ABSTRACT A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and ot her securities. The income earned through these invest ments and the cap ital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. 1
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A mutual fund is simply a financial intermediary that allows a group of investors to pool
their money together with a predetermined investment objective. The mutual fund will
have a fund manager who is responsible for investing the pooled money into specific
securities (usually stocks or bonds). When you invest in a mutual fund, you are buying
shares (or portions) of the mutual fund and become a shareholder of the fund. Mutual
funds are one of the best investments ever created because they are very cost efficient and
very easy to invest in (you don't have to figure out which stocks or bonds to buy). By
pooling money together in a mutual fund, investors can purchase stocks or bonds withmuch lower trading costs than if they tried to do it on their own. But the biggest
advantage to mutual funds is diversification. A Mutual Fund is a trust that pools the
savings of a number of investors who share a common financial goal. The money thus
collected is then invested in capital market instruments such as shares, debentures and
other securities. The income earned through these investments and the capital
appreciation realized is shared by its unit holders in proportion to the number of units
Mutual funds have been a significant source of investment in both government and
corporate securities. It has been for decades the monopoly of the state with UTI being the
key player, with invested funds exceeding Rs.300 bn. (US$ 10 bn.). The state-owned
insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds
exist, including private and foreign companies. Banks--- mainly state-owned too have
established Mutual Funds (MFs). Foreign participation in mutual funds and asset
management companies is permitted on a case by case basis. UTI, the largest mutual fund
in the country was set up by the government in 1964, to encourage small investors in theequity market. UTI has an extensive marketing network of over 35, 000 agents spread
over the country. The UTI scrips have performed relatively well in the market, as
compared to the Sensex trend. However, the same cannot be said of all mutual funds. All
MFs are allowed to apply for firm allotment in public issues. SEBI regulates the
functioning of mutual funds, and it requires that all MFs should be established as trusts
under the Indian Trusts Act. The actual fund management activity shall be conducted
from a separate asset management company (AMC). The minimum net worth of an AMC
or its affiliate must be Rs. 50 million to act as a manager in any other fund. MFs can be
penalized for defaults including non-registration and failure to observe rules set by their
AMCs. MFs dealing exclusively with money market instruments have to be registered
with RBI. All other schemes floated by MFs are required to be registered with SEBI.
EMERGENCE OF THE MUTUAL FUND INDUSTRY IN INDIA
The origin of the Indian mutual fund industry can be traced back to 1964 when the Indian
government, with a view to augment small savings within the country and to channelisethese savings to the capital markets, set up the Unit Trust of India (UTI).
The UTI was setup under a specific statute, the Unit Trust of India Act, 1963. The Unit
Trust of India launched its first open-ended equity scheme called Unit 64 in the year
1964, which turned out to be one of the most popular mutual fund schemes in the
This section provides descriptions of the characteristics -- such as investment objective
and potential for volatility of your investment -- of various categories of funds. These
descriptions are organized by the type of securities purchased by each fund: equities,
fixed-income, money market instruments, or some combination of these.
Organization of fund types is done to show how aggressive or conservative they are andwhat is the investment objective. Because mutual funds have specific investment
objectives such as growth of capital, safety of principal, current income or tax-exempt
income, one can select one fund or any number of different funds to help investor meet
her specific goals. In general mutual funds fall into these general categories:
1. Equity Funds invest in shares of common stocks.
2. Fixed-Income Funds invest in government or corporate securities which offer
fixed rates of return.
3. Balanced Funds invest in a combination of both stocks and bonds.
4. Money Market Funds for high stability of principal, liquidity and income.
5. Bond Funds, both tax-exempt and taxable funds to generate income.
performance records. They are less likely than aggressive growth funds to invest
in smaller companies which may provide short-term substantial gains at the risk
of substantial declines.
Although growth funds are more conservative than aggressive growth funds, theyare still relatively volatile. They are suitable for growth-oriented investors but not
investors who are unable to assume risk or who are dependent on maximizing
current income from their investments.
iii) International/Global Funds
International funds seek growth through investments in companies outside India.
Global funds seek growth by investing in securities around the world, including
India. Both provide investors with another opportunity to diversify their mutual
fund portfolio, since foreign markets do not always move in the same direction as
India.
