OBJECTIVES OF STUDY (2)

8/7/2019 OBJECTIVES OF STUDY (2)

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OBJECTIVES OF STUDY

y To know the general views of people about mutual fund.

y To know the position of Mutual fund sales in the Indian Financial Market.

y To know whether mutual fund in an Investment or not?

y To give a brief idea about the benefits available from Mutual Fund investment

y To give an idea of the types of schemes available.

y To discuss about the market trends of Mutual Fund investment.

y To study some of the mutual fund schemes and analyse them.

y

Observe the fund management process of mutual funds.

y Explore the recent developments in the mutual funds in India.

y To give an idea about the regulations of mutual funds.


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REASEARCH METHODOLGY

A research methodology is a sample frame work or plan for a study that is used as aguide for conducting research. To achieve the objective of studying the stock market datahas been collected.Research methodology carried for this study can be two types.

1. Primary2. Secondary

y Primary data- The data, which has being collected for the first time and it is theoriginal data. In this project the primary data has been taken from guide of theproject.

y Secondary data- Internet, magazine & mutual fund Seller Companys literatureavailable.

y RESEARCH DESIGN

y It is the blue print of research to be conducted.

y Research design used in the study: - Descriptive research

y It is the research in which the already existing facts are studied in the way theyexist.

SAMPLING PLAN

y Sampling Unit mutual fund selling companies.

y Sampling Procedure-Convenience sampling.

y Research area- Pune.


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There are a lot of investment avenues available today in the financial market for an investor withan investable surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds wherethere is low risk but low return. He may invest in Stock of companies where the risk is high andthe returns are also proportionately high. The recent trends in the Stock Market have shown thatan average retail investor always lost with periodic bearish tends. People began opting for

portfolio managers with expertise in stock markets who would invest on their behalf. Thus wehad wealth management services provided by many institutions. However they proved too costlyfor a small investor. These investors have found a good shelter with the mutual funds.

Mutual fund industry has seen a lot of changes in past few years with multinational companiescoming into the country, bringing in their professional expertise in managing funds worldwide.In the past few months there has been a consolidation phase going on in the mutual fund industryin India. Now investors have a wide range of Schemes to choose from depending on theirindividual profiles.

A mutual fund is a professionally-managed type ofcollective investment scheme that pools

money from many investors to buy securities (stocks, bonds, short-term money marketinstruments, and/or other securities). A mutual fund has a fund managerthat trades (buys andsells) the fund's investments in accordance with the fund's investment objective.Mutual funds may invest in many kinds ofsecurities (subject to its investment objective as setforth in the fund's prospectus, which is the legal document under SEC laws which offers thefunds for sale and contains a wealth of information about the fund). The most common securitiespurchased are "cash" or money market instruments, stocks, bonds, other mutual fund shares andmore exotic instruments such as derivatives like forwards, futures, options and swaps. Somefunds' investment objectives (and or its name) define the type of investments in which the fundinvests. For example, the fund's objective might state "...the fund will seek capital appreciationby investing primarily in listed equity securities (stocks) of U.S. companies with any marketcapitalization range." This would be "stock" fund or a "domestic/US stock" fund since it statedU.S. companies. A fund may invest primarily in the shares of a particular industry or marketsector, such as technology, utilities or financial services. These are known as specialty or sectorfunds. Bond funds can vary according to risk (e.g., high-yield junk bonds or investment-gradecorporate bonds), type ofissuers (e.g., government agencies, corporations, or municipalities), ormaturity of the bonds (short- or long-term). Both stock and bond funds can invest in primarilyU.S. securities (domestic funds), both U.S. and foreign securities (global funds), or primarilyforeign securities (international funds). Since fund names in the past may not have provided aprospective investor a good indication of the type of fund it was, the SEC issued a rule under the'40 Act which aims to better align fund names with the primary types of investments in which thefund invests, commonly called the "name rule". Thus, under this rule, a fund must invest undernormal circumstances in at least 80% of the securities referenced in its name. for example, the"ABC New Jersey Tax Free Bond Fund" would generally have to invest, under normalcircumstances, at least 80% of its assets in tax-exempt bonds issued by the state of New Jerseyand its political subdivisions. Some fund names are not associated with specific securities so thename rule has less relevance in those situations. For example, the "ABC Freedom Fund" is suchthat its name does not imply a specific investment style or objective. Lastly, an index fund strivesto match the performance of a particular market index, such as the S&P 500 Index. In such a


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fund, the fund would invest in securities and likely specific derivates such as S&P 500 stockindex futures in order to most closely match the performance of that index.

