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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 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
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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
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MUTUAL FUNDSFeatures / Advantages of Mutual Fund
Professional managementDiversificationConvenient
administrationReturn potentialLow CostsLiquidityTransparency
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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
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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
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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
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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