The best way to invest abroad is through mutual funds, rather than direct
investment in a foreign security. Most investors are unfamiliar with foreign
investment practices and currencies and may not have a clear understanding of
how economic or political events can affect foreign securities. An investor in an
international mutual fund doesn't have to worry about trading practices,
recordkeeping, time zones or other laws and customs of a foreign country -- that
is all handled by the fund's money manager.
International and global funds can invest in common stocks or bonds of foreign
firms and governments. Many international funds invest in a particular country or
region of the world.
While international and global funds offer opportunities for growth and
diversification, these types of funds do carry some additional risks over domestic
funds and should be carefully evaluated and selected according to the investor's
objectives, timeframe and risk profile. Because most international and global
funds are considered to be aggressive growth funds or growth funds, investors
must be willing to assume the risk of potential loss in value in the hope of
For the cautious investor, these funds provide a very high stability of principal
while seeking a moderate to high current income. They invest in highly-liquid,
virtually risk-free, short-term debt securities of agencies of the Government,
banks and corporations and Treasury Bills. They have no potential for capital
appreciation.
Tax-exempt money market funds invest in securities that provide safety of
principal, liquidity and income exempt from federal income taxes by investing in
short-term, high-rated municipal obligations.
Because of their short-term investments, money market mutual funds are able to
keep a constant share price; only the yield fluctuates. Therefore, they are an
attractive alternative to bank accounts. With yields that are generally competitivewith -- and usually somewhat higher than -- yields on bank certificates of deposit
(CDs), they offer several advantages:
o Money can be withdrawn any time without penalty. Money market funds
also offer check writing privileges.
o Money market funds invest only in highly-liquid, short-term, top-rated
money market instruments.
o Money market funds are suitable for conservative investors who want high
stability of principal and moderate current income with immediate liquidity.
Money market funds are suitable for conservative investors who want high
stability of principal and moderate current income with immediate liquidity.
4. Municipal Bond Funds
Municipal bond funds provide higher tax-exempt income than tax-exempt money
market funds by investing in longer-maturity (and often lower-rated) securities, which
generally offer higher yields than the short-term, high-rated securities in which tax-
exempt money market funds invest. Municipal bond funds vary greatly in the quality
and maturity of the municipal bonds they invest in. The longer the maturity, the
higher the yield. Also, the lower the credit rating of the issuer, the greater is the risk
and the higher the yield.
While municipal bond funds generally provide lower yields than income funds with debt
obligations of similar maturities and ratings, for an investor in a high marginal tax bracket the after-tax yields of municipal bond funds will be higher. The price and yield of
municipal bond funds will fluctuate moderately with interest rates. As interest rates
decline, the value of principal increases while yield decreases; as rates increase, bond
prices decline but yields increase.
Suitable for investors in medium to higher tax brackets who want current income free
from federal income tax.
5. Double & Triple Tax-Exempt Bond Funds
These bond funds provide the investor with an even greater tax advantage by investing in
municipal bonds of a single state. Triple tax-exempt funds are exempt from income tax in
a specific city. Thus they generate income exempt from not only federal income tax but
also from state and/or city income tax for residents of those jurisdictions. Like all bond
funds, the value of the shares will fluctuate with interest rates, as will the current yield.
Also, the stability of principal and yield levels varies with the quality and maturity length
of the bonds in which the funds invest. Lack of geographic diversification increases credit
risk of these funds compared with national funds.
These funds are suitable for investors in medium to high tax brackets in high tax states
who want income with maximum exemption from taxes.
6. Specialty/Sector Funds
These funds invest in securities of a specific industry or sector of the economy such as
health care, high technology, leisure, utilities or precious metals. Because such funds
invest primarily in one sector, they do not offer the element of downside risk protection
found in mutual funds that invest in a broad range of industries. However, the funds do
enable investors to diversify holdings among many companies within an industry, a more
conservative approach than investing directly in one particular company. Sector funds
offer the opportunity for sharp capital gains in cases where the fund's industry is "in
favor" but also entail the risk of capital losses when the industry is out of favor.
While sector funds restrict holdings to a particular industry, other specialty funds such as
index funds give investors a broadly-diversified portfolio and attempt to mirror the
performance of various market averages. Index funds generally buy shares in all the
companies composing the S&P 500 Stock Index or other broad stock market indices.
