Mutual Funds

Objective
• Meaning of Mutual Fund (MF)
• Working of a MF
• Structure of MF in India
• Procedure for NFO
• Types of MF
• Features of Mutual Funds – SIP, STP, SWP
• Tracking error
• AMFI – Role & Objective
What is a Mutual Fund?
Mutual Funds Explained
Videos explaining the concept and basics of Mutual Funds:

• DSP Blackrock MF -
https://www.youtube.com/watch?v=cCD8icUm9dA
• UTI MF - https://www.youtube.com/watch?v=deaU-eVM5xs

Why you should diversify your investments? -

https://www.youtube.com/watch?v=_AsIuR-z_nw
 What is a Mutual Fund?
• A mutual fund is a pool of money managed by a professional Fund Manager.
• It is a trust that collects money from a number of investors who share a
common investment objective and invests the same in equities, bonds, money
market instruments and/or other securities.
• And the income / gains generated from this collective investment is
distributed proportionately amongst the investors after deducting applicable
expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV.

Simply put, the money pooled in by a large number of investors is what makes up
a Mutual Fund.

• Mutual funds are ideal for investors who either lack large sums for investment,
or for those who neither have the inclination nor the time to research the
market, yet want to grow their wealth. The money collected in mutual funds is
invested by professional fund managers in line with the scheme’s stated
objective. In return, the fund house charges a small fee which is deducted
from the investment. The fees charged by mutual funds are regulated and are
subject to certain limits specified by the Securities and Exchange Board of
India (SEBI).
 What is a Mutual Fund?
Definition as per SEBI (Mutual Funds) Regulations, 1996, (‘SEBI Regulations’):

“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

Examples of Investment objectives generally described in Scheme Information Document

(SID) as:

• “To provide returns that closely corresponds to the total returns of the NIFTY 100”. OR

• “To generate long-term capital appreciation by creating a portfolio that is invested

predominantly in Equity and Equity related securities of companies “ OR

• “The investment objective is to provide medium to long-term capital appreciation by

investing primarily in Large and Midcap stocks”.
 How does a Mutual Fund work?
1. A mutual fund requires to obtain SEBI registration before it can collect funds from the public.

2. Mutual Fund is managed by professional fund manager who charges investment management fees

3. Mutual Fund invites investors to invest in its schemes through advertisements, agents & distributors.

o As per SEBI regulations, Mutual Fund is required to issue Scheme Information Document (SID) and
Key Information Memorandum (KIM) disclosing all details regarding the fund management,
investment objectives, risk etc.

o Investors make a decision to invest based on such information.

o Investors of mutual funds are known as a ‘unit holders’ since the Mutual Fund issues units to the
investors in accordance with the quantum of money invested by them.

o Thereby each investor becomes a proportionate owner of the assets of the Mutual Fund.

4. Mutual Fund’s portfolio is structured and maintained to match its investment objectives. Eg;

o An equity fund would invest in stocks and equity-related instruments,

o Debt fund would invest in bonds, debentures, etc.

6. Value of the investment held by unitholders is determined based on scheme’s “Net Asset Value”

o NAV = market value of investments + assets – liabilities & fees, expenses & levies payable

o Open-ended scheme allows NAV based redemption of units on a daily basis throughout its life

o closed-ended scheme redeems units only on maturity but units may be sold on stock exchange
since they are compulsorily listed
Advantages of Investing
in MFs
 Advantages of investing in
MFs
• Professional Management
Mutual funds employ experienced and skilled professionals who make investment
research and analyze the performance and prospects of various instruments before
selecting a particular investment. Thus, by investing in mutual funds, one can avail the
services of professional fund managers, which would otherwise be costly for an individual
investor.
• Diversification
Diversification involves holding a wide variety of investments in a portfolio so as to
mitigate risks. Mutual funds usually spread investments across various industries and asset
classes, constrained only by the stated investment objective. Thus, by investing in mutual
funds, one can avail the benefits of diversification and asset allocation without investing
a large amount of money that would be required to create an individual portfolio.
• Liquidity
In an open-ended scheme, unit holders can redeem their units from the fund house
anytime. Even with close-ended schemes, one can sell the units on a stock exchange at
the prevailing market price. Besides, some close-ended and interval schemes allow direct
repurchase of units at NAV related prices from time to time. Thus investors do not have to
worry about finding buyers for their investments.
• Flexibility
Mutual funds offer a variety of plans, such as regular investment, regular withdrawal and
dividend reinvestment plans. Depending upon one’s preferences and convenience, one
can invest or withdraw funds, accordingly.
 Advantages of investing
•
in MFs
Cost Effective
Since Mutual funds have a number of investors, the fund’s transaction costs, commissions
and other fees get reduced to a considerable extent. Thus, owing to the benefits of
larger scale, mutual funds are comparatively less expensive than direct investment in the
capital markets.
• Well Regulated
Mutual funds in India are regulated and monitored by the Securities and Exchange Board
of India (SEBI), which strives to protect the interests of investors. Mutual funds are required
to provide investors with regular information about their investments, in addition to other
disclosures like specific investments made by the scheme and the proportion of
investment in each asset classes.
• Convenient Administration
The facility of making investments through service centers as well as through internet
ensures convenience.
• Return Potential
By allocating right asset mix, mutual funds offer a chance of higher potential of returns.
The high concentration of risky assets would lead to higher return and vice-versa.
• Transparency
Information available through fact sheets, offer documents, annual reports and
promotional materials help investors gather knowledge about their investments.
• Choice of Schemes
The investors can chose from various kinds of scheme available to them. The risk-seeker
investors can go for more aggressive schemes while risk-averse investors can go for
income schemes funds and so on.
 MF Concepts: Net Asset Value
• NAV is the measure of performance of an individual scheme of
a mutual fund.
• It is essentially, the market value of the securities held by the
scheme.
• The NAV is the combined market value of the shares, bonds and
securities held by a fund on any particular day (as reduced by
permitted expenses and charges).

NAV per Unit represents the market value of all the Units in a mutual fund
scheme on a given day, net of all expenses and liabilities plus income accrued,
divided by the outstanding number of Units in the scheme.

Example – a mutual fund has issued 10 lakh units at Rs. 10 each. NAV at the time
of allotment is Rs. 10. If the market value of securities jumps to INR 200 lakhs, the
NAV of each unit shall be INR 20 (Rs. 200 lakhs/ 10 lakh units). (current value of
the fund is Rs. 200 lakhs. At the time of allotment of unit, value of the fund is Rs.
100 lakhs).

