■ Mutual Funds
There are asset management companies basically to manage public's money.
The asset management company is a a trsutee and the balance amount is returned with a specific change. They act ibtermediary between the stock market and Investors.
● Determining the rate of return
ONE: When the holding period is 1 year
Rate of return = [ (NAV1 - NAVo) + I1 + G1] \
NAVo
where, NAV1 = Net Asset Value at the end of the year.
NAVo = NAV in the beginning of the year.
I1 = Distribution on A/C of income/dividends.
G1 = Distribution on the A/C of capital gains.
Growth = NAV1 - NAVo
TWO: When holding period is other than one year
Holding Period Rate (HPR) = [ (NAV1 - NAVo) + I1 + G1] \ NAVo
Annualized Rate of return = HPR × 12 / No of months as holding period
OR,
HPR × 365 / No of days as holding period
■ Different schemes and plans of Mutual Funds
a) Dividend Plan (DP)
Mutual fund plan where the mutual fund companies whatever returns they have generated, it will keep on distributing to its units holders in the form of dividends.
b) Dicidends Re investment Plan (DRIP)
This is not distributed by dividend holders. Those dividends are compulsorily re invested by generating more and more units. Instead of giving cash of unit holders, the mutual hold will be re investing that dividend and give additional units to the unit holders.
c) Bonus Plan (BP)
The mutual funds give additional units by the way of bonus to the investors.
● Difference in Taxation
DRIP = On the additional units, the cost gor unit holder for that additional units would be NAV prevailing on that date of distributing those units.
d) Growth Plan
Likewise, not only DP, DRIP or BP. The units remain the same. The portfolio made by the mutual fund and gain accumulate in that the NAV of each unit increases.
Generally, there are two categories:
a) Open Ended
b) Closed Ended
To be contd ... (Numerical portion to be done later)
Aditya Pokhrel
MBA, MA Economics, MPA
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