Asset allocation funds move funds among a variety of markets and instruments in
response to the fund manager's view of relative market prospects. They are broadly
diversified and sometimes have higher management fees since there may be a variety of securities in the portfolio. These funds are suitable for investors, who can tolerate a
moderate to high degree of risk, are seeking capital appreciation and to whom dividend
income is secondary in importance. And whatever the instruments, social responsibility
funds apply moral and ethical as well as economic principles in the selection of
securities.
Specialty funds are suitable for investors seeking to invest in a particular industry who
can monitor industry performance regularly and alter investment strategies accordingly.Investors must be willing to assume the risk of potential loss in value of their investment
in the hope of achieving substantial gains. They are not suitable for investors who must
conserve their principal or maximize current income.
c) Types of Mutual Funds Best Suited to Particular Investment Objective .
For investors who understand how to actively manage their portfolio, mutual fund
investments can be moved as market conditions change. Investor funds in equities when
the market is on the upswing and move into money market funds on the downswing or
take any number of steps to ensure that her investments are meeting her needs in
changing market climates. Since it is impossible to predict what the market will do at any
point in time, staying on course with a long-term, diversified investment view is
recommended for most investors.
10. Investor Information
Shareholders receive regular reports from the funds, including details of transactions on a
year-to-date basis. The current net asset value of investors shares (the price at which you
may purchase or redeem them) appears in the mutual fund price listings of dailynewspapers. Investor can also obtain pricing and performance results for the all mutual
funds at this site, or it can be obtained by phone from the fund.
11. Periodic Withdrawals
If investor wants steady monthly income, many funds allow her to arrange for monthly
fixed checks to be sent to her, first by distributing some or all of the income and then, if
necessary, by dipping into her principal.
12. Dividend Options
Investor can receive all dividend payments in cash. Or investor can have them reinvested
in the fund free of charge, in which case the dividends are automatically compounded.
This can make a significant contribution to investor’s long-term investment results. With
some funds investors can elect to have their dividends from income paid in cash and
capital gains distributions reinvested.
13. Automatic Direct Deposit
Investor can usually arrange to have regular, third-party payments -- such as Social
Security or pension checks -- deposited directly into investor’s fund account. This puts
investor’s money to work immediately, without waiting to clear her checking account,
and it saves one from worrying about checks being lost in the mail.
When investor own shares in a mutual fund, she own securities in many companies
without having to worry about keeping stock certificates in safe deposit boxes or sending
them by registered mail. Investor doesn’t even have to worry about handling the mutualfund stock certificates; the fund maintains her account on its books and sends one
periodic statements keeping track of all her transactions.
15. Online Services
The internet provides a fast, convenient way for investors to access financial information.
A host of services are available to the online investor including direct access to no-load
companies.
17. Asset Management Accounts
These master accounts, available from many of the larger fund groups, enable an investor
to manage all her financial service needs under a single umbrella from unlimited check
writing and automatic bill paying to discount brokerage and credit card accounts.
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
A typical mutual fund structure in India can be graphically represented as follows:
REGULATORY REGIME
A mutual fund is a fund established in the form of a trust to raise monies through the sale
of units to the public or a section of the public under one or more schemes for investingin securities, including money market instruments. The regulation of mutual funds
operating in India falls under the purview of the authority of the Securities and Exchange
Board of India (SEBI). Any person proposing to set up a mutual fund in India is required,
under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996
(Mutual Fund Regulations), to be registered with the SEBI.
a. Mutual Fund
The Mutual Fund Regulations lay down several criteria that need to be fulfilled in order
to be granted registration as a mutual fund. Every mutual fund must be registered with
SEBI and must be constituted in the form of a trust in accordance with the provisions of
the Indian Trusts Act, 1882. The instrument of trust must be in the form of a deed
with brokers, so as to avoid any undue concentration of business with any broker. The
Mutual Fund Regulations further mandates that the trustees should prevent any conflicts
of interest between the AMC and the unit holders in terms of deployment of net worth.