Since the market value of securities changes every day, so does the NAV of
funds. Depending on the type of scheme, it is mandatory for the NAV to be
disclosed daily or weekly.
 MF Concepts: Net Asset Value
A fund’s NAV is affected by 4 sets of factors;
• Purchase & Sale of Investment Securities (Realised Profit):
Lets take an example of ITC, which is one of the top holding of one of the equity
mutual fund scheme. The fund manager of the scheme had bought the stock at
the price of Rs. 251.40 per share. Currently ITC is trading at Rs. 279.45 per share. If
the fund manager sells the stock today, the fund will realise the profit. But, if the
prices declines and corrects to Rs. 222.05 and the fund manager sells the security
at this price then it will result in the loss booked by the fund affecting the NAV of
the fund.

• Valuation of all investment securities held (Unrealised Profit):

As can be seen from the case mentioned in point 1, even if the fund manager
does not sell ITC stock, the up/down in the price of the stock will lead to change in
the NAV of the fund, as the fund accounts for the daily closing price of its securities
to compute its NAV.

• Other assets and liabilities:

Mutual funds invests the entire money collected in various instruments e.g. small
sized companies in growth funds or corporate bonds in income funds, etc.
Sometimes liquidity or volumes in these instruments are very low. At this time, if the
fund witnesses large scale redemption pressure from its investors, the fund will have
to borrow money from banks to satisfy such liquidity requirement. Such liability
comes at a cost (i.e. rate of interest) which may affect the NAV of the fund.
 MF Concepts: Net Asset
Value
• Units sold or redeemed:
As explained above, large scale redemption by unit holders of the mutual
fund may also mean that the fund will have to sell its stocks or securities at
whatever prevailing prices in the market to satisfy the redemption requests by
its investors. This kind of stress selling may lead to further lowering of prices
affecting the NAV of the fund.

NAVs are disclosed on daily basis for both Open Ended schemes and Close
Ended schemes.
 NAV Computation
Example 1 -
Let's assume at the close of trading yesterday that a
particular mutual fund held Rs. 10,500,000 worth of
securities, Rs. 2,000,000 of cash, and Rs. 500,000 of liabilities.
If the fund had 1,000,000 units outstanding, then yesterday's
NAV would be:

NAV = (Rs. 10,500,000 + Rs. 2,000,000 – Rs. 500,000) /

1,000,000 = Rs. 12.00

A fund's NAV will change daily as the value of a fund's

securities, cash held, liabilities, and the number of shares
outstanding fluctuate.
 NAV Computation
Example 2 -
ABC Asset Management started its ABC Balanced Fund on 1 January 2016 with Rs. 50
million in capital. Following are the details of the fund's assets and liabilities at the end
of first year.

Rs. in thousand
Local equity 9,000
Global equity 15,000
Local bonds 8,000
Global bonds 12,000
US Treasury 5,000
Preferred stock 10,000
Cash 2,000
Management fee payable 500
Accrued expenses 200

The fund initially had 2 million shares. It issued new shares and redeemed some old
ones during the year such that its outstanding shares as at the year end are 2.2 million.

Find the fund's net asset value.

(Assets – liabilities)/outstanding units = Rs. 27.41
Example 3 -
NAV Computation
Smart Invest AMC started its Smart Hybrid Fund (a close ended mutual fund) on 1
January 2018 and made an issue of 10,00,000 units at Rs. 10 each. It made the
following investments:

Particulars Rs.
50,000 equity shares of Rs. 100 each @ Rs. 160 80,00,000
7% G-sec at par 8,00,000
9% Debentures (Unlisted) at par 5,00,000
10% Debentures (Listed) at par 5,00,000
Cash 2,00,000
During the year, dividends received were Rs. 12,00,000. Interest on all kinds of debt
securities was received as and when due. At the end of the year, equity shares and
10% Debentures were quoted at 175% and 90% respectively. Other investments are at
par.
Find out NAV per unit at the end of the year, if operating expenses paid during the
year amounted to Rs. 5,00,000 and the MF paid a dividend of Rs. 0.80 per unit at the
end of the year.

NAV=[(50,000x100x175%)+(5,00,000x90%)+8,00,000+5,00,000+2,00,000+12,00,000+(7%x8,
00,000)+(9%x5,00,000)+(10%x5,00,000)-5,00,000-(10,00,000x0.80)]/10,00,000 = Rs. 10.75
per unit approx.
 NAV Computation
Example 4 -
Based on the following information, determine the NAV of a Regular Income MF.
Particulars Rs. in crores
Listed shares at cost (ex-dividend) 20.00
Cash in hand 1.23
Bonds and debentures at cost 4.30
- Of these, bonds not listed and quoted 1.00
Other fixed income securities at cost 4.50
Accrued dividend 0.80
Amt payable on shares 6.32
Expenditure accrued 0.75
No. of units (FV – Rs. 10) 20.00
Current realisable value of fixed income securities of FV 106.50
Rs. 100 (not covered above)
The listed shares were purchased when index was 1,000
Current index value 2,300
Value of bonds and debentures (listed) 8.00

There has been a diminution of 20% in the vale of unlisted bonds and debentures.

NAV = [(20x2,300/1,000)+1.23+8+(1x80%)+4.50+0.80+106.50-6.32-0.75]/20 = Rs. 8.04 approx.

 MF Concepts: Expense Ratio
''There is no free lunch.'‘
• This holds true for investing in a mutual fund too. Like a doctor who charges you for his
service, mutual funds too charge a fee for managing your money.
• This involves the fund management fee, agent commissions, registrar fees, and selling
and promoting expenses.
• All this falls under a single basket called Total Expense Ratio (TER) or annual recurring
expenses
• TER is expressed as a percentage of the fund's average weekly net assets.
• TER is to be prominently disclosed on a daily basis under a separate head “Total Expense
Ratio of Mutual Fund Schemes” on the websites of the AMC and AMFI in downloadable
spreadsheet format.
• Any change in the base TER in comparison to previous base TER charged to any
scheme/plan shall be communicated to investors of the scheme/plan through
notice via email or SMS at least three working days prior to effecting such change.

Expense ratio is the percentage of total assets that are spent to run a mutual fund. Expenses
become an important factor while comparing bond funds.
Expense ratio states how much you pay a fund in percentage term every year to manage
your money.

