dividend payout: The dividend declared is paid out to the investors
The notice of dividend shall be published not earlier than 5
days from the record date fixed to determine eligibility
The dividend will be specified in rupees per unit
Dividend reinvestment: The dividend is re-invested in units of the
same scheme at the ex-dividend NAV
Using Investment Options
The choice of option depends on need for income or growth and the
tax implications
Investors in equity funds may prefer to receive a periodic payout
which they can invest elsewhere and diversify their risks
Investors in debt funds may use the dividends paid out to take
slightly higher risk and invest in equity for better returns
Investors in debt funds may use the growth option to benefit from
compounding growth
Dividend and capital gains are taxed differently for funds categorized
as equity-oriented and non equity-oriented
Investors may choose investment options to minimize tax-outgo
Mutual Fund Taxation: Dividend
Under Section 115R of the Income Tax Act, mutual funds are required
to levy income distribution tax
The dividend distribution tax (DDT) depends upon
Type of fund: equity oriented or non-equity oriented
Type of investor: Individual or corporate
The DDT is applied on the gross dividend payable with effect from
1st October, 2014
The income distribution (dividend) by the mutual funds are
exempted from the Income tax in the hands of investors
Mutual Fund Taxation: Dividend
Under Section 115R of the Income Tax Act, mutual funds are required
to levy income distribution tax
The dividend distribution tax (DDT) depends upon
Type of fund: equity oriented or non-equity oriented
Type of investor: Individual or corporate
The DDT is applied on the gross dividend payable with effect from
1st October, 2014
The income distribution (dividend) by the mutual funds are
exempted from the Income tax in the hands of investors
Dividend Distribution Tax Rates
Individual / HUF
Equity Oriented Schemes: Nil
Money Market and Liquid Schemes: 25% + 10% Surcharge + 3% Cess
= 28.325%
Other non-equity oriented Schemes: 25% + 10% Surcharge + 3% Cess
= 28.325%
Dividend Distribution Tax Rates
Domestic Company
Equity Oriented Schemes: Nil
Money Market and Liquid Schemes: 30% + 10% Surcharge + 3% Cess
= 33.99%
Other non-equity oriented Schemes: 30% + 10% Surcharge + 3% Cess
= 33.99%
Dividend Distribution Tax Rates
NRI
Equity Oriented Schemes: Nil
Money Market and Liquid Schemes: 25% + 10% Surcharge + 3% Cess
= 28.325%
Other non-equity oriented Schemes: 25% + 10% Surcharge + 3% Cess
= 28.325%
Mutual Fund Taxation: Capital Gains
The appreciation in the NAV realized at the time of redemption or
sale of the units is subject to tax as capital gains
Money Market and Liquid Schemes
Mutual Fund Taxation: Capital Gains
The rate at which capital gains will be taxed will depend upon
The type of fund: whether equity oriented or non-equity oriented
fund
The period for which the investment was held before the capital
gain was realized: If it was held for less than 12 months (36
months for non equity-oriented schemes) then it is short-term
capital gain. Else, it is long term capital gains
The type of investor: whether resident individual, non-resident
Indian or corporate investor
Short-Term Capital Gains
Type of Scheme Individual / HUF* Domestic Company** NRI***
Equity oriented 15% 15% 15%
Money Market Marginal rate of tax Marginal rate of tax Marginal rate of tax
Other non-equity Marginal rate of tax Marginal rate of tax Marginal rate of tax
oriented
*Surcharge @ 10% and education cess @ 3% applicable if income exceeds Rs. 10 crore
**Surcharge @ 5% if income exceeds Rs. 1 crore but less than Rs. 10 crore and 10% if
income exceeds Rs. 10 crore. Education cess @3% will also apply
***Short-Term capital gains applicable will be deducted at source
Long-Term Capital Gains
Type of Scheme Individual / HUF* Domestic Company** NRI***
Equity oriented Nil Nil Nil
Money Market 20% after Indexation 20% after Indexation 20% after Indexation
Other non-equity
20% after Indexation 20% after Indexation 20% after Indexation
oriented
*Surcharge @ 10% and education cess @ 3% applicable if income exceeds Rs. 10 crore
**Surcharge @ 5% if income exceeds Rs. 1 crore but less than Rs. 10 crore and 10% if
income exceeds Rs. 10 crore. Education cess @3% will also apply
***Short-Term capital gains applicable will be deducted at source
Other Tax Implications
Securities Transaction Tax (STT) @ of 0.001% of the redemption
value will be charged at the time of redeeming equity-oriented
mutual funds
Tax deduction at source will apply on NRI transactions
There is no TDS on transactions of resident investors
Capital loss can be set-off against capital gains, subject to
Short-term capital loss can be set off against long/short-term capital
gains
Long-term capital loss (LTCL) can be set off only against long-term
capital gains
No set-off benefit for LTCL from equity-oriented funds
Thank you !!!