Most mutual funds' investment portfolios are continually monitored by one or more employeeswithin the sponsoring investment adviser or management company, typically called a portfolio

managerand their assistants, who invest the funds assets in accordance with its investmentobjective and trade securities in relation to any net inflows or outflows of investor capital (ifapplicable), as well as the ongoing performance of investments appropriate for the fund. Amutual fund is advised by the investment adviser under an advisory contract which generally issubject to renewal annually.

Mutual funds are subject to a special set of regulatory, accounting, and tax rules. In the U.S.,unlike most other types of business entities, they are not taxed on their income as long as theydistribute 90% of it to their shareholders and the funds meet certain diversification requirementsin the Internal Revenue Code. Also, the type of income they earn is often unchanged as it passesthrough to the shareholders. Mutual fund distributions of tax-free municipal bond income are

tax-free to the shareholder. Taxable distributions can be eitherordinary income orcapital gains,depending on how the fund earned those distributions. Net losses are not distributed or passedthrough to fund investors.

Net asset value

The Net Asset Value, or NAV, is the current market value of a fund's holdings, minus the fund'sliabilities, that is usually expressed as a per-share amount. For most funds, the NAV isdetermined daily, after the close of trading on some specified financial exchange, but some fundsupdate their NAV multiple times during the trading day. The public offering price, or POP, is theNAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV,

and so process orders only after the NAV is determined. Closed-end funds (the shares of whichare traded by investors) may trade at a higher or lower price than their NAV; this is known as apremium ordiscount, respectively. If a fund is divided into multiple classes of shares, each classwill typically have its own NAV, reflecting differences in fees and expenses paid by the differentclasses.

Some mutual funds own securities which are not regularly traded on any formal exchange. Thesemay be shares in very small or bankrupt companies; they may be derivatives; or they may beprivate investments in unregistered financial instruments (such as stock in a non-publiccompany). In the absence of a public market for these securities, it is the responsibility of thefund manager to form an estimate of their value when computing the NAV. How much of a

fund's assets may be invested in such securities is stated in the fund's prospectus.

The price per share, or NAV (net asset value), is calculated by dividing the fund's assets minusliabilities by the number of shares outstanding. This is usually calculated at the end of everytrading day.


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Average annual return

US mutual funds use SEC form N-1A to report the average annual compounded rates of returnfor 1-year, 5-year and 10-year periods as the "average annual total return" for each fund. Thefollowing formula is used:[5]

P(1+T)n = ERV

Where:

P = a hypothetical initial payment of $1,000.T = average annual total return.n = number of years.

ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).

Turnover

Turnoveris a measure of the fund's securities transactions, usually calculated over a year's time,and usually expressed as a percentage of net asset value.

This value is usually calculated as the value of all transactions (buying, selling) divided by 2divided by the fund's total holdings; i.e., the fund counts one security sold and another one

bought as one "turnover". Thus turnover measures the replacement of holdings.

In Canada, under NI 81-106 (required disclosure for investment funds) turnover ratio iscalculated based on the lesser of purchases or sales divided by the average size of the portfolio(including cash).

Expenses and expense ratios

Mutual funds bear expenses similar to other companies. The fee structure of a mutual fund canbe divided into two or three main components: management fee, non-management expense, and

12b-1/non-12b-1 fees. All expenses are expressed as a percentage of the average daily net assetsof the fund.