A lower expense ratio does not necessarily mean that it is a better-managed fund. A good
fund is one that delivers good return with minimal expenses.
SEBI circular on TER for MFs dated June 08, 2018 - https://www.sebi.gov.in/legal/circulars/jun-
2018/total-expense-ratio-for-mutual-funds_39187.html
 Understanding Expense
Ratio
For example, you invest Rs. 10,000 in a fund (allotment NAV – Rs.
10 p.u.) with an expense ratio of 1.5%. In the first year of
investment, the fund gains 10% and hence, the NAV (pre-
expense) jumps to Rs. 11 p.u. After charging the expense, the
NAV shall fall to Rs. 10.84 p.u. (Rs. 11x98.5%) thus, delivering a
8.35% absolute return to the investor.
NAVs are always reported net of fees and expenses, therefore, it
is necessary to know how much the fund is deducting as
expenses.

Since this is charged regularly (every day), a high expense ratio

over the long-term may eat into your returns massively through
power of compounding.
 Expense Ratio
Different funds have different expense ratios. But the Securities &
Exchange Board of India has stipulated a limit that a fund can
charge.
• The largest component of the expense ratio is management
and advisory fees.
• From management fee an AMC generates profits.
• Then there are marketing and promotion expenses.
• All those involved in the operations of a fund like the
custodian and auditors also get a share of the pie.
• Interestingly, brokerage paid by a fund on the purchase and
sale of securities is not reflected in the expense ratio.
• Funds state their buying and selling price after taking the
transaction cost into account.
Expense Ratio
 Expense ratio
Recurring expenses that are charged directly to the scheme which affects NAV are;
• Marketing & Selling expenses (incld. Distributors fees)
• Brokerage charges ( in case the AMC is not adjusting the brokerage charges in
buying or selling price)
• Registration charges
• Audit fees
• Custodian fees
• Expenses on investors communication
• Insurance Premium paid by the fund
• Cost of Statutory advertisement
• Management fees

Expenses that are not charged to the scheme and hence do not affect the NAV are;
• Penalties and fines for violation of law
• Interest on late payment to unit holders
• Legal, Marketing, publication and General expenses not attributed to any schemes
• Depreciation on fixed assets and software development expenses
 MF Concepts: Loads
Mutual funds charge load to investors in order to pay for the distributor's sales
expenses. A load does take away a part of your investment, but it's a price you have
to pay in order to participate in a fund.

Load can be charged in three different ways;

• At the time of the entry into the fund, by deducting the specified load amount
from the initial investment. Such a load is called an entry load. For example, if Rs
100 is invested in a fund which charges an entry load of 2 per cent, Rs 2 will be
deducted and Rs 98 will be the amount actually invested.

• Load can also be charged at the time of redemption - called exit load. In this case
the load amount is deducted from the redemption proceeds of the investor. For
instance, if the investment has grown to Rs 100 in a fund that charges exit load of 2
per cent, he will get redemption of Rs 98 (100-2).
• A third type of load is similar to the exit load. Here the load is charged depending
on the duration of stay in the fund. Thus for example, if units are redeemed before
six months an exit load of 0.5 per cent is levied. This time-based exit load is called
contingent deferred sales charge (CDSC).
 Regulations on Loads
• Most equity funds used to charge an entry load and no exit load. However,
SEBI has banned Mutual Funds currently to charge an entry load and as a
result Mutual Funds charge exit load on cases which redeems funds within a
stipulated time period.
• Across the category of equity schemes, loads can be greater in actively
managed equity schemes than in passively managed ones.
• Regulations allowed a fund to charge a maximum load of 6 per cent in the
past.
• Another way of looking at it is that a load imparts discipline to investing. The
CDSC of 0.5 per cent in debt funds exists to ensure that you stay in the fund
• While the load is an expense you have to bear to participate in a mutual fund,
it is not the only expense that you pay for the pleasure of investing in a mutual
fund. The expense ratio is the sum of all charges that you bear to invest in a
fund. This is in addition to the load. So along with the load, do check the
expense ratio of the fund you invest in too.
 Regulations on Loads
• Repurchase/Redemption Price

The price per Unit at which a Mutual Fund would ‘repurchase’ the units (i.e.,
buys back units from the investor) and includes Exit Load, if / wherever
applicable.

o Redemption Price = Applicable NAV*(1- Exit Load, if any)

o For Example: NAV = ₹10, Exit Load = 2%, then Redemption Price will be =
₹10* (1-0.02) = ₹9.80
 MF Concepts: AUM
Assets under management (AUM) is the total
market value of assets that an investment
company or financial institution manages on
behalf of investors.

• Assets under management definitions and formulae vary by company. Some financial
institutions include bank deposits, cash and mutual funds in their calculations; others limit
it to funds under discretionary management, where the investor assigns responsibility to
the company.

• Assets under management describes how much of investor’s money an investment

company controls. Investments are held in a mutual fund or hedge fund and are
managed by a venture capital company, portfolio manager or brokerage company.

• AUM indicates the size of the fund and may refer to the total amount of assets managed
for all clients or the total assets managed for a specific client. It includes the funds the
manager can use to make transactions.

For example, if an investor has Rs. 50,000 in an investment portfolio, the fund manager can
buy and sell shares using the investor's funds without obtaining the investor’s permission.
Fluctuating daily, AUM depends on the flow of investor money in and out of a particular fund
and asset performance. It also fluctuates based on changes in the company investments or
the value of a fund.
 AUM
• Calculating AUM:
o Methods of calculating assets under management vary among companies. It may
increase when investment performance increases or when new customers and new
assets are acquired.
o It may decrease when investment performance decreases, and because of client
turnovers, fund closures, withdrawals or redemptions.
o Assets under management include investor capital and can include capital owned
by the investment company executives.

• Why AUM Matters

o Several investment companies charge management fees that are a fixed
percentage of assets under management and it is important for investors to
understand how companies calculate AUM.
o Investment companies use assets under management as a marketing tool to attract
investors.
o It helps investors get an indication of the size of the company's operations relative to
its competitors. However, it is only one aspect in evaluating a company and does not
offer full details about the investment potential of the company.

