Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.
Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. The mutual funds normally come out with a number of schemes with different investment objectives which are launched
from time to time.
A mutual fund is required to be registered with SEBI before it can collect funds from the public.
What is mutual fund.?
- A trust that raises money through sale of
– Gives investors exposure to different
segments of markets
– Investors get access to professional
– Plays an active role in building wealth an
generating income for investors
– A key participant in the capital market
– Source for corporates to raise money
List of all stakeholders in Indian mutual fund industry is as follows:
l Ministry of Finance
l SROs (in general)
l Income Tax Regulations
l Investors‘ Associations
STRUCTURE OF A MUTUAL FUND
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (“AMC”) and a custodian.
The trust is established by a sponsor or more than one sponsor who is like a promoter of a company.
The trustees of the mutual fund hold its property for the benefit of the unit-holders. The AMC, approved by SEBI, manages the funds by making investments in various types of securities.
The custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are
vested with the general power of superintendence and direction over AMC.
They monitor the performance and
compliance of SEBI Regulations by the mutual fund.
What is mutual fund.?
OVERVIEW OF MUTUAL FUNDS INDUSTRY IN INDIA
– Started with the introduction of Unit Trust of India (UTI) – in 1963.
– Public sector companies started setting up mutual funds, beginning with SBI Mutual Fund in 1987.
This was followed by Canbank Mutual Fund, Punjab National Bank Mutual Fund, Bank of Baroda Mutual Fund, etc.
– Private sector mutual funds started in 1993; Franklin Templeton (erstwhile Kothari Pioneer) was the first of its kind.
Regulator & Industry Body
Regulator: Securities and Exchange Board of India (SEBI)
– Regulates mutual funds, custodians and registrars & transfer agents
– The applicable guidelines for mutual funds are set out in SEBI (Mutual Funds) Regulations, 1996; updated periodically
What is mutual fund.?
SCHEMES ACCORDING TO INVESTMENT OBJECTIVE
(a) Income Oriented Schemes:
The fund primarily offer fixed income to investors.
Naturally enough, the main securities in which investments are made by such funds are the fixed income yielding ones like
bonds, corporate debentures, Government securities and money market instruments, etc.
(b) Growth Oriented Schemes: These funds
offer growth potentialities associated with investment in capital market namely:
(i) high source of income by way of dividend and
(ii) rapid capital appreciation,
both from holding of good quality scrips.
These funds, with a view to satisfying the growth needs of investors, primarily concentrate on the low risk and high yielding spectrum of equity scrips of the corporate sector.
(c) Hybrid Schemes:
These funds cater to both the investment needs of the prospective investors –
namely fixed income as well as growth orientation.
Therefore, investment targets of these mutual funds are judicious mix of both the fixed income securities like bonds and debentures and also sound equity
In fact, these funds utilise the concept of balanced investment management. These funds are, thus, also known as “balanced funds”.
(d) High Growth Schemes:
As the nomenclature depicts, these funds primarily invest in high risk and high return volatile securities in the market and induce the investors with a high degree of capital
(e) Capital Protection Oriented Scheme:
It is a scheme which protects the capital invested in the mutual fund through suitable orientation of is portfolio structure.
(f) Tax Saving Schemes:
These schemes offer tax rebates to the investors under tax laws as prescribed from time to time.
This is made possible because the Government offers tax incentive for investment in specified avenues.
For example, Equity Linked Saving Schemes (ELSS) and pensions schemes.
(g) Special Schemes:
This category includes index schemes that attempt to replicate the performance of particular index such as the BSE, Sensex or the NSE-50 or industry specific schemes (which invest in specific industries) or sectoral schemes
(which invest exclusively in segment such as ‘A’ Group or initial public offering).
Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index.
Sectoral fund schemes are ideal for investors who have already decided to invest in particular sector or segment.
(h) Real Estate Funds:
These are close ended mutual funds which invest predominantly in real estate and properties.
(i) Off-shore Funds:
Such funds invest in securities of foreign companies with RBI permission.
(j) Leverage Funds:
Such funds, also known
as borrowed funds, increase the size and value of portfolio and offer benefits to members from out of the excess of gains over cost of borrowed funds. They tend
to indulge in speculative trading and risky investments.