The trustees are also responsible for ensuring that there is no change carried out in thefundamental attributes of any scheme or the trust or fees and expenses payable or any
other change that would modify the scheme and affect the interest of unit holders, unless
each unit holder is provided with written communication thereof. In addition, the unit
holders must be given the option to exit at the prevailing Net Asset Value (“NAV”)
without any exit load. They are obliged to perform a quarterly review of all transactions
carried out between the mutual funds, AMC and its associates. As far as professional
indemnity cover for the trustees or the AMC is concerned, industry practice in India
reveals that the insurance policy is taken out by an Indian insurance company (as is
required by the Insurance Act, 1938) while the risk is subsequently ceded to an overseas
re-insurer who underwrites the primary policy issued by the Indian insurance company.
d. Asset Management Company
The sponsor or the trustees are required to appoint an AMC to manage the assets of the
mutual fund. Under the Mutual Fund Regulations, the applicant must satisfy certain
eligibility criteria in order to qualify to register with SEBI as an AMC:
o the sponsor must have at least 40% stake in the AMC;
o the directors of the AMC should be persons having adequate professional
experience in finance and financial services related field and not found guilty of
moral turpitude or convicted of any economic offence or violation of any
securities laws;
o
the AMC should have and must at all times maintain, a minimum net worth of Rs.100 million;
o the board of directors of such AMC has at least 50% directors, who are not
associate of, or associated in any manner with, the sponsor or any of its
The mutual fund is required, under the Mutual Fund Regulations, to appoint a custodian
to carry out the custodial services for the schemes of the fund. Only institutions with
substantial organizational strength, service capability in terms of computerization, andother infrastructure facilities are approved to act as custodians. The custodian must be
totally delinked from the AMC and must be registered with SEBI. Under the Securities
and Exchange Board of India (Custodian of Securities) Guidelines, 1996, any person
proposing to carry on the business as a custodian of securities must register with the
SEBI and is required to fulfill specified eligibility criteria. Additionally, a custodian in
which the sponsor or its associates holds 50% or more of the voting rights of the share
capital of the custodian or where 50% or more of the directors of the custodian represent
the interest of the sponsor or its associates cannot act as custodian for a mutual fund
constituted by the same sponsor or any of its associate or subsidiary company.
f. Schemes
Under the Mutual Fund Regulations, a mutual fund is allowed to float different schemes.
Each scheme has to be approved by the trustees and the offer document is required to be
filed with the SEBI. The offer document should contain disclosures which are adequate
enough to enable the investors to make informed investment decision, including thedisclosure on maximum investments proposed to be made by the scheme in the listed
securities of the group companies of the sponsor. If the SEBI does not comment on the
contents of the offering documents within 21 days from the date of filing, the AMC
would be free to issue the offer documents to public.
There are obligations on the AMC and the trustee to ensure that the statements made in
the offer documents are true and correct. The AMC is also required to provide an option
to the unit-holder to nominate a person in whom the units held by him shall vest in theevent of his death. SEBI has also prescribed an Advertising Code that has to be observed
while launching a new scheme.
Close-ended schemes are required to be listed on a recognized stock exchange within six
months from the closure of the subscription. However, this requirement is not mandatory
if the scheme provides for periodic repurchase facility to all the unit-holders or monthly
income or caters to special classes of persons, if the details of such repurchase facility are
clearly disclosed in the offer document or if the scheme opens for repurchase within a
period of six months from the closure of subscription. The units of close-ended scheme
may be converted into open-ended scheme if the offer document of such scheme
discloses the option and the period of such conversion or if the unit-holders are provided
with an option to redeem their units in full. A close-ended scheme is required to be fully
redeemed at the end of the maturity period. However, a close-ended scheme may be
allowed to be rolled over if the purpose, period and other terms of the roll over and all
other material details of the scheme including the likely composition of assets
immediately before the roll over, the net assets and NAV of the scheme, are disclosed to
the unit-holders and a copy of the same has been filed with SEBI. Additionally, such a
roll over would be permitted only in case of those unit-holders who have expressed their
consent in writing and the unit-holders who do not opt for the roll over or have not given
written consent shall be allowed to redeem their holdings in full at NAV based price.
The SEBI has restricted a mutual fund from giving guaranteed returns in a scheme unless
such returns are fully guaranteed by the sponsor or the AMC or a statement indicating the
name of the person who will guarantee the return is made in the offer document or the
manner in which the guarantee to be met has been stated in the offer document.
g. Investment Criteria
The Mutual Fund Regulations lay down certain investment criteria that the mutual funds
need to observe. There are certain restrictions on the investments made by a mutual fund.
These restrictions are listed down as Annexure 2 to this paper.
