Mutual Fund Schemes: Types, Structures, and Budgeting
Types of Mutual Fund Schemes
Open-Ended Fund/Scheme
An open-ended scheme offers units for sale without a fixed redemption period. Investors can buy and sell units at Net Asset Value (NAV) which is declared daily. Key feature: liquidity.
Close-Ended Fund/Scheme
A close-ended scheme has a fixed maturity period (e.g., 3-5 years). Subscription is open for a specific period at launch. Units are traded on stock exchanges.
- Listed: Close-ended schemes (except ELSS) must be listed on a recognized stock exchange.
- No Repurchase: Units cannot be repurchased before maturity (except ELSS).
- Conversion: Conversion to open-ended scheme is possible under certain conditions.
- Full Redemption: Full redemption occurs at maturity.
- Roll-over: Possible with unitholder consent and disclosure of terms.
Interval Schemes
Subscription is open during specific periods. Repurchase is allowed on business days (with applicable loads except during the specified transaction period).
Market Capitalization and Mutual Funds
Large-cap funds: Invest in top 100 companies by market capitalization, offering stability and consistent returns.
Mid-cap funds: Invest in companies ranked 101st to 250th, balancing growth potential and risk.
Small-cap funds: Focus on companies below 250th rank, offering high growth potential but higher volatility.
Load or No Load Scheme
Load Scheme
Charges a percentage of NAV upon exit. Discourages early exits. The exit load is ploughed back into the scheme.
No Load Scheme
No entry or exit charges. Investors buy and sell units at NAV.
Dividend Equalisation
Compensates new investors for income earned before their purchase. An equalisation payment is added to the cost of new units and later returned as part of the dividend.
Budgeting and Budgetary Control
Budget
A financial and/or quantitative statement of policy for a defined period to achieve a specific objective.
Flexible Budget
Adjusts for changes in activity levels by recognizing fixed, semi-fixed, and variable costs.
Types of Budgets
- Functional Budget: Specific to a particular function or department (e.g., Sales Budget).
- Master Budget: Summary of all functional budgets.
- Fixed Budget: Remains unchanged regardless of activity level.
Budgetary Control
The process of establishing budgets, assigning responsibilities, comparing actuals with budgets, and taking corrective actions.
Objectives of Budgetary Control
- Define targets and responsibilities.
- Investigate and correct deviations.
- Optimize resources and maximize profits.
- Create a dynamic team spirit.
Budget Manual
A document outlining the procedures, forms, and responsibilities for budgetary control.
Key Factor
The factor limiting an entity’s activity (e.g., sales, machinery, labor).
Purchase Budget
Shows the quantity and value of materials and services to be purchased.
Labour Budget
Shows the number of employees and/or labor hours required for production and sales.
Zero Based Budgeting (ZBB)
Allocates resources efficiently by starting from zero and justifying each expense.
Advantages of Budgets and Budgetary Control
- Sets targets and motivates performance.
- Fixes responsibility and facilitates communication.
- Promotes coordination and lays down policies.
- Provides a tool for control and facilitates decentralization.
Limitations of Budgets/Budgetary Control
- Based on estimates, which may be inaccurate.
- Unrealistic targets can be demotivating.
- Fixed budgets ignore variable costs.
- Can be costly to implement and administer.
Marginal Costing vs Absorption Costing
Marginal Costing: Only variable costs are considered for product costing. Fixed costs are treated as period costs.
Absorption Costing: Both fixed and variable costs are considered for product costing.
Contribution
Sales less variable costs. Indicates the profitability of a product before considering fixed costs.
P/V Ratio
Contribution divided by sales. Shows the proportion of each sales rupee that contributes to covering fixed costs and generating profit.