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Understanding Mutual Funds

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It pools the money of several investors and invests this in stocks, bonds, money ... From this, all expenses are deducted and the resultant value divided by the ... – PowerPoint PPT presentation

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Title: Understanding Mutual Funds


1
Understanding Mutual Funds
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  • Godmind Mutual Fund Advisory services

2
What is a Mutual Fund?
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3
A vehicle for investing in stocks and bonds
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  • A vehicle for investing in stocks and bonds.
  • Not an alternative investment option to stocks
    and bonds.
  • It pools the money of several investors and
    invests this in stocks, bonds, money market
    instruments and other types of securities.
  • owner of a mutual fund unit gets a proportional
    share of the funds gains, losses, income and
    expenses.

4
Each mutual fund has a specific stated objective
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  • Funds objective is laid out in the fund's
    prospectus, which is the legal document that
    contains information about the fund
  • Its history, its officers and its performance.

5
Some popular objectives of a mutual fund are -
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  • Fund Objective What the fund
    will invest in
  • Equity (Growth) - Only in
    stocks
  • Debt (Income) - Only in
    fixed-income securities
  • MoneyMarket - In
    short-term money market

  • instruments

  • (including government securities)
  • Balanced - Partly
    in stocks and partly in

  • fixed- income securities,

  • ('balance' in returns and risk)

6
Managed by an Asset Management Company (AMC)
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  • The company that puts together a mutual fund is
    called an AMC .
  • AMC may have several mutual fund schemes .
  • AMC hires a professional money manager, who buys
    and sells securities in line with the fund's
    stated objective.

7
All AMCs Regulated by SEBI, Funds governed by
Board of Directors
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  • Mutual fund regulations require that the funds
    objectives are clearly spelt out in the
    prospectus.
  • Every mutual fund has a board of directors that
    is supposed to represent the shareholders'
    interests, rather than the AMCs.

8
The Basics of Mutual Funds.
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9
Net Asset Value or NAV
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  • NAV is the total asset value (net of expenses)
    per unit of the fund and is calculated by the AMC
    at the end of every business day.

10
How is NAV calculated?
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  • The value of all the securities in the portfolio
    in calculated daily. From this, all expenses are
    deducted and the resultant value divided by the
    number of units in the fund is the funds NAV.

11
Expense Ratio
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  • AMCs charge an annual fee, or expense ratio that
    covers administrative expenses, salaries,
    advertising expenses, brokerage fee, etc.
  • Fund's expense ratio is typically to the size of
    the funds under management and not to the returns
    earned.

12
Load
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  • Some AMCs have sales charges, or loads, on their
    funds (entry load and/or exit load) to compensate
    for distribution costs.
  • Funds without a sales charge are called no-load
    funds.

13
Open- and Close-Ended Funds
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  • Open-ended Funds can enter and exit the fund
    scheme at its NAV.
  • Close-Ended Funds Redemption can take place only
    after the period of the scheme is over.
    Close-ended funds are listed on the stock
    exchanges

14
Important documents
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  • Two key documents that highlight the fund's
    strategy and performance are 1) the prospectus
    (legal document) and the shareholder reports
    (normally quarterly).

15
Benefits of Investing Through Mutual Funds
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16
Professional Money Management
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  • Fund managers are responsible for implementing a
    consistent investment strategy .
  • Fund managers monitor market and economic trends
    and analyze securities

17
Diversification
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  • Diversification is one of the best ways to reduce
    risk.
  • Mutual funds offer investors an opportunity to
    diversify across assets.

18
Liquidity
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  • Investors can sell their mutual fund units on any
    business day.
  • Receive the current market value on their
    investments within a short time period (normally
    three- to five-days).

19
 Affordability
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  • The minimum initial investment for a mutual fund
    is fairly low for most funds (as low as Rs500 for
    some schemes.

20
 Convenience
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  • Convenience of periodic purchase plans, automatic
    withdrawal plans and the automatic reinvestment
    of interest and dividends.
  • Reports and statements .

21
Flexibility and variety
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  • Pick from conservative, blue-chip stock funds,
    Sectoral funds,
  • Funds that aim to provide income with modest
    growth
  • Those that take big risks in the search for
    returns.
  • You can even buy balanced funds, or those that
    combine stocks and bonds in the same fund.

22
Tax benefits on Investment in Mutual Funds
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  • 100 Income Tax exemption on all Mutual Fund
    dividends .
  • Deduction upto 1 lakh available u/s 80(c) under
    investment in ELSS funds as of FY2005-2006.

23
INVEST EARLY INVEST REGULARLY
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Happy Investing
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