The moneys collected under any scheme of a mutual fund shall be invested only in
transferable securities in the money market or in the capital market or in privately placeddebentures or securitised debts. However, in the case of securitised debts, such fund may
invest in asset backed securities and mortgaged backed securities. Furthermore, the
mutual fund having an aggregate of securities which are worth Rs.100 million
(approximately USD 2.15 million) or more shall be required to settle their transactions
In addition to the above, mutual funds are not permitted to borrow money from the
market except to meet temporary liquidity needs of the mutual funds for the purpose of
repurchase, redemption of units or payment of interest or dividend to the unit holders.
Even such borrowing cannot exceed 20% of the net asset of a scheme and the duration of
such a borrowing cannot exceed a period of six months. Similarly, a mutual fund is not
permitted to advance any loans for any purpose. A mutual fund is permitted to lend
securities in accordance with the Stock Lending Scheme of SEBI. The funds of a scheme
are prohibited from being used in option trading or in short selling or carry forward
transactions. However, SEBI has permitted mutual funds to enter into derivative
transactions on a recognized stock exchange for the purpose of hedging and portfolio
balancing and such investments in derivative instruments have to be made in accordance
with SEBI Guidelines issued in this regard.
h. Limitation of Fees and Expenses
The Mutual Fund Regulations lay down certain restrictions on the fees that can be
charged by the AMC and also caps the expenses that can be loaded on to the Fund. The
AMC can charge the mutual fund with investment and advisory fees subject to the
following restrictions:
(i) One and a quarter of one per cent of the weekly average net assets outstanding in eachaccounting year for the scheme concerned, as long as the net assets do not exceed Rs. 1
billion, and
(ii) One per cent of the excess amount over Rs. 1 billion, where net assets so calculated
exceed Rs. 1 billion.
For schemes launched on a no load basis, the AMC can collect an additional management
fee not exceeding 1% of the weekly average net assets outstanding in each financial year.
In addition to the aforesaid fees, the AMC may charge the mutual fund with the initial
expenses of launching the schemes and recurring expenses such as marketing and selling
expenses including agents’ commission, if any, brokerage and transaction cost, fees and
expenses of trustees, audit fees, custodian fees etc.
Government allows private sector, public sector and joint sector to establish mutual
funds. The mutual fund can be sponsored by a limited company with a sound track
record, general reputation and fairness in all its business transactions. A scheduled bank or All India or State level financial institution can also sponsor a mutual fund. Two or
more limited companies can also jointly sponsor a mutual fund. The sponsoring
entity/entities should have a sound record as evidenced by:
a) audited balance sheet and profit and loss account for last five years;
b) a positive net worth and consistent record of profitability and a good financial
standing during the last five years;
c) good credit record with banks and financial institutions;
d) general reputation in the market;
e) organisation and management; and
f) fairness in business transactions.
A company in the private sector or a bank or a financial institution desirous of setting up
a mutual fund should establish the fund as a trust under the Indian Trusts Act. It shouldthen establish an Asset Management Company. The Asset management Company should
have net worth of not less than Rs. 5 crores (50 million rupees).
The Asset Management Company can issue shares to the public and mobilize share
capital or it can avail loans from the sponsoring company or from any other bank or
institution. The sponsoring company/institution has to get authorization from SEBI for
the mutual fund as well as for the Asset Management Company by making an application
to SEBI in the prescribe application form and by paying prescribed fee. The AMC willoperate the mutual fund.
Mutual funds invest the funds collected from the public according to the investment
objectives stated in the offer documents/prospectus. Mutual funds generally invest in a
wide range of securities in different industries with a view to spreading the investment
risk. Mutual funds are allowed to invest only in transferable securities either in the capital
market or in the money market. They can invest in privately placed debentures or
securities debts. All debt instruments in which mutual funds invest should have been
rated as investment grade by CRISIL or any other approved credit rating agency. Mutual
funds are prohibited from giving term loans. No individual scheme of mutual fund can
invest more than 5 per cent of its corpus in any one company’s shares. Under all its
schemes put together the investment of a mutual funds should not exceed 5 per cent of the paid up capital of any single company. Further, under all its schemes put together
mutual funds should not invest more than 10 per cent of their funds in the shares or
debentures or other securities of a single company. There is a further restriction that the
investment made by the mutual fund in any single industry should not exceed 15 per cent
of its funds in the shares and debentures of any specific industry. Mutual funds should
take delivery of scrips purchased and should give delivery of scrips sold by them. Mutual
funds should not engage in short selling or carry forward transactions or badla finance.