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Management fees

The management fee for the fund is usually synonymous with the contractual investmentadvisory fee charged for the management of a fund's investments. However, as many fundcompanies include administrative fees in the advisory fee component, when attempting to

compare the total management expenses of different funds, it is helpful to define managementfee as equal to the contractual advisory fee plus the contractual administrator fee. This "levels theplaying field" when comparing management fee components across multiple funds.

Contractual advisory fees may be structured as "flat-rate" fees, i.e., a single fee charged to thefund, regardless of the asset size of the fund. However, many funds have contractual fees whichinclude breakpoints so that as the value of a fund's assets increases, the advisory fee paiddecreases. Another way in which the advisory fees remain competitive is by structuring the feeso that it is based on the value of all of the assets of a group or a complex of funds rather thanthose of a single fund..

Non-management expenses

Apart from the management fee, there are certain non-management expenses which most fundsmust pay. Some of the more significant (in terms of amount) non-management expenses are:transfer agent expenses (this is usually the person you get on the other end of the phone linewhen you want to buy/sell shares of a fund), custodian expense (the fund's assets are kept incustody by a bank which charges a custody fee), legal/audit expense, fund accounting expense,registration expense (the SEC charges a registration fee when funds file registration statementswith it), board of directors/trustees expense (the members of the board who oversee the fund areusually paid a fee for their time spent at meetings), and printing and postage expense (incurredwhen printing and delivering shareholder reports).

12b-1/Non-12b-1 service fees

In the United States, 12b-1 service fees/shareholder servicing fees are contractual fees which afund may charge to cover the marketing expenses of the fund. Non-12b-1 service fees aremarketing/shareholder servicing fees which do not fall under SEC rule 12b-1. While funds donot have to charge the full contractual 12b-1 fee, they often do. When investing in a front-endload or no-load fund, the 12b-1 fees for the fund are usually .250% (or 25 basis points). The 12b-1 fees for back-end and level-load share classes are usually between 50 and 75 basis points butmay be as much as 100 basis points. While funds are often marketed as "no-load" funds, thisdoes not mean they do not charge a distribution expense through a different mechanism. It is

expected that a fund listed on an online brokerage site will be paying for the "shelf-space" in adifferent manner even if not directly through a 12b-1 fee.


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Investor fees and expenses

Fees and expenses borne by the investor vary based on the arrangement made with the investor'sbroker. Sales loads (or contingent deferred sales loads (CDSL)) are included in the fund's totalexpense ratio (TER) because they pass through the statement of operations for the fund.

Additionally, funds may charge early redemption fees to discourage investors from swappingmoney into and out of the fund quickly, which may force the fund to make bad trades to obtainthe necessary liquidity. For example, Fidelity Diversified International Fund (FDIVX) charges a10 percent fee on money removed from the fund in less than 30 days.

Brokerage commissions

An additional expense which does not pass through the fund's income statement (statement ofoperations) and cannot be controlled by the investor is brokerage commissions. Brokeragecommissions are incorporated into the price of securities bought and sold and, thus, are acomponent of the gain or loss on investments. They are a true, real cost of investing though. Theamount of commissions incurred by the fund and are reported usually 4 months after the fund'sfiscal year end in the "statement of additional information" which is legally part of theprospectus, but is usually available only upon request or by going to the SEC's or fund's website.Brokerage commissions, usually charged when securities are bought and again when sold, aredirectly related to portfolio turnover which is a measure of trading volume/velocity (portfolioturnover refers to the number of times the fund's assets are bought and sold over the course of ayear). Usually, higher rate of portfolio turnover (trading) generates higher brokerage

commissions. The advisors of mutual fund companies are required to achieve "best execution"through brokerage arrangements so that the commissions charged to the fund will not beexcessive as well as also attaining the best possible price upon buying or selling.


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Types of mutual funds

Open-end fund, forms of organization, other funds

The term mutual fundis the common name for what is classified as an open-end investment

company by the SEC. Being open-ended means that, at the end of every day, the fundcontinually issues new shares to investors buying into the fund and must stand ready to buy backshares from investors redeeming their shares at the then current net asset value per share.