(k) Hedge Funds:
They employ their funds for speculative trading, i.e. for buying shares whose prices are likely to rise and for selling shares whose prices are likely to fall.
(l) Fund of Funds:
They invest only in units of other mutual funds. Such funds do not operate at present in India.
(m) New Direction Funds:
They invest in companies engaged in scientific and technological research such as birth control, anti-pollution, oceanography etc.
(n) Exchange Trade Funds (ETFs) are a new variety of mutual funds that first introduced in 1993. ETFs are sometimes described as mere “tax efficient” than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distribution of realized and taxable capital gains than most mutual funds.
(o) Money Market Mutual Funds:
These funds invest in short- term debt securities in the money market like certificates of deposits, commercial papers, government treasury bills etc.
Owing to their large size,
the funds normally get a higher yield on such short term investments than an individual investor.
(p) Infrastructure Debt Fund:
They invest primarily in the debt securities or securitized debt investment of infrastructure companies.
What is a mutual fund.?
ADVANTAGES OF MUTUAL FUNDS
The advantages of investing in a mutual fund are:
- Professional Management:
Investors avail the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.
Mutual funds invest in a number of companies across a broad cross-section of
- industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. Investors achieve this diversification through a Mutual Fund with far less money than one can do on his own.
Investing in a mutual fund reduces paper work and helps investors to avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with
brokers and companies.
Mutual funds save investors time and make investing easy and convenient.
- Return Potential:
Over a medium to long term, Mutual funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.
- Low Costs:
Mutual funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
In open ended schemes, investors can get their money back promptly at net asset value related prices from the mutual fund itself. With close ended schemes, investors can sell their units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at net asset value (NAV) related prices which some close ended and interval schemes offer periodically or offer it for redemption to the fund on the date of maturity.
Investors get regular information on the value of their investment in addition to disclosure on the specific investments made by scheme, the proportion invested in each class of assets and the fund manager’s investment strategy and outlook.
RISKS INVOLVED IN MUTUAL FUNDS
Mutual funds may face the following risks, leading to non-satisfactory performance:
- Excessive diversification of portfolio, losing focus on the securities of the key segments.
- Too much concentration on blue-chip securities.
- Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage and commission.
- Poor planning of investment returns.
- Unresearched forecast on income, profits and Government policies.
- Fund managers being unaccountable for poor results.
- Failure to identify clearly the risk of the scheme as distinct from risk of the market.
- Under performance in comparison to peers.
What is a mutual fund.?_
KEY PLAYERS IN MUTUAL FUND
A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities. It is formed by trust body.
There are five principal constituents and three market intermediaries in the formation and functioning of mutual fund:
Five principal constituents
A sponsor is an influential investor who creates demand for a security because of their positive outlook on it.
The sponsor brings in capital and creates a mutual fund trust and sets up the AMC.
The sponsor makes an application for registration of the mutual fund and contributes at least 40% of the net worth of the AMC.
#•Asset Management Company_____
An asset management company (AMC) is a company that invests its clients’ pooled funds into securities that match declared financial objectives.
Asset management companies provide investors with more diversification and investing options than they would have themselves.
AMCs manage mutual funds, hedge funds and pension plans, these companies earn income by charging service fees or commissions to their clients.
A trustee is a person or firm that holds and administers property or assets for the benefit of a third party.
A trustee may be appointed for a wide variety of purposes, such as in case of bankruptcy, for a charity, for a trust fund or for certain types of retirement plans or pensions.
l Unit Holders
A unitholder is an investor who owns the units issued by a trust, like a real estate investment trust or a master limited partnership (MLP).
The securities issued by trusts/MF are called units, and investors in units are called unitholders.
The unit in turn reflect share of the investor in the Net Assets of the fund.
l# Mutual fund__
A mutual fund established under the Indian Trust Act to raise money through, the sale of units to the public for investing in the capital market.
The funds thus collected as per the directions of asset management company for invested.
The mutual fund has to be SEBI registered.
Three market intermediaries are:
A custodian is a person who carries on the business of providing custodial services to the client.
