Mutual Funds and Financial Services Analysis for CA Final

Understand Mutual Funds and Financial Services Analysis

Key rules to remember

Net Asset Value per unit

NAV = (Market value of investments + Other assets − Liabilities and accrued expenses) ÷ Units outstanding

Use market value on the valuation date, not cost. Include accrued income and deduct accrued expenses.

Absolute return on a fund

Return % = [(Closing NAV − Opening NAV) + Distributions per unit] ÷ Opening NAV × 100

Adjust for entry load if you bought above NAV, and exit load if you sold below NAV.

Effective purchase price and sale price

Purchase price = NAV × (1 + entry load %); Redemption price = NAV × (1 − exit load %)

Load is charged on NAV. Use these prices for the investor's actual return.

Annualised return

Annualised return = (Ending value ÷ Beginning value)^(1 ÷ years) − 1

Use this when the holding period is more than one year.

NAV after dividend

Ex-dividend NAV = Cum-dividend NAV − Dividend per unit

Assumes no other change in the portfolio value.

Factoring advance and cost

Advance = Receivables × advance % − factor's reserve and commission; Effective cost % = (Commission + Interest) ÷ Net funds advanced × (365 ÷ credit days)

Commission is on invoice value. Interest is charged on the amount advanced. Adjust for savings in collection and bad-debt costs.

Securitisation flow

Originator → sells receivables to SPV → SPV issues rated securities to investors → collections pay investors

Know the three parties: originator, SPV, investors.

How to solve Mutual Funds and Financial Services Analysis questions

1. 1Identify what is asked: NAV, return, cost of a service, or a comparison.
2. 2List all assets at market value on the valuation date, including accrued income and cash.
3. 3List all liabilities and accrued expenses, then compute net assets.
4. 4Divide by units outstanding. Adjust units if new units were issued or redeemed during the period.
5. 5For return, add distributions to the NAV change, apply loads, and divide by the actual amount invested.
6. 6For factoring or similar services, compute the net funds received, the total cost, and the annualised effective cost, then compare with the bank alternative.
7. 7For credit rating or securitisation, state the provision or feature, apply it to the facts in the case, and conclude with a recommendation.
8. 8Check units and rounding. Write the final answer with a short interpretation.

Quickest way: Three-line NAV and cost check

Common mistakes in Mutual Funds and Financial Services Analysis

• Using cost of investments instead of market value in NAV.

  Students copy the first figure listed in the question.

  Fix: Always check which valuation is given and use current market value for NAV.

• Forgetting to deduct accrued expenses or liabilities.

  Focus stays on the portfolio of securities.

  Fix: Make a two-column list of assets and liabilities before dividing.

• Ignoring the dividend or load when computing return.

  The NAV change looks like the full answer.

  Fix: Add distributions to the return, and use the load-adjusted purchase and redemption prices.

• Treating factoring and forfaiting as the same.

  Both involve selling receivables.

  Fix: Factoring: usually short-term domestic or export trade debts, with services like collection and ledger management. Forfaiting: medium-term export receivables, non-recourse, usually with a bank guarantee.

• Computing the factoring cost without annualising it.

  Cost is shown as a percentage for the credit period.

  Fix: Multiply the period cost by 365 ÷ credit days, using the net amount advanced as the base.

• Mixing up the originator and the SPV in securitisation.

  Both appear in the same flow.

  Fix: The originator owns the receivables and sells them. The SPV buys them and issues securities to investors.

Worked examples