Mutual funds must be structured as corporations or trusts, such as business trusts, and anycorporation or trust will be classified by the SEC as an investment company if it issues securitiesand primarily invests in non-government securities. An investment company will be classified bythe SEC as an open-end investment company if it does not issue undivided interests in specifiedsecurities (the defining characteristic ofunit investment trusts or UITs) and if it issuesredeemable securities. Registered investment companies that are not UITs or open-endinvestment companies are closed-end funds. Closed-end funds are like open end except they are

more like a company which sells its shares a single time to the public under an initial publicoffering or "IPO". Subsequently, the fund's shares trade with buyers and sellers of shares in thesecondary market at a market-determined price (which is likely not equal to net asset value) suchas on the New York or American Stock Exchange. Except for some special transactions, the fundcannot continue to grow in size by attracting more investor capital like an open-end fund may.

Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an open-end investment company. ETFs combine characteristics of both mutual funds and closed-endfunds. ETFs are traded throughout the day on a stock exchange, just like closed-end funds, but at

prices generally approximating the ETF's net asset value. Most ETFs are index funds and trackstock market indexes. Shares are issued or redeemed by institutional investors in large blocks(typically of 50,000). Most investors buy and sell shares through brokers in market transactions.Because the institutional investors normally purchase and redeem in in kind transactions, ETFsare more efficient than traditional mutual funds (which are continuously issuing and redeemingsecurities and, to effect such transactions, continually buying and selling securities andmaintaining liquidity positions) and therefore tend to have lower expenses.

Exchange-traded funds are also valuable for foreign investors who are often able to buy and sellsecurities traded on a stock market, but who, for regulatory reasons, are limited in their ability toparticipate in traditional U.S. mutual funds.

Equity funds

Equity funds, which consist mainly of stock investments, are the most common type of mutualfund. Equity funds hold 50 percent of all amounts invested in mutual funds in the UnitedStates.[6] Often equity funds focus investments on particular strategies and certain types ofissuers.


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Market Capitalization

Fund managers and other investment professionals have varying definitions ofmid-cap, andlarge-cap ranges. The following ranges are used by Russell Indexes:[7]

y

R

ussell Microcap Index micro-cap ($54.8 539.5 million)y Russell 2000 Index small-cap ($182.6 million 1.8 billion)y Russell Midcap Index mid-cap ($1.8 13.7 billion)y Russell 1000 Index large-cap ($1.8 386.9 billion)

Growth vs. value

Another distinction is made between growth funds, which invest in stocks of companies thathave the potential for large capital gains, and value funds, which concentrate on stocks that areundervalued. Value stocks have historically produced higher returns; however, financial theorystates this is compensation for their greater risk. Growth funds tend not to pay regulardividends.

Income funds tend to be more conservative investments, with a focus on stocks that paydividends. A balanced fund may use a combination of strategies, typically including some levelof investment in bonds, to stay more conservative when it comes to risk, yet aim for somegrowth.

Index funds versus active management

An index fund maintains investments in companies that are part of major stock (or bond)indexes, such as the S&P 500, while an actively managed fund attempts to outperform a relevantindex through superior stock-picking techniques. The assets of an index fund are managed toclosely approximate the performance of a particular published index. Since the composition of an

index changes infrequently, an index fund manager makes fewer trades, on average, than does anactive fund manager. For this reason, index funds generally have lower trading expenses thanactively managed funds, and typically incur fewer short-term capital gains which must be passedon to shareholders. Additionally, index funds do not incur expenses to pay for selection ofindividual stocks (proprietary selection techniques, research, etc.) and deciding when to buy,hold or sell individual holdings. Instead, a fairly simple computer model can identify whateverchanges are needed to bring the fund back into agreement with its target index.

