Mutual Fund - CA Final SFM

Mutual Fund: - Mutual is a trust that pools the savings of a number of investors who share a common financial goals. Mutual Fund offers an opportunity to invest in a diversified professionally managed basket of securities at relatively low cost.

Type of Mutual Funds

Functional Based	Ownership Based	Portfolio Based
Open Ended	Public Sector	Equity	Debt	Specialized
Close Ended	Private Sector	Growth	Bond	Index
	Foreign Mutual Fund	Aggressive	Gilt	International
		Income		Off Shore
		Balanced		Sector

Advantages and Drawbacks of Mutual Funds

Advantages of Mutual Fund	Drawbacks of Mutual Funds
Professional Management	No Guarantee of Return
Diversification	No Guarantee of Maximizing of Returns through diversification
Convenient Administration	Future cannot predicted
Higher Return	Selection of proper mutual fund
Low Cost Management	Cost Factor
Liquidity	Unethical practices
Transparency	Taxes
Highly Regulated	Transfer Difficulties
Economies of Scale
Flexibility
Other Benefits – SIP , SWP etc.

Net Assets Value (NAV): -

Net Assets Value (NAV) = Total Assets – Outside Liability

Or

Net Assets Value (NAV) = Market Value of Investment + Receivables + Accrued Income + Cash & Cash Equivalent + Other Assets – Accrued Expenses – Payable – Other Liabilities

NAV per Unit = Total NAV/No. of Units Outstanding

Note: - For Calculation of Net Assets Market Value should be taken unless not provided or stated in question to take otherwise.

Load on Mutual Fund

A) Entry Load: - Entry Load is levied on purchase of Mutual Fund.

If there is entry load then NAV will be –

NAV = NAV + Entry Load

B) Exit Load: - Exit Load is levied on sale/exists of Mutual Fund.

If there is exist load the NAV will be –

NAV = NAV – Exit Load

Expenses Ratio = (Expenses x 100) /(NAV₁ + NAV₀)/2

Where, NAV₁ = NAV at Year End

             NAV₀ = NAV at beginning of Year

Return = [(Dividend + Capital Gain + NAV₁ – NAV₀) x 100]/NAV₀

Where,

Dividend and Capital Gain Consist which are distributed to unit holders

Dividend should be calculated on face value if dividend rate is given unless otherwise stated in question or dividend yield is given.

Capital Gain Tax in case of Bonus

Capital Gain Tax = (NAV as on date of Redemption – NAV as on Date of Bonus) x Capital Gain Tax Rate x No. of Bonus Unit

Capital Gain Tax in case of Dividend Reinvestment

Capital Gain Tax = (NAV as on date of Redemption – NAV as on Date of Dividend Reinvestment) x Capital Gain Tax Rate x No. of Unit issued on Dividend reinvestment

Required Rate Return from Mutual Fund

Required Rate of Return = (Required Return or Expected Return)/(1 – Initial Expenses)    +  Recurring Expenses

Performance Evaluation Ratio

S. No.	Name of Method	Formula	Remarks
1.	Sharp ratio	= Rp - Rf   σp	Higher Sharp Ratio is Better
2.	Treynor Ratio	= Rp - Rf     βp	Higher Treynor Ratio is Better
3.	Jenson’s Alpha	= Rp – CAPM Return	Where Rp is actual Return
Note: - If Alpha is positive (i.e. greater than 0) then fund is undervalued, Buy Recommendation Note: - If Alpha is negative (i.e. less than 0) then fund is overvalued, sell Recommendation Note: - If Alpha is zero (i.e. is equal to zero) then fund is fairly value, Hold Recommendation if already Purchased.
4.	Morning Star – MS Index (Excess Return)	Average Return -  Average Risk of Loss
Step involved in at the morning Star Step I: - Compute Average Return Step II: - Compute Average Risk of Loss Step III: - Apply Formula for Excess Return
5.	Fama’s Net Selectivity	= Rp – [Rf + σp(Rm  - Rf)        σm

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