INTRODUCTION TO MUTUAL
FUNDS
PART III
DR. PAYAL JAIN
DEPARTMENT OF COMMERCE GARGI COLLEGE
NAV, EXPENSES, ETC OF
MUTUAL FUNDS
NET ASSET VALUE
• Price of is stock is determined by demand and supply forces.
• On the other hand, a mutual fund’s value is determined by how much is invested in the fund as well as the costs to run it, and its number of outstanding shares.
• Value of assets = value of all securities in the portfolio
• Value of liabilities = value of all liabilities and fund expenses
• The NAV of a fund is the fund’s per share market value
• It is the price at which an investor would buy from or sell to the fund company.
• NAV per unit tells us how much one share of the fund is worth.
NET ASSET VALUE…. contd..
• NAV per unit = Net Asset Value of the Fund / Number of Units Outstanding
• Net Assets = [ Market Value of Investments + Receivables +
Accrued Incomes + Other Assets ] -
[ Accrued Expenses + Payables + Other Liabilities ]
EXAMPLE
• Value of securities = Rs. 75 lakh
• Cash = Rs. 15 lakh
• Accrued income = Rs. 24 lakh
• Short-term liabilities = Rs. 1 lakh
• Long-term liabilities = Rs. 12 lakh
• Number of outstanding shares = 20 lakhs
• NAV per unit = [Rs. 75 lakh + Rs. 15 lakh + Rs. 24 lakh ]- [Rs. 1 lakh + Rs. 12 lakh] / 20 lakhs
• NAV per unit = Rs. 101 lakh/20 lakh = Rs. 5.05 per unit
COSTS INCURRED BY MUTUAL FUNDS
• Every mutual fund house incurs expenses.
• According to rules, mutual funds deduct a small portion from investors’ investments to pay for these expense
• Equity funds are allowed to charge up to 2.25% of the assets that a scheme manages.
• Debt funds’ expenses are capped at 2%.
• The lower the expense ratio of a scheme, the higher the NAV.
• “However, while expense ratio is important, it should be
borne in mind that it is not the only criterion while selecting mutual fund scheme. A scheme with a consistently decent track record, but a higher expense ratio may be better than the one which lower expense ratio, but gives poor returns”. - AMFI
COSTS OF NVESTING IN A
MUTUAL FUND
ANNUAL CHARGES DUE TO ON-GOING
RECURRING EXPENSES (called
Expense Ratio)
ONE-TIME CHARGES or
LOADS
ON-GOING/RECURRING EXPENSES
• Asset management companies (AMCs) manage the assets of the mutual funds and take the
investment decisions.
• AMCs charge investors for professional fund
management i.e. the investment management and advisory fees, which are charged annually.
• Additionally, operating expenses such as sales &
marketing / advertising expenses, administrative expenses, transaction costs, registrar fees,
custodian fees, audit fees – are also charged as a percentage of the fund’s daily net assets.
EXPENSE RATIO = MANAGEMENT + OPERATING EXPENSES
• The sum of management fees and operating fees is
commonly referred to as ‘Expense Ratio’, which is charged annually.
• Information on expense ratio applicable to a MF scheme is mentioned in the Scheme Information Document. For
example, an expense ratio of 1% per annum means that each year 1% of a scheme’s total assets will be used to cover the expenses of managing and operating a scheme.
• Management expense ratio (MER) or total expense ratio (TER) is expressed as a percentage of average Assets under Management (AUM) during a period.
• Expense ratio = Expenses / Average AUM
• As AUM goes up, expense ratio goes down.
LOADS = ONE-TIME CHARGES
• Entry load: It is a front-end charge deducted from the NAV at the time of investing in a mutual fund scheme. SEBI abolished entry loads in August 2009.
• Transaction charge: Starting August 2011, SEBI has allowed AMCs to collect a nominal amount as a one-time transaction fee.
• If amount invested is less than Rs. 10000 – no transaction fee
• If amount invested is more than Rs. 10000 by a first-time investor – Rs 150
• If amount invested is more than Rs. 10000 by an existing investor – Rs.100
• In the case of Systematic Investment Plans (SIPs), where the total
commitment towards the SIP is more than Rs. 10000, a transaction charge of Rs. 100 will be levied payable in four equal installments starting from the second to the fifth installment.
• Exit Load: It is a charge levied when an investor redeems / sells his units in a short span of time since he made the investment.
Mutual funds charge exit loads to deter investors from leaving mutual fund schemes before holding them for a sufficient period.
RETURN FROM MUTUAL FUND
• ABSOLUTE RETURN
• RISK-ADJUSTED RETURN
ABSOLUTE RETURN
• Absolute return of mutual fund is compared with return on benchmark mutual fund.
• Mutual Funds are required to declare their own benchmarks in Scheme Information Document.
• The fund houses select benchmark indices on the basis of market capitalisation and sectoral or
thematic strategies of the respective funds. For
example, large-cap funds would have BSE SENSEX, BSE100, Nifty 50 or Nifty 100 as their benchmark indices. Similarly, mid-cap funds would have Nifty Midcap 100 or Nifty Midcap 150 as their benchmark indices while infrastructure funds would use Nifty Infrastructure or BSE India Infrastructure India.
RISK-ADJUSTED RETURN
• Sharpe ratio = (return on portfolio – risk-free
rate of return) / standard deviation of the portfolio
• Treynor’s Ratio = (return on portfolio – risk-free rate of return) / beta of the portfolio
• Jensen’s Alpha = Fund’s Actual returns – Expected rate of returns
• These numbers are usually given in a mutual fund’s fact sheet.
References
• Investing in Stock Markets, Dr. Vanita Tripathi and Neeti Panwar, Taxmann’s.
• Web resources such as
• Moneycontrol.com
• Amfiindia.com
• Sebi gov.in