• How to Compare AUM

o Investors want to know how much money from other investors is flowing into a
company. Therefore, an investor should understand how to compare AUM.
o More assets under management are not always better. It may be helpful to search
for below-average to average net assets as a method to compare AUM.
 MF investments are Investing in MF is
Mutual Funds are for only for the long
experts same as investing
term in Stock market

Schemes with lower One needs a large One needs to have a

NAV as better than amount of money to Demat account to
Schemes with higher invest in Mutual invest in Mutual
NAV Funds Funds

Buying a top-rated
A scheme with a
mutual fund scheme
higher NAV has
ensures better
reached its Peak!!
returns.
 Myths & Facts
Myth 1: Mutual Funds are for experts
Fact: In fact, Mutual funds are meant for of common investors who may lack the knowledge
or skill set to invest in securities market. Mutual Funds are professionally managed by expert
Fund Managers after extensive market research for the benefit of investors. A mutual fund is
an inexpensive way for investors to get a full-time professional fund manager to manage their
money.

Myth 2: MF investments are only for the long term

Fact: Mutual funds can be for the short term or for longer term based on one’s investment
horizon and objective.
There are different types of mutual fund schemes – which invest in different types of securities
– in equity as well as debt securities that are suitable for different investor needs.
In fact, there are various short-term schemes where you can invest for a few days to a few
weeks to a few years e.g., Liquid Funds are low duration funds, with portfolio maturity of less
than 91 days, while Ultra short-Term Bond Funds are low duration funds, with portfolio maturity
of less than a year. There are Short-Term Bond Funds which are medium duration funds where
the underlying portfolio maturity ranges from one year – three years. Then, there are Long-
Term Income Funds which are medium to long duration funds with portfolio maturity between
3 and 10 years. While Equity Schemes are most suitable for a longer term, debt mutual funds
are suitable for investors with short term (less than 5 years) investment horizon.
 Myths & Facts
Myth 3: Investing in MF is same as investing in Stock market
Fact: Mutual Funds invest in stock market (i.e., equities), bond market (corporate bonds as
well as govt. bonds) and Money Market instruments such as Treasury Bills, Commercial Papers,
Certificate of Deposit, Collateral Borrowing & Lending Obligation (CBLO) etc. Many of these
instruments are not available to retail investors due to large ticket size of minimum order
quantity (such as G-Secs) and hence, retail investors could participate in such investments
through mutual fund schemes

Myth 4: Schemes with lower NAV as better than Schemes with higher NAV
Fact: This is a common misconception. A mutual fund's NAV represents the market value of all
its underlying investments. NAV of a fund is irrelevant, because it represents the market value
of the fund’s investments and not the market price. Any capital appreciation will depend on
the price movement of its underlying securities. Let us understand this through an illustration.
Suppose, you invest ₹10,000 each in scheme A whose NAV is ₹20 and scheme B (whose NAV
is say, ₹100. You will be allotted 500 units of scheme A and 100 units of scheme B. Assuming
that both schemes have invested their entire corpus in exactly same stocks and in the same
proportions, if the underlying stocks collectively appreciate by 10%, the NAV of the two
schemes should also rise by 10%, to ₹22 and ₹110, respectively. Thus, in both the scenarios, the
value of your investment increases to ₹ 11,000.
Thus, the current NAV of a fund does not have any impact on the returns.
 Myths & Facts
Myth 5: One needs a large amount of money to invest in Mutual Funds
Fact: Absolutely incorrect. One could start investing mutual funds with just ₹5,000 for a lump-
sum / one-time investment with no upper limit and ₹1,000 towards subsequent / additional
subscription in most of the mutual fund schemes. And for Equity linked Savings Schemes (ELSS),
the minimum amount is as low as ₹ 500.
In fact, one could invest via Systematic Investment Plan ( SIP) with as little as ₹500 per month for
as long as one wishes to.

Myth 6: One needs to have a Demat account to invest in Mutual Funds

Fact: Holding mutual fund Units in Demat mode is absolutely optional, except in respect of
Exchange Traded Funds. For all other schemes, including the close-ended listed schemes like
Fixed Maturity Plans (FMPs), it is entirely upto the investor whether to hold the units in a Demat
mode or in conventional physical account statement mode.
 Myths & Facts
Myth 7: A scheme with a higher NAV has reached its Peak!
Fact: This is a very common misconception because of the general association of Mutual Funds
with shares. One needs to keep in mind that the NAV of a scheme is nothing but a reflection of
the market value of the underlying shares held by the fund on any day. Mutual Funds invest in
shares, which may be bought or sold whenever deemed appropriate by the Fund Manager
depending on the scheme’s investment strategy (Buy-Hold-Sell). If the Fund Manager feels that
a particular stock has peaked, he can choose to sell it.
A high NAV does not mean the fund is expensive. In fact, high NAV indicates a good
performance of the scheme over the years.

Myth 8: Buying a top-rated mutual fund scheme ensures better returns.

Fact: Mutual fund ratings are dynamic and based on performance of the scheme over time –
which in itself is subject to market fluctuations. So, a Mutual fund scheme that may be on top
of the rating chart currently, may not necessarily maintain the same rating month after month
or at a later date . However, a top rated fund is a good first step to short list a scheme to invest
in (although past performance does not necessarily guarantee better returns in future).
Investment in a mutual fund scheme needs to be tracked with respect to the scheme’s
benchmark to evaluate its performance periodically to decide whether to stay invested or to
exit.
 The 3 Tier Structure
The board that is in charge of running the mutual
funds in India is called the Securities and Exchange
Board of India or SEBI for short. All mutual fund
schemes are required to be registered with SEBI
before their launch. Mutual Fund is run heavily on
investor’s money so SEBI has a set of stringent rules
and regulations in place which will dictate how the
mutual fund is run. According to SEBI, the three main
structure and roles are played by
– A Sponsor, a Trustee and an Asset Management
Company.
 With such a clearly defined structure present in a mutual fund, your money and
investment details are filtered through a number of different processes to
determine the best investment for you. With a good structure in place, the mutual
fund you select will have a consistent performance too.
 Structure of MF
A mutual fund is set up in the form of a trust, which has Sponsor,
Trustees, Asset Management Company (AMC) and custodian.

• The trust is established by a Sponsor or more than one Sponsor

who is like promoter of a company.
• The Trustees of the mutual fund hold its property for the benefit
of the unit holders.
• AMC approved by SEBI manages the funds by making
investments in various types of securities.
• Custodian, who is required to be registered with SEBI, holds the
securities of various schemes of the fund in its custody.