The custodian keeps the custody of the securities of the client.
The custodian also provides incidental services such as maintaining the accounts of securities of the client, collecting the benefits or rights accruing to the client in respect of securities.
Every custodian should have adequate facilities, sufficient capital and financial strength to manage the custodial services.
The SEBI (Custodian of Securities) Regulations, 1996 prescribe the roles and
responsibilities of the custodians.
According to the SEBI the roles and responsibilities of the custodians are to Administrate and protect the assets of the clients; Open a separate custody account and deposit account in the name of each
client; Record assets; and Conduct registration of securities.
What is a mutual fund.?
A transfer agent is a person who has been granted a Certificate of Registration to conduct the business of transfer agent under the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993.
Transfer agents’ services include issue and redemption of mutual fund units, preparation of transfer documents and maintenance of updated investment records.
They also record transfer of units between investors where depository does not function.
They also facilitate investors to get customized reports.
What is a mutual fund.?
A depository facilitates the smooth flow of trading and ensure the investor`s about their investment in securities.
SEBI (MUTUAL FUND) REGULATIONS, 1996
SEBI (Mutual Fund) Regulations, 1996 has been notified on December 09, 1996 with objective to improve the working and regulation of the mutual fund industry, so that mutual funds could provide a better performance and service to all categories of investors and offer a range of innovative products in a competitive manner to match
investor needs and preferences across various investor segments.
SEBI (Mutual Funds) Regulations, 1996
deals with 10 Chapters and 12 schedules.
The key provisions of the SEBI Regulations, 1996 include:
l All the schemes to be launched by the AMC needs to be approved by the Board of Trustees and copies of offer documents of such schemes are to be filed with SEBI.
l The offer documents shall contain adequate disclosures to enable the investors to make informed decisions.
l The listing of close-ended schemes is mandatory and they should be listed on a recognised stock exchange within six months from the closure of subscription. However, the listing is not mandatory in
a) if the scheme provides for monthly income or caters to senior citizens, women, children and physically handicapped;
b) if the scheme discloses details of repurchase in the offer document; or
c) if the scheme opens for repurchase within six months of closure of subscription.
d) if the scheme is a capital protection oriented scheme.
l Units of a close-ended scheme can be opened for sale or redemption at a predetermined fixed interval if the minimum and maximum amount of sale, redemption and periodicity is disclosed in the offer
l Units of a close-ended scheme can be converted into an open-ended scheme with the consent of a majority of the unit-holders and disclosure is made in the offer document about the option and period of
l Units of close-ended scheme may be rolled over by passing a resolution by a majority of the shareholders.
l No scheme other than equity-linked saving scheme can be opened for subscription for more than 15 days.
Further, the minimum subscription and the extent of over subscription that is intended to be retained should be specified in the offer document. In the case of over-subscription, all applicants applying up to 5,000 units must be given full allotment subject to over subscription.
l The AMC is required to refund the application money if minimum subscription is not received, and also the excess over subscription within five working days of closure of subscription.
l A close-ended scheme shall be wound up on redemption date, unless it is rolled over, or if 75% of the unit-holders of a scheme pass a resolution for winding up of the scheme; if the trustees on the happening of any event require the scheme to be wound up; or if SEBI, so directs in the interest of
In addition, the SEBI took various measures and issued guidelines to facilitate operations of mutual funds.
As part of these measures, mutual funds were allowed to invest in foreign debt securities in the countries with full
convertible currencies and with highest foreign currency credit rating by accredited credit rating agencies.
They were also allowed to invest in government securities where the countries are AAA rated.
Moreover, guidelines were issued for valuation of unlisted equity shares in order to bring about uniformity in the calculation
of NAVs of mutual fund schemes.
In order to allow mutual funds to invest in both gold and gold related instruments, the SEBI amended its regulation in 2006.
The amended regulation, Securities and Exchange Board of India (Mutual Funds) (Amendment)
Regulation, 2006 permits introduction of Gold Exchange Traded Fund (GETF) Schemes by mutual fund.
The new mutual fund scheme can invest primarily in gold and gold related instruments, subject to certain investment
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