The scrips purchased by the mutual fund should be transferred to the fund’s name and
scheme also.
The Government has granted tax exemption to all mutual funds approved by SEBI. The
investors in the mutual fund pay income-tax on the dividend/income received by them
each year from the mutual funds.
Mutual funds generally publish their net asset value every Friday. Net asset value
represents the current market value for the funds on the basis of the share marketquotations divided by the number of units or shares outstanding on any give date.
Mutual funds employ an expert fund manager for each scheme and he is entrusted with
the specific task of purchasing shares and other securities from the Stock Exchange and
selling them at a higher price at the appropriate time. The mutual fund mangers are
subject to the control and superintendence of the board of trustees of the fund. The board
of trustees of the mutual fund are eminent persons who have wide experience in
investment matters, finance, administration etc. The board of trustees guide the
operations of the mutual fund.
Mutual funds have to submit unaudited half-yearly financial results to SEBI. The mutual
funds should get their accounts audited once in a year by a qualified chartered accountant
or by a firm of chartered accountant and submit the audited accounts to SEBI and publish
the abridged version of balance sheet, income and expenditure statements etc., in
newspapers for the benefit of investing public.
After the annual accounts are audited, mutual funds ascertain the income earned by them
and distribute atleast 90 per cent of the income by way of dividends to their unit holders.After the duration of each scheme is over, mutual funds sell their securities pertaining to
the concerned scheme and redeem the units issued by them by paying the investors their
capital and the capital gains made by fund in proportion to their respective holdings of
units in the fund.
ADVANTAGES OF MUTUAL FUNDS FOR INVESTORS
Reduced Risk: Mutual funds invest in a number of reputed and well managed blue-chip
companies. So, the fall in the prices of a few scrips, will not affect them much. Thus risk
of loss due to a fall in the value of few scrips is minimized.
Expertise of Professional Management: The investors get the expertise of professional
money managers who watch the funds portfolio and take necessary decisions on what
scrips are to be purchased, what scrips are to be sold and when they should be bought and
sold.
Diversification of Portfolio: When a person invests in a mutual fund, he participates in a
larger basket of shares of may different companies in a number of different industries
Automatic Reinvestment: In a mutual fund it is possible to reinvest the dividends and
capital gains. The automatic reinvestment feature of a mutual fund is a form of forced
saving and can make a big difference in the long run.
Selection and timings of investment: Expertise in the selection of shares, debentures,etc., and timing is made available to investors that invested funds generate higher returns
to them.
Liquidity of investment: Mutual funds are ready on any day (after the initial lock in
period is over) to buy back the units from the investors at the net asset value of the
investment. They announce through daily newspapers their re-purchase price of the units
issued under different schemes.
Saving Habit: Mutual funds encourage saving and investment habit among the public at
large.
Tax Shelter: Some mutual funds are permitted by the Government to launch Equity-
Linked Tax Saving Schemes. Investors who invest in such schemes get tax relief or tax
rebate.
Safety of Funds: Mutual funds are governed by the guidelines issued by the Ministry of
Finance on 14.02.1992. The SEBI acts as a watch-dog and tries to protect the interest of
investors. So, the funds invested in Mutual Funds are generally regarded as safe.
Mutual Fund Market in India since its inception:
The Indian mutual fund industry has evolved over distinct stages. The growth of the
mutual fund industry in India can be divided into four phases: Phase I (1964-87), Phase
II (1987-92), Phase III (1992-97), and Phase IV (beyond 1997).
Phase I: The mutual fund concept was introduced in India with the setting up of
UTI in 1963. The Unit Trust of India (UTI) was the first mutual fund set up under
the UTI Act, 1963, a special act of the Parliament. It became operational in 1964
with a major objective of mobilizing savings through the sale of units and
investing them in corporate securities for maximizing yield and capital
any distributor who achieves his target is entitled to a foreign trip. Funnily, the number of
junkets have increased so much that they are becoming counter-productive. Some large
distributors are sick and tired of such frequent fly-offs. According to sources, one of the
frustrated distributors returned to Mumbai mid-way from his Kashmir junket. So far, it
was deducted from investors’ money, but the regulator has now come down heavily on
AMCs and is preventing the fund industry from making investors pay for such
extravaganzas. So AMCs are supposed to be bearing the expenses on their own. “Earlier,
AMCs were debiting the expenses of junkets to the schemes but now they have to pay out
of their pockets. In remains to be seen whether irrespective of cumbersome rules and
regulations and poor performance, the distributors, bribed by lavish junkets, would be
able to push fund products down the throats of the investing public. Interestingly,
Companies selling mutual funds are also in the same game. “Most of the brokers are
selling their products today. If a broker gets Rs1 crore sale of mutual fund business, he or
she gets a free trip to Malaysia. Everyone is getting tempted to go on a foreign trip,” said
a distributor.