The trustees are vested with the general power of

superintendence and direction over AMC. They monitor the
performance and compliance of SEBI Regulations by the mutual
fund.
 Structure
Sponsor:

•The sponsor is the one who ends up choosing the trustees and sets up an AMC where
investors can submit their money in.
•Being a sponsor is a huge responsibility which is why SEBI has a set of guidelines to
determine if they are eligible enough.
•These include being in the financial services for at least five years, for all the years the
sponsor should have profitability.
•Along with this, the sponsor should have a positive net worth which will also contribute to
the AMC.
•According to SEBI, the sponsor should have professional competence, financial
soundness and reputation for fairness and integrity.
•The sponsor contributes 40% of the networth of the AMC.

A Sponsor is any person or corporate body that establishes the Fund

and registers it with SEBI. It forms a Trust and appoints a Board of
Trustees. It also appoints Custodian and Asset Management Company
either directly or through Trust, in accordance with SEBI regulations.
 Structure
Trustee
• Trustee is created through a document called the Trust Deed that is executed by the Fund Sponsor and
registered with SEBI.
• The Trust-the mutual fund may be managed by a Board of Trustees- a body of individuals or a Trust
Company- a corporate body.
• Trustees are the protector of unit holders’ interests.
• A minimum of 2/3rd of the trustees must be independent of the sponsor to ensure fair dealings.

Rights of Trustees
• Approve each of the schemes floated by the AMC.
• The right to request any necessary information from the AMC.
• May take corrective action if they believe that the conduct of the fund's business is not in accordance
with SEBI Regulations.
• Have the right to dismiss the AMC,
• Ensure that, any shortfall in net worth of the AMC is made up.

Obligations of the Trustees

• Enter into an investment management agreement with the AMC.

• Ensure that the fund's transactions are in accordance with the Trust Deed.
• Furnish to SEBI on a half-yearly basis, a report on the fund's activities
• Ensure that no change in the fundamental attributes of any scheme or the trust or any other change
which would affect the interest of unit holders is happens without informing the unit holders.
• Review the investor complaints received and the redressal of the same by the AMC.
 Structure
Asset Management Company (AMC)

• Acts as an investment manager of the Trust under the Board Supervision and direction of the Trustees.
• Has to be approved and registered with SEBI.
• Will float and manage the different investment schemes in the name of Trust and in accordance with
SEBI regulations.
• Acts in interest of the unit-holders and reports to the trustees.
• At least 50% of directors on the board are independent of the sponsor or the trustees.

Obligation of Asset Management Company:

• Float investment schemes only after receiving prior approval from the Trustees and SEBI.
• Send quarterly reports to Trustees.
• Make the required disclosures to the investors in areas such as calculation of NAV and repurchase price.
• Must maintain a net worth of at least Rs. 50 crores at all times.
• Will not purchase or sell securities through any broker, which is average of 5% or more of the aggregate
purchases and sale of securities made by the mutual fund in all its schemes.
• AMC cannot act as a trustee of any other mutual fund.
• Do not undertake any other activity conflicting with managing the fund.
 Structure
Custodians

•A custodian’s role is keeping custody of the securities that are bought by the fund manager and also keeping a
tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has
invested.
•The Custodian is appointed by the Board of Trustees. The custodian also participates in a clearing and settlement
system through approved depository companies on behalf of mutual funds, in case of dematerialized securities.
•Only the physical securities are held by the Custodian. The deliveries and receipt of units of a mutual fund are done
by the custodian or a depository participant at the instruction of the AMC and under the overall direction and
responsibility of the Trustees. Regulations provide that the Sponsor and the Custodian must be separate entities.

Registrar & Transfer Agents

•The Register and Transfer Agent is in charge of updating the records of the investors, processing the applications,
purchasing transactions, redemption of transactions amongst other functions.
•The registrar and transfer agents are appointed by the AMC. AMC pay compensation to these agents for their
services. They carry out the following functions
•Receiving and processing the application forms of investors
•Issuing unit certificates
•Sending refund orders
•Giving approval for all transfers of units and maintaining records
•Repurchasing the units and redemption of units
•Issuing dividend or income warrants
 Structure
Accountants

•The fund accountants present are responsible in keep a tab on the NAV or Net Asset Value of the different assets
and liabilities available.
•Fund accountants are appointed by the AMC. The are in charge of maintaining proper books of accounts relating
to the fund transactions and management. The perform the following functions
•Computing the net asset value per unit of the scheme on a daily basis
•Maintaining its books and records
•Monitoring compliance with the schemes, investment limitations as well as SEBI regulations
•Preparing and distributing reports of the schemes for the unit holders and SEBI and monitoring the performance of
mutual funds custodians and other service providers.

Auditors

•Since the accounts and the schemes of the AMC are kept separately, the auditor is present to audit and keep a
track on the various accounts of the AMC.
•An auditor is appointed by the AMC and must undertake independent inspection and verification of its accounting
activities.
 New Fund Offer (NFO)
• People are quite familiar with the term IPO which is a direct offer by the
company to buy its share which can be later traded in the stock market.
• Likewise, NFO is the first time subscription offer for a new scheme launched by
the mutual fund companies.
• During the subscription period an investor can buy the units at the fixed rate of
Rs.10 per unit (except in case of ETFs and Index Funds).
• If it is a close ended fund then investor can buy the units only during the
subscription period and will have to hold the units for the said period, whereas
in the open ended fund, one can buy units even after the subscription period
is over and can redeem it at any time.
• After the NFO period, investors can take exposure in open ended funds only
at the prevailing NAV.

Before investing in a NFO, it is important to check if the NFO is offering something

new or if something similar already exists.
 NFO
• No proven track record: Since NFO’s are launched with a new idea or a theme/sector it is
very difficult to analyze the future of the fund. One can always find a similar kind of fund
already running in the market which has a rating from the experts and where
qualitative/quantitative analysis can be done on the basis of its past record, which
cannot be done in case of NFO.

• It is not cheaper than its other peer funds: Many investor thinks that NFO’s are available at
cheap price compared to other ongoing schemes, which is totally wrong. Suppose an
investor invests Rs. 10,000 in an NFO at NAV of Rs.10 and invests the same amount into an
ongoing scheme whose NAV is Rs.20. Now the growth of the NAV in both the schemes
depends upon the kind of portfolio they hold. Here the percentage growth of the NAV is
important rather than the value of NAV. So, unlike in equity IPO, it is the underlying in case
of mutual funds which matters not the NAV.

