MUTUAL FUNDS

What is Mutual Fund:

A Mutual Fund is a trust pools the savings of a number of investors share a common financial goal a diversified portfolio of financial instruments equities, debentures / bonds or other instruments the fund is then deployed in: investment alternatives Income is shared by unit holdersIn proportion to their investment

MUTUAL FUNDSEmergence of Mutual Fund in India

Mutual funds in India began in 1964Unit Trust of India (UTI) was the firstRemains the market leader even todayHaving about 68% of the market shareLost monopoly in 1987With entry of public sector mutual fundsPromoted by public sector banks and insurance companiesIndustry was open to foreign institutions in 1993Real competitive structure began only then

MUTUAL FUNDSFeatures / Advantages of Mutual Fund

Professional managementDiversificationConvenient administrationReturn potentialLow CostsLiquidityTransparency

MUTUAL FUNDSSchemes of the Mutual Funds (by structure)

Open ended mutual funds:

Redeemable on demand available through out the year Not Listed on the Stock Exchange Fund would be ready to buy the shares May issue new shares in lieu of them Buy back on Net Asset Value (NAV) Value depends on: performance of select securities at exchange

MUTUAL FUNDSSchemes of the Mutual Funds (by structure)

B. Close ended mutual funds:

Limited number of shares Having Certain Maturity period Subscription during a specified period Listed on the exchange and traded Listing and trading is to create liquidity As they cannot be redeemed before maturity These are similar to equity shares

MUTUAL FUNDSSchemes of the Mutual Funds (by objective)

A. Income Oriented Schemes:

Fund offers fixed income to the investors Fund itself invests the money in: fixed income yielding bonds etc. Ideal for capital stability and regular income Capital appreciation might be low Has a reduced risk

MUTUAL FUNDSSchemes of the Mutual Funds (by objective)

B. Growth Oriented Schemes:

Fund offers Growth potential Invests fund in: Dividend paying companies Companies with rapid capital appreciation focus on low risk high yield equity Ideal for long term growth No regular income

MUTUAL FUNDSSchemes of the Mutual Funds (by objective)

C. High Growth schemes:

Fund offers High Growth potential Invests fund in: Dividend paying companies Companies with rapid capital appreciation focus on high risk high yield equity subject to lot of volatility Ideal for aggressive investors

MUTUAL FUNDSSchemes of the Mutual Funds (by objective)

D. Hybrid schemes:

Fund offers Income + Growth potential Invests fund in: Debentures and bonds; and Equity in Dividend paying companies Companies with capital appreciation focus on Balanced investment Hence they are also known as Balanced funds

MUTUAL FUNDSSchemes of the Mutual Funds (by objective)

E. Tax saving schemes:

Fund offers Tax rebate Investment in exempted avenues Equity linked savings schemes pension schemes focus on Tax saving and appreciation

MUTUAL FUNDSSchemes of the Mutual Funds (by objective)

F. Money market mutual funds:

Investment in: short term debt securities Such as deposits and bonds Focus on high yielding short term investments Tax saving and appreciation

MUTUAL FUNDSSchemes of the Mutual Funds (by objective)

G. Other funds; such as:

Real Estate Funds Off-shore funds hedge funds fund of funds Exchange trade funds (ETFs)

MUTUAL FUNDSRisks involved in the Mutual Funds

Market risk:Market influenced by outside factorsAffecting particular or all industriesPrices of the scripts fall and risewithout connection with the performance of the Company

MUTUAL FUNDSRisks involved in the Mutual Funds

Inflation riskFall in rupee valueReduced purchase powerResulting in in-sufficient earningsCredit riskWeak financial position of the borrowing companyAffecting the payment of interestAffecting the repayment of principal amount

MUTUAL FUNDSRisks involved in the Mutual Funds

Investment riskInvestment may not be in proper sectorsGrowth sectors might be ignoredResulting in lesser returns than anticipatedLiquidity riskThin trading in the invested securitiesAffecting the sale valueHence returns not as anticipated

MUTUAL FUNDSComputation of net asset value:Fixed/unlimited number of shares are issuedBy the fund at once or from time to timeThe money received is referred to as FundEach scheme invests the fund in: pre-promised nature of securitiesThese investments are termed as AssetsRedemption of the shares is done on the basis of Net Asset Valuei.e. the proportion of the Net Assets to each share or Total net assets of the scheme No. of units/shares outstanding

MUTUAL FUNDSRisks involved in the Mutual Funds

Other risks:Excessive diversification of the portfolioFocus only on blue chip securitiesFrequent buying and selling resulting in brokerage and commissionPoor planningNegligence of the fund managers

MUTUAL FUNDSConstitution and management of Mutual Funds

Mutual fund shall be in the form of a trustTrust deed shall be registered under Indian Registration Act, 1908Sponsor and Trustees shall be the parties to the Trust Deed

Who can be a trusteePerson of ability, integrity and standingShall be independent (not associate with sponsor)Cannot be a trustee of more than one fund -unless he is an independent trustee

MUTUAL FUNDSConstitution and management of Mutual Funds

Who can be a Sponsor:

Person of ability, integrity and standingSound track record; meaning: Associated with financial services with 5 years Positive net worth for preceding 5 years has closed the 5th year in profits40% contribution to the net worth of the AMC

MUTUAL FUNDSConstitution and management of Mutual Funds

Incorporation of an Asset Management Company:

Every mutual fund shall have an AMCIncorporated under Companies Act, 1956AMC should be approved by SEBIEnter into an agreement with TrusteesShall formulate schemesRaise money against unitsInvest the funds in approved securitiesDistribute income to the shareholder of the funds

MUTUAL FUNDSConstitution and management of Mutual Funds

Registration of a mutual Fund:

Sponsor with a sound track recordEligible trusteesExecution and Registration of trust deedIncorporation of AMCAgreement of AMC with the TrusteesSponsor to contribute 40% of Net worth of AMCAppointment of a Custodian

MUTUAL FUNDSRestriction on investments by mutual funds

Investment in debts instruments (rated belowInvestment) shall not exceed 15% of NAV

Debt instruments issued by a single issuer only upto 10% of the NAV

Not more than 10% of the paid up capital in any Co.

Issue expenses shall not exceed 6% of the fund

No investment in unlisted associate company

MUTUAL FUNDSRestriction on business activities of mutual funds

No activity other than management of the scheme

Shall not act as trustee of any scheme

Shall not invest in any of the schemes floated by it

Unless disclosed in the offer document