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MUTUAL FUNDS

Topics:

What is Mutual Fund

Emergence of Mutual Fund in India

Features / Advantages of Mutual Fund

Schemes of Mutual Fund Risks involved in Mutual Funds

Constitution and Management of Mutual Fund

Registration of Mutual Funds

Restrictions on investments by Mutual Funds

Restrictions on business activities

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MUTUAL FUNDS

What is Mutual Fund:

A Mutual Fund is a trust

pools the savings of a number of investors

share a common financial goala diversified portfolio of financial instruments

equities, debentures / bonds or other instruments

the fund is then deployed in:

investment alternatives

Income is shared by unit holders

In proportion to their investment

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MUTUAL FUNDS

Schemes of the Mutual Funds (by structure)

A. Open ended mutual funds:

Redeemable on demand

available through out the yearNot 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

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MUTUAL FUNDS

Schemes of the Mutual Funds (by structure)

B. Close ended mutual funds:

Limited number of shares

Having Certain Maturity periodSubscription 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

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MUTUAL FUNDS

Schemes 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

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MUTUAL FUNDS

Schemes 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

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MUTUAL FUNDS

Schemes 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

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MUTUAL FUNDS

Schemes 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

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MUTUAL FUNDS

Schemes 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

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MUTUAL FUNDS

Schemes 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

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MUTUAL FUNDS

Schemes 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)

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MUTUAL FUNDS

Risks involved in the Mutual Funds

Market risk:

Market influenced by outside factors

Affecting particular or all industries

Prices of the scripts fall and rise

without connection with the performance

of the Company

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MUTUAL FUNDS

Risks involved in the Mutual Funds

Inflation risk

Fall in rupee value

Reduced purchase power

Resulting in in-sufficient earnings

Credit risk

Weak financial position of the borrowing company

Affecting the payment of interest

Affecting the repayment of principal amount

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MUTUAL FUNDS

Risks involved in the Mutual Funds

Investment risk

Investment may not be in proper sectors

Growth sectors might be ignored

Resulting in lesser returns than anticipated

Liquidity risk

Thin trading in the invested securities

Affecting the sale value

Hence returns not as anticipated

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MUTUAL FUNDS

Computation of net asset value:

Fixed/unlimited number of shares are issued

By the fund at once or from time to time

The money received is referred to as Fund

Each scheme invests the fund in:

pre-promised nature of securitiesThese investments are termed as Assets

Redemption of the shares is done

on the basis of Net Asset Value

i.e. the proportion of the Net Assets to each share

or

Total net assets of the scheme

No. of units/shares outstanding

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MUTUAL FUNDS

Risks involved in the Mutual Funds

Other risks:

Excessive diversification of the portfolio

Focus only on blue chip securities

Frequent buying and selling resulting

in brokerage and commission

Poor planning

Negligence of the fund managers

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MUTUAL FUNDS

Constitution and management of Mutual Funds

Mutual fund shall be in the form of a trust

Trust deed shall be registered

under Indian Registration Act, 1908

Sponsor and Trustees shall be the partiesto the Trust Deed

Who can be a trustee

Person of ability, integrity and standing

Shall be independent (not associate with sponsor)

Cannot be a trustee of more than one fund

-unless he is an independent trustee

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MUTUAL FUNDS

Constitution and management of Mutual Funds

Who can be a Sponsor:

Person of ability, integrity and standing

Sound track record; meaning:Associated with financial services with 5 years

Positive net worth for preceding 5 years

has closed the 5th year in profits

40% contribution to the net worth of the AMC

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MUTUAL FUNDS

Constitution and management of Mutual Funds

Incorporation of an Asset Management Company:

Every mutual fund shall have an AMC

Incorporated under Companies Act, 1956AMC should be approved by SEBI

Enter into an agreement with Trustees

Shall formulate schemes

Raise money against units

Invest the funds in approved securities

Distribute income to the shareholder of the funds

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MUTUAL FUNDS

Constitution and management of Mutual Funds

Registration of a mutual Fund:

Sponsor with a sound track record

Eligible trusteesExecution and Registration of trust deed

Incorporation of AMC

Agreement of AMC with the Trustees

Sponsor to contribute 40% of Net worth of AMC

Appointment of a Custodian

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MUTUAL FUNDS

Restriction on investments by mutual funds

Investment in debts instruments (rated below

Investment) shall not exceed 15% of NAV

Debt instruments issued by a single issueronly 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

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MUTUAL FUNDS

Restriction 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