• Comes with high initial expenses: The marketing charges and other initial expenses are
high in case of NFO’s. These expenses are capped to a certain percentage and are
managed out of the NAV over the period and hence are responsible for the lesser return.
So it’s better to avoid new funds as charges are high.
 NFO
• Limited Diversification: Generally NFOs are sector specific (normally at the top of bull
market) or have focus on certain category like mid cap, small cap. People are advised
to invest with a proper diversification because if one sector does not perform the returns
are compensated by another sector and proper balance is maintained. So it is better to
read the investment objective of the scheme before investing and avoid those which
have limited scope of diversification. Your portfolio should be designed based on your
goals.

• NFO are not exactly like IPO’s: Many people are of the view that there is no difference
between NFO and IPO which is not true. In NFO the NAV is fixed/ pre-decided at Rs. 10
per unit and is not affected due to the demand or some other factors. While in IPO the
listing price depends on the demand and expectation of the market with the company.
So the price may fall or rise while listing. So please remember the growth of NAV in mutual
funds only depends upon the growth of the underlying securities.
New Fund Offer (NFO)
 Comparison between types of Mutual Funds
Type of Fund
Parameter Equity Funds Debt Funds Hybrid Funds
Composition Predominantly invest in Predominantly invest in Invest in a mix of equity
equity shares (65 to 80% of fixed income securities and debt instruments
total assets of Mutual Fund)

Risk Risk is higher than Debt and Risk is lower as compared Risk is less than Equity
Hybrid Funds since to equity funds as prices are funds but higher than debt
investment is in equity less volatile and returns are funds due to a component
shares whose prices are generally fixed and hence of equity investments
volatile certain
Return If the market does well high Return is assured as per the Fixed returns from debt
returns are possible but terms of debt investments maintain a
when markets fall losses regular and assured flow of
could be substantial income whereas returns
from equity component in
the form of capital
appreciation / dividend
help to earn higher returns
Primary objective Capital appreciation and Fixed income at regular Assure fixed income and
wealth creation intervals some component of capital
appreciation or dividend
 Liquid Funds
o Liquid Funds, as the name suggests, invest predominantly in highly liquid
money market instruments and debt securities of very short tenure and
hence provide high liquidity.
o They invest in very short-term instruments such as Treasury Bills (T-bills),
Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized
Lending & Borrowing Obligations (CBLO) that have residual maturities of up
to 91 days.
o Redemption requests in these Liquid funds are processed within one working
(T+1) day.
o The aim of the fund manager of a Liquid Fund is to invest only into liquid
investments with good credit rating with very low possibility of a default.
o The returns typically take the back seat as protection of capital remains of
utmost importance.
o Control over expenses in the form of low expense ratio, good overall credit
quality of the portfolio and a disciplined approach to investing are some of
the key ingredients of a good liquid fund.
o Most retail customers prefer to keep their surplus cash in Savings Bank
deposits as they consider the same to be safest and they could withdraw the
money at any time.
 Liquid Funds
o Liquid Funds and Money Market Mutual Funds provide a more attractive
option.
o Surplus cash invested in money market mutual funds earns higher post-tax
returns with a reasonable degree of safety of the principal invested and
liquidity.
o Liquid funds are preferred by investors to park their money for short periods of
time typically 1 day to 3 months.
o Wealth managers suggest liquid funds as an ideal parking ground when you
have a sudden influx of cash, which could be a huge bonus, sale of real
estate and so on and you are undecided about where to deploy that
money.
o Investors looking out for opportunities in equities and long-term fixed income
instruments can also park their money in the liquid funds in the meantime.
o Many equity investors use liquid funds to stagger their investments into equity
mutual funds using the Systematic Transfer Plan (STP), as they believe this
method could yield higher returns.
o Investors are offered growth and dividend options.
 Liquid Funds
o Within dividend option, investors can choose daily, weekly or monthly
dividends depending on their investment horizon and investment amount.
Redemption payment is typically made within one working day of placing
the redemption request.
o With mutual funds going online, individual investors with small sums can look
at Liquid funds as an effective short-term investment option over their savings
bank account.
o Liquid Funds also offer Instant Redemption Facility / Instant Access Facility
(IAF). IAF facilitates credit of redemption proceeds in the bank account of
the investor on the same day of redemption request.
o The monetary limit under IAF is INR 50,000/- or 90% of latest value of
investment in the scheme, whichever is lower. This limit is applicable per day
per scheme per investor.
o MFs have in place a mechanism so that adequate balance is available in
the bank account of the scheme to meet liquidity/ redemption requirements
under IAF. MFs cannot borrow to meet the redemption requirements under
IAF.
 FoFs
o A ‘Fund Of Funds’ (FOF) is an investment strategy of holding a portfolio of other
investment funds rather than investing directly in stocks, bonds or other securities.
An FOF Scheme of a primarily invests in the units of another Mutual Fund
schemes. This type of investing is often referred to as multi-manager investment.
o These schemes offer the investor an opportunity to diversify risk by spreading
investments across multiple funds. The underlying investments for a FoF are the
units of other mutual fund schemes either from the same mutual fund or other
mutual fund houses.
o Experts believe fund of funds are generally better suited for smaller investors that
want to gain access to a range of different asset classes or for those whose
advisers do not have the expertise to make single manager recommendations.
o Under current Income Tax regime in India, a FOF investing in equity funds is
treated as a Equity Fund and consequently taxed accordingly.
 Exchange Traded Funds
• An ETF, or exchange traded fund, is a marketable security that tracks an
index, a commodity, bonds, or a basket of assets like an index fund.
• In the simple terms, ETFs are funds that track indexes such as Nifty 50 or S&P
BSE Sensex, etc.
• When you buy shares/units of an ETF, you are buying shares/units of a portfolio
that tracks the yield and return of its native index.
• They don't try to beat the market, they try to be the market.
• Unlike regular mutual funds, an ETF trades like a common stock on a stock
exchange.
• The traded price of an ETF changes throughout the day like any other stock,
as it is bought and sold on the stock exchange. The trading value of an ETF is
based on the net asset value of the underlying stocks that an ETF represents.
• ETFs typically have higher daily liquidity and lower fees than mutual fund
schemes, making them an attractive alternative for individual investors.
 ETFs
ETFs are cost-efficient : Because an ETF tracks an index without trying to
outperform it, it incurs lower administrative costs than actively managed
portfolios. Typical ETF administrative costs are lower than an actively managed
fund. Because they have lower expense ratio, there are fewer recurring costs to
diminish ETF returns.

Difference between ETF and Index Fund?