RECENT TRENDS FOR MUTUAL FUND INDUSTRY
The ban on entry load on mutual fund products could impact RMF in terms of profitability and increase their sales level. The Securities and Exchange Board of India
(Sebi) has banned the entry load charge on mutual fund products from August 1. Now,
Reliance Mutual Fund has to negotiate with customers for commission, which is to be
paid through a different cheque. "The industry is likely to witness consolidation as
Reliance Mutual Fund (RMF) may not be able to accommodate the acute profit and loss
stress and also not able to simply increase their sales level. Within equity, the
prevalence of closed-ended funds will increase, with RMF driving for low churn
ratios." For the move to be successful, business model of the RMF has to be overhauled.
Before entry load exemption, their mutual fund system, the intermediaries (distributors)
would more interest in selling mutual funds. This will in turn increase profits of mutual
fund houses, which will then charge higher trail and asset management fees.
IDFC sees little financial impact on his business. IDFC says that, after ban of entry load,
selling mutual funds would not have made sense. According to IDFC, “it’s not possible toask clients for separate cheques every month if they opt for mutual funds via a systematic
investment plan (SIP). After the entry load ban, IDFC has shifted their small clients
online. IDFC is using mutual funds to acquire new customers and later cross-sell
them other products. IDFC, on the other hand, has seen their margins shrink after
the entry load ban and decrease in sales level. They had to pay intermediaries
commission from their pocket. To save costs, IDFC is also working on technology
platforms to enable online transactions at every distributor’s website. Intermediaries say
Reliance Mutual Fund and IDFC are about to implement this. IDFC and RMF feel that
in the beginning the profitability is likely to take a hit, not only due to the ban on
entry load, but also due to the increased spend on marketing, distribution and
administrative expenses. Barely six months into the ‘no-entry load’ era for the mutual
fund industry, is the sector witnessing a huge tectonic shift with distributors shying away
RMF and IDFC approached Amfi for a solution. The circular, issued on May 7, mandated
that fund houses need not pay trail commission to either the old or the new distributor.
Instead, the amount should be kept in a separate account and used for investor education.
The existing retailer, consequently, was earning his 2.25 per cent load every month from
the AMC. Such customers are told by rival agents that shifting will ensure a saving of
2.25 per cent a month. And, those not paying the entry load are offered better service.
Retailer will not sell mutual funds until they get some clarity on entry load. They will see
how the issue unfolds over the next few weeks. The final decision will depend on how
Sebi settles the issue without really hurting the distributor,” a senior official at India Post
told ET. Then, the transfer letter signed by the customer is sent to the RMF. The IDFC in
turn, issues a letter to the old distributor, saying the ‘broker code’ has been changed. Infact, industry sources said some fund houses that sought a reason for the change, were
sent transfer letters with the customer’s signature with an additional reason filled by the
sales people. The method is something like this. Approach a customer of a small broker
and tell him he’s not being serviced properly. For instance, many customers were not
aware of the ban on entry load and were carrying on with their systematic investment
plans (SIPs). But with ban on entry load, retailers are likely to take a hit as some of the
players believe that it will be very difficult to convince investor to pay a fee for the
service given.
Many investors seem to be of the view that they have “missed the bus” and would wait
for a correction before returning in large numbers. The fact that the markets have been
moving in a relatively narrow band since August hasn’t helped create demand in the past
few months either. With the market regulator now allowing the purchase of mutual fund
units through stock brokers, reach would be wider. Besides, a common online trading
platform for mutual funds is expected to be available in less than six months. While these
factors will improve access, flows will largely depend on how the market performs. It
finds that 87% of investors with investments less than Rs 1 lakh have redeemed equity
funds at a profit. In contrast, it has been the NFOs that have caught the investors on the
wrong foot. While 49% of NFO investments have been redeemed at loss, 22% have been
redeemed at a 'minor' profit. Customers continue to dominate the equity mutual fund
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