MUTUAL FUNDS

Concept of mutual funds A mutual fund is a financial intermediary pools the savings of investors collective investment in a diversified portfolio of securities. A fund is “mutual” as all of its returns, minus its expenses, are shared by the fund’s investors

Definition The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 defines a mutual fund as a ‘a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments’.

Benifits Professional management Portfolio diversification An average investor lacks the knowledge of capital market operations help of an expert Mutual funds are managed by professional managers Portfolio diversification Reduction in transaction costs benefit of economies of scale is passed on to the investors. Liquidity: sell their units to the fund if it is an open-ended scheme or selling them on a stock exchange if it is a close-ended scheme.

Convenience Flexibility Tax benefits Transparency Negatives: Mutual funds offer a family of schemes, and investors have the option of transferring their holdings from one scheme to the other. Tax benefits Transparency Negatives: No Control over Cost No Tailor-made Portfolios Professional fund management doesn’t guarantee good returns.

Constituents of a Mutual Fund Sponsor Trustees Asset Management Company Custodian / Depository Participant R & T Agent Distributors Banker

Who is Sponsor of a mutual fund  A sponsor is an entity that sets up the mutual fund. Sponsor sets up a mutual fund to earn money by doing fund management. Largely, a sponsor can be compared with a promoter of a company. Sponsor does the following important activities:   Sponsor creates a Public Trust under Indian Trust Act, 1882.   Sponsor appoints trustees to manage the trust with the approval of SEBI.  Sponsor creates an Asset Management Company under Companies Act, 1956, which will act as the Investment Manager for the Mutual Fund. Sponsor applies and registers the trust as a Mutual Fund with SEBI  Sponsor applies and registers the trust as a Mutual Fund with SEBI.

trustee Trustee is an individual who is responsible for a property or an organization on behalf of some other individual or a third party. Mutual fund can be managed by a board of trustees or a trust company. The board of trustees is governed by the Indian Trust Act whereas a trust company is governed by the Companies Act, 1956.

functions/obligations of trustees: Trustees ensure that the activities of the mutual fund are in accordance with SEBI (mutual fund) regulations, 1996. Trustees ensure that the AMC has proper systems and procedures in place. Trustees ensure that all the other fund constituents are formed and that proper due diligence is exercised by the AMC in the appointment of constituents and business associates. All schemes floated by the AMC have to be approved by the trustees. Trustees review and ensure that the net worth of the AMC is as per the SEBI stipulated norms. Trustees furnish to SEBI, on a half-yearly basis, a report on the activities of AMC.

The following are some important points regarding the appointment of trustees:  Sponsor with prior approval of SEBI appoints trustees. There should be at least four members in the board of trustees. At least 2/3rd of the trustees should be independent. Trustee of one mutual fund cannot be trustee of another mutual fund, unless he is an independent trustee in both cases and has the approval of both the boards. The trustees are appointed by executing and registering a trust deed.

Asset Management Company AMC is appointed by trustees for managing fund schemes. An AMC functions under the supervision of its own board of directors and also under the directions of trustees and SEBI.

Major functions of an asset management company Trustees appoint the Asset Management Company (AMC), to manage investor’s money. The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them. The AMC’s Board of Directors must have at least 50% of Directors who are independent directors. The AMC has to be approved by SEBI. The AMC functions under the supervision of it’s Board of Directors, and also under the direction of the Trustees and SEBI. AMC needs to follow all rules and regulations prescribed by SEBI and as per the Investment Management Agreement it signs with the Trustees.

CUSTODIAN/DEPOSITORY PARTICIPANT The custodian is appointed by trustees for safekeeping of physical securities. Dematerialised securities holdings are held in a depository through a depository participant. The custodian and depositories work under the instructions of the AMC, although under the overall direction of trustees.

REGISTRAR/TRANSFER AGENTS Registrar or transfer agents are the trusts or institutions that register and maintain detailed records of the transactions of investors for the convenience of mutual fund houses.

ROLES OF REGISTRAR OR TRANSFER AGENT Countersigning securities upon issuance Monitoring the issuance of securities with a view to preventing unauthorized issuance, a function commonly performed by a person called a registrar Registering the transfer of such securities Exchanging or converting securities Transferring recorded ownership of securities by bookkeeping entry, without the physical issuance of securities certificates

DISTRIBUTOR An individual or a corporation serving as principal underwriter of a mutual fund's shares, buying shares directly from the fund, and reselling them to other investors.

BANKER The financial institutions engaged in the activities of mutual funds are the banker of mutual funds. The functions are: Facilitates financial transactions. Provides remittance facilities.

ACCORDING TO TYPE OF INVESTMENT EQUITY FUNDS / SCHEMES DEBT FUNDS / SCHEMES DIVERSIFIED FUNDS / SCHEMES GILT FUNDS / SCHEMES MONEY MARKET FUNDS / SCHEMES SECTOR SPECIFIC FUNDS INDEX FUNDS

EQUITY FUNDS provide capital appreciation over the medium to long- term high risk schemes provide different options to the investors allow the investors to change the options at a later date good for investors having a long-term outlook 

DEBT FUND aim is to provide regular and steady income to investors invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments less risky capital appreciation are also limited the NAVs of such funds are affected

DIVERSIFIED FUND aim is to provide both growth and regular income invest 40-60 per cent in equity and debt instruments NAVs are likely to be less volatile compared to pure equity funds

GILT FUNDS invest exclusively in government securities no default risk NAVs of these schemes also fluctuate due to change in interest rates and other economic factors

MONEY MARKET FUND income funds and their aim is to provide easy liquidity, preservation of capital and moderate income invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, cp etc returns on these schemes fluctuate much less compared to other funds

SECTOR SPECIFIC SCHEME invest in the securities of only those sectors or industries as specified in the offer documents returns dependent on the performance of the respective sectors/industries more risky compared to diversified funds

INDEX FUND replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc invest in the securities in the same weightage comprising of an index NAVs would rise or fall in accordance with the rise or fall in the index There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

TYPES OF MUTUAL FUNDS

2. According to the time of closure of the scheme a. Open ended schemes Open-end schemes is liquid schemes. Available for subscription and repurchase on a continuous basis. Do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis.

b. Close-ended fund/scheme Scheme has a stipulated maturity period . The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. Some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. These mutual funds schemes disclose NAV generally on weekly basis.

Tax Saving Funds 3. ACCORDING TO TAX INCENTIVE SCHEMES Offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. Eg. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds offer tax benefits. Growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

a. Dividend Paying Schemes 4. ACCORDING TO THE TIME OF PAYOUT  a. Dividend Paying Schemes The profits of mutual funds are distributed among the investors at various intervals. Dividends will only be paid when a mutual fund performs well. It also depends upon the mutual fund manager’s decision as to when and how much dividend to pay.

b. Reinvestment Schemes Dividend which is paid out is ploughed into the mutual fund that means an investor can buy more units in the mutual scheme from the  dividend income which is declared at the existing NAV. There is no difference in the NAV. The NAV of the fund remains the same.

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