While both are passively managed, the biggest difference is that Index Funds
operate in the way all mutual funds do, in that they are priced at the close of the
trading day based on the NAV of the underlying securities, whereas ETFs are
priced to the market throughout the trading day. That means they are easier to
buy and sell quickly, if need be. Secondly, ETFs are available only on stock
exchanges. Hence, you need a demat account to invest in an ETF, whereas for an
Index Fund, you don’t need a demat account and you may buy or sell the Units of
an Index Fund directly from the mutual fund in small amounts.
 Benefits of Investing in ETFs
ETFs combine the range of a diversified portfolio with the simplicity of trading a
single stock. Investors can purchase ETF shares on margin, short sell shares, or hold
for the long term. ETFs can be bought/ sold easily like any other stock on the
exchange through terminals across the country.
• Asset Allocation: Managing asset allocation can be difficult for individual
investors given the costs and assets required to achieve proper levels of
diversification. ETFs provide investors with exposure to broad segments of the
equity markets. They cover a range of style and size spectrums, enabling
investors to build customized investment portfolios consistent with their
financial needs, risk tolerance, and investment horizon. Both institutional and
individual investors use ETFs to conveniently, efficiently, and cost effectively
allocate their assets.
• Cash Equitisation: Investors typically seek exposure to equity markets, but
often need time to make investment decisions. ETFs provide a "Parking Place"
for cash that is designated for equity investment. Because ETFs are liquid,
investors can participate in the market while deciding where to invest the
funds for the longer-term, thus avoiding potential opportunity costs.
Historically, investors have relied heavily on derivatives to achieve temporary
exposure. However, derivatives are not always a practical solution. The large
denomination of most derivative contracts can preclude investors, both
institutional and individual, from using them to gain market exposure. In this
case and in those where derivative use may be restricted, ETFs are a practical
alternative.
 Benefits of Investing in
ETFs
• Hedging Risks: ETFs are an excellent hedging vehicle because they can be
borrowed and sold short. The smaller denominations in which ETFs trade
relative to most derivative contracts provides a more accurate risk exposure
match, particularly for small investment portfolios.

• Arbitrage (cash vs futures) and covered option strategies: ETFs can be used to
arbitrage between the cash and futures market, as they are very easy to
trade. ETFs can also be used for cover option strategies on the index.
 Gold ETF
• A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic
physical gold price. They are passive investment instruments that are based
on gold prices and invest in gold bullion.
• In short, Gold ETFs are units representing physical gold which is in
dematerialised form. One Gold ETF unit is equal to 1 gram of gold and is
backed by physical gold of very high purity. Gold ETFs combine the flexibility
of stock investment and the simplicity of gold investments.
• Gold ETFs are listed and traded on the National Stock Exchange of India (NSE)
and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Gold
ETFs trade on the cash segment of BSE & NSE, like any other company stock,
and can be bought and sold continuously at market prices.
• Buying Gold ETFs means you are purchasing gold in an electronic form. You
can buy and sell gold ETFs just as you would trade in stocks. When you
actually redeem Gold ETF, you don’t get physical gold, but receive the cash
equivalent. Trading of gold ETFs takes place through a dematerialised
account (Demat) and a broker, which makes it an extremely convenient way
of electronically investing in gold.
• Because of its direct gold pricing, there is a complete transparency on the
holdings of a Gold ETF. Further due to its unique structure and creation
mechanism, the ETFs have much lower expenses as compared to physical
gold investments.
 Gold ETF
• Purity & Price: Gold ETFs are represented by 99.5%
pure physical gold bars. Gold ETF prices are listed
on the website of BSE/NSE and can be bought or
sold anytime through a stock broker. Unlike gold
jewellery, gold ETF can be bought and sold at the
same price Pan-India.
• Where to buy: Gold ETFs can be bought on BSE/NSE
through the broker using a demat account and
trading account. A brokerage fee and minor fund
management charges are applicable when buying
or selling gold ETFs
 Gold ETFs
Risks:
Gold ETFs are subject to market risks impacting the price of
gold. Gold ETFs are subject to SEBI (Mutual Funds)
Regulations. Regular audit of the physical gold bought by
fund houses by a statutory auditor is mandatory.

Who should invest in Gold ETF?

Gold ETFs are ideal for investors who wish to invest in gold
but do not want to invest in physical gold due to the
storage hassles / doubt about purity of gold and are also
looking to get tax benefits. There is no premium or making
charge, so investors stand to save money if their investment
is substantial. What’s more, one can purchase as low as
one unit (which is 1 gram).
 Advantages of buying
Gold ETF
• Purity of the gold is guaranteed and each unit is backed
by physical gold of high purity.
• Transparent and real time gold prices.
• Listed and traded on stock exchange.
• A tax efficient way to hold gold as the income earned
from them is treated as long term capital gain.
• No security transaction tax, no VAT and no sales tax.
• No fear of theft - Safe and secure as units held in Demat.
One also saves on safe deposit locker charges.
• ETFs are accepted as collateral for loans.
• No entry and exit load.
 How to Sell or redeem
Gold ETF
Gold ETFs can be sold at the stock exchange through
the broker using a demat account and trading
account. Since one is investing in an ETF that is
backed by physical gold, ETFs are best used as a tool
to benefit from the price of gold rather than to get
access to physical gold. So, when one liquidates Gold
ETF Units, one is paid as per domestic market price of
the gold. AMCs also permit redemption of Gold ETF
Units in the form of physical gold in ‘Creation Unit’ size,
if one holds equivalent of 1kg of gold in ETFs, or in
multiples thereof.
 What is Systematic
Investment Plan (SIP)
A Systematic Investment Plan (SIP) is a plan that lets
you invest specific amounts of money at regular
intervals to gradually build a large corpus. By investing
in a SIP, your investments get disciplined. Also, since
you are investing regularly, the setbacks to your
investments when markets are low get balanced by
your investments’ gains when the market is high. And
as you gain returns and keep investing higher amounts
during the investment tenure, your returns keep
multiplying and growing.
 SIP, SWP and STP
Systematic Investment Plan (SIP) Systematic Withdrawal Plan (SWP) Systematic Transfer Plan (STP)

