Page 252 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 12: Mutual Fund

Solution: Notes
Monthly Return on the Mutual Fund


(NAV  NAV ) 1  G t
t
t 1

t
r =
NAV

t 1
Where r = Return on mutual fund
NAV = Net asset value at the time period ‘t’ i.e. `10.03
t
NAV = Net asset value at time period “t – 1” i.e. `10.00
t–1
I = Income at time period ‘t’ i.e. ` 0.05
t
G = Capital gain distribution at time period ‘t’ i.e. ` 0.04
t
By substituting, we get,
`
( 10.03 – 10.00) + 0.05 + 0.04
`
`
`
r = = 0.012
` 10.00
= 1.20% p.m. or 14.4% p.a.
Self Assessment
Fill in the blanks:

11. A load fund is one that charges a percentage of ................................ for entry or exit.
12. Each time one buys or sells units in the fund, a ................................ will be payable.

12.6 Creation of a Portfolio

The portfolio of a mutual fund depends on the objectives of each scheme/fund floated by mutual
fund. For example, the objective of an income-oriented scheme is to provide regular monthly
income to its shareholders. The portfolio of such a fund should consist of fixed income-bearing
securities, so that the fund can achieve its objective. The Indian experience reveals that the
portfolio of such a fund consists of mainly the following securities:

 Non-convertible Debentures (NCD’s) - 75 to 90%
 Call Money -10 to 25%
A portfolio of income-cum-growth oriented fund consists of mainly NCDs up to 70% of the
portfolio, approximately 25% of equities and 5% of money market instruments. On the other
hand, a pure growth of equity fund creates a portfolio of share/stock of growth or blue-chip
companies.

The fund manager of a mutual fund is the person responsible for buying these securities in such
a way that the fund is able to achieve its objectives. A fund manager tries to create a well-
diversified portfolio of securities so that unsystematic risk is reduced significantly and returns
expected on individual securities and on portfolio is directly related to ‘market risk’ or systematic
risk. A fund manager has the following investment options in terms of buying securities from
the Indian market:

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