In: Finance
2) be able to describe the expenses associated with investment
in mutual funds, calculate net asset value and fund returns
3) identify the major types of investment policies of mutual
funds.
4) understand the implications of turnover on expenses and
taxes.
Answer(2): These are the expenses associated with investment in mutual funds:
Entry Load- This expense is charged when investor purchases the units of the mutual fund.
Exit Load- This expense is charged when investor redeems the units of mutual funds, this is dedcuted from the NAV.
Expense Ratio- It is the cost that an investment company charges to operate the fund.
Formula: Expense Ratio = Operating expenses / Average dollar value of Asset under management (AUM).
Answer(3): Investment policies differ from types of funds to funds, these are as following:
Equity Fund- Investment policy says that the fund will invest majorly (90%) into equity and equity related schemes.
Debt Fund- Investment policy says that the fund will invest majorly in debt securities.
Diversification- Mutual fund scheme should be well diversified and should have proper asset allocation.
Minimum number of Investors per scheme- There should be minimum number of investors in each scheme. There should be minimum 20 investors in each scheme.
Holding - Mutual fund scheme should not have more than 10% holding in any company's capital or voting rights. Short selling is not allowed in mutual funds.
Answer(4): Tax implications on Mutual funds-
Long term capital gain tax- It is charged when units are held more than one year. In mutual funds equity related schemes, are exempt from LTCG.
Short term capital gain tax- It is charged at the rate of 15% when units are redeemed before one year.