SIP is an investment plan (methodology) SWP allows you to withdraw a fixed amount An STP or Systematic Transfer Plan
offered by Mutual Funds wherein one of money from a mutual fund. Unlike moves a fixed amount of money
could invest a fixed amount in a mutual lumpsum redemption of the mutual fund, from one mutual fund to another
fund scheme periodically, at fixed intervals an SWP allows a planned and regular flow of at regular intervals. Typically, an
– say once a month, instead of making a income. STP is used to transfer money
lump-sum investment. between liquid or debt fund to an
There are 2 options to under this method: equity fund.
1) Fixed Periodic Withdrawal
A fixed periodic withdrawal allows the Systematic Transfer Plan is of two
unitholder to withdraw a fixed sum on types;
regular intervals, say monthly. The mutual 1) fixed STP, and capital
fund house will sell units equivalent to the appreciation STP. A fixed STP
SWP amount and transfer the amount to the is where investors take out a
investor’s account. fixed sum from one
2) Appreciation Withdrawal investment to another. ‘
In the appreciation withdrawal method, 2) A capital appreciation STP is
mutual fund unit holder makes the choice to where investors take the
withdraw capital appreciation at a fixed profit part out of one
frequency. investment and invest in the
While in the fixed withdrawal plan, the other.
corpus may deplete over a period of time,
there is no such possibility in the
appreciation withdrawal plan as only capital
appreciation gets transferred in the form of
an SWP.
 Systematic Investment Plan
SIP,Systematic
SWP and STP
Withdrawal Plan (SWP) Systematic Transfer Plan (STP)
(SIP)

SIP is a very convenient method If your bank account is registered with the mutual fund,
of investing in mutual funds your SWP amount will directly be remitted into your bank
through standing instructions to account through ECS (Electronic Clearing Service).
debit your bank account every
month, without the hassle of
having to write out a cheque
each time.
Benefits: An SWP can be very useful for:
Helps average purchase cost • retirement financial planning or in the time of
financial exigencies such as unemployment.
• Regular payments to be made in future (lental).
What is Capital Protection
Scheme
A capital protection-oriented scheme is typically a hybrid close
ended scheme that invests significantly in fixed- income securities
and a part of its corpus in equities. These are close-ended schemes
that come in tenors of fixed maturity e.g. three to five years.

Structure of the scheme - Example

If the fund collects INR 100, it invests INR 80 in fixed-income securities
and INR 20 in equities or equity related instruments. The money is
invested in such a way that the INR 80 portion is expected to
grow to become INR 100 in three years (assuming that the scheme
has a maturity period of three years). Thus, the aim is to preserve the
INR 100 capital till maturity of the scheme.
Thus, the scheme is oriented towards protection of capital and
not with guaranteed returns. Further, the orientation towards
protection of capital originates from the portfolio structure of the
scheme and not from any bank guarantee or insurance cover.
Investors are not offered any guaranteed/indicated returns
 Role & Objective of AMFI
• AMFI, the apex body of all the registered asset management
companies was incorporated on August 22, 1995 as a non-
profit organization.
• All the asset management companies that have launched
mutual fund schemes are its members.
• One of the objectives of AMFI is to promote investors' interest
by defining and maintaining high ethical and professional
standards in the mutual fund industry.
• The AMFI code of ethics sets out the standards of good
practices to be followed by the asset management
companies in their operations and in their dealings with
investors, intermediaries and public.
• AMFI code has been drawn up to encourage adherence to
standards higher than those prescribed by the regulations for
the benefits of investors in the mutual fund industry.
 Role & Objective of SEBI
• SEBI is the regulator for Mutual Funds in India and lays down the basic rules
and regulations for Mutual funds in India.
• SEBI (Mutual funds) Regulations, 1996 also lays down the provisions for the
appointment of trustees and their obligations.
• Every mutual fund must be registered with SEBI and registration is granted only
where SEBI is satisfied with the background of the fund.
• SEBI has the authority to inspect the books of accounts , records and
documents of a Mutual fund, its trustees, AMC and custodian where it deems
it necessary.
• Regulations are laid down regarding listing of funds, refund procedures,
transfer procedures, disclosures etc.
• SEBI has also laid down advertisement code to be followed by a mutual fund
in making any publicity regarding a scheme and its performance.
• SEBI has prescribed norms/ restrictions for investment management with a
view to minimize / reduce undue investment risks.
• SEBI also has the authority to initiate penal actions against an erring Mutual
Fund.
• In case of a change in the controlling interest of an asset management
company, investors should be given at least 30 days time to exercise their exit
option.
 Tracking Error
• Tracking error is defined as the annualised standard
deviation of the difference in returns between the
Index fund and its target Index.
• In simple terms, it is the difference between returns
from the Index fund to that of the Index.
• An Index fund manager needs to calculate his
tracking error on a daily basis especially if it is open-
ended fund. Lower the tracking error, closer are the
returns of the fund to that of the target Index.
 Tracking Error
Reasons for tracking error are as under –
• Expenditure incurred by the fund: Ideally all the corpus of the
fund have to be invested in the securities of the benchmarked
Index as the objective of the scheme is to mimic the returns of
the underlying index. But it is not possible, as the Fund has to
incur expenses towards its day to day management,
transaction fees payable at the time of purchase or sale of
securities, etc. The expenditure of the fund has to be met out
of the corpus of the fund which means that the fund will invest
less funds than what it has collected. This in turns affects the
returns as the fund will receive returns only on the amount
which is invested. Hence, the lower the expenditure incurred
by the fund, the lower will be the tracking error.
 Tracking Error
• Cash balance: The investment pattern of the fund provides for the asset
allocation pattern. Ideally, the full corpus of the fund has to be invested
in the underlying index. But this may not be possible due to the funds
obligation to meet requests for redemption, receipt of dividend, etc. The
fund has to set aside some amount of its corpus to meet the redemption
request. As the redemption has to be made within a few days, the fund
has to hold cash or other short terms assets which enable it to convert
such instrument in cash. To provide for this exigency the fund has to keep
aside some part of its corpus and therefore is not able to investment all its
corpus. Further, the fund may receive dividend on the shares held by it
which should again be invested in the constituents of the benchmarked
index as soon as possible. If the fund is not able to invest such dividend
then it holds more cash than required and hence its returns would be
affected. Similar is the cash of subscription for purchase of units of the
fund. So when the funds holds more cash, it has that much less to invest in
the underlying index and thus it leads to mismatch in the returns. It should
be the endeavour of the fund to keep the right amount of cash which at
the same time can provide for redemption request and should not be
ideal.
Tracking Error - calculation
The following is the information pertaining to the NAVs of SBI Magnum
Nifty based Fund and the values of Nifty for a particular period.
Tracking Error - calculation