Certain empirical evidence seems to illustrate that mutual funds do not beat the market andactively managed mutual funds under-perform other broad-based portfolios with similarcharacteristics. One study found that nearly 1,500 U.S. mutual funds under-performed the marketin approximately half of the years between 1962 and 1992.[8] An analysis of the equity fundsreturns of the 15 biggest asset management companies worldwide from 2004 to 2009 showedthat about 80% of the funds have returned below their respective benchmarks.[citation needed]Moreover, funds that performed well in the past are not able to beat the market again in thefuture (shown by Jensen, 1968; Grinblatt and Sheridan Titman, 1989)..[9]


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Bond funds

Bond funds account for 18% of mutual fund assets. Types of bond funds include term funds,which have a fixed set of time (short-, medium-, or long-term) before they mature. Municipalbond funds generally have lower returns, but have tax advantages and lower risk. High-yield

bond funds invest in corporate bonds, including high-yield orjunk bonds. With the potential forhigh yield, these bonds also come with greater risk.

Money market funds

Money market funds hold 26% of mutual fund assets in the United States. Money market fundsgenerally entail the least risk, as well as lower rates of return. Unlike certificates of deposit(CDs), open-end money fund shares are generally liquid and redeemable at "any time" (that is,normal business hours during which redemption requests are taken - generally not after 4 PMET). Money funds in the US are required to advise investors that a money fund is not a bankdeposit, not insured and may lose value. Most money fund strive to maintain an NAV of $1.00

per share though that is not guaranteed; if a fund "breaks the buck", its shares could be redeemedfor less than $1.00 per share. While this is rare, it has happened in the U.S., due in part to themortgage crisis affecting related securities.

Funds of funds

Funds of funds (FoF) are mutual funds which invest in other mutual funds (i.e., they are fundscomposed of other funds). The funds at the underlying level are often funds which an investorcan invest in individually, though they may be 'institutional' class shares that may not be within

reach of an individual shareholder). A fund of funds will typically charge a much lowermanagement fee than that of a fund investing in direct securities because it is considered a feecharged for asset allocation services which is presumably less demanding than active directsecurities research and management. The fees charged at the underlying fund level are a real costor drag on performance but do not pass through the FoF's income statement (statement ofoperations), but are usually disclosed in the fund's annual report, prospectus, or statement ofadditional information. FoF's will often have a higher overall/combined expense ratio than thatof a regular fund. The FoF should be evaluated on the combination of the fund-level expensesand underlying fund expenses, as these both reduce the return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor), although

some invest in unaffilated funds (those managed by other advisors) or both. The cost associatedwith investing in an unaffiliated underlying fund may be higher than investing in an affiliatedunderlying because of the investment management research involved in investing in fund advisedby a different advisor. Recently, FoFs have been classified into those that are actively managed(in which the investment advisor reallocates frequently among the underlying funds in order toadjust to changing market conditions) and those that are passively managed (the investmentadvisor allocates assets on the basis of on an allocation model which is rebalanced on a regularbasis).


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The design of FoFs is structured in such a way as to provide a ready mix of mutual funds forinvestors who are unable to or unwilling to determine their own asset allocation model. Fundcompanies such as TIAA-CREF, American Century Investments, Vanguard, and Fidelity havealso entered this market to provide investors with these options and take the "guess work" out ofselecting funds. The allocation mixes usually vary by the time the investor would like to retire:

2020, 2030, 2050, etc. The more distant the target retirement date, the more aggressive the assetmix.

Hedge funds

Hedge funds in the United States are pooled investment funds with loose, if any, SEC regulation,unlike mutual funds. Some hedge fund managers are required to register with SEC as investmentadvisers under the Investment Advisers Act of 1940. The Act does not require an adviser tofollow or avoid any particular investment strategies, nor does it require or prohibit specificinvestments. Hedge funds typically charge a management fee of 1% or more, plus aperformance fee of 20% of the hedge fund's profit. There may be a "lock-up" period, during

which an investor cannot cash in shares. A variation of the hedge strategy is the 130-30 fund forindividual investors.

Mutual funds vs. other investments

Mutual funds offer several advantages over investing in individual stocks. For example, thetransaction costs are divided among all the mutual fund shareholders, which allows for cost-effective diversification. Investors may also benefit by having a third party (professional fund

managers) apply expertise and dedicate time to manage and research investment options,although there is dispute over whether professional fund managers can, on average, outperformsimple index funds that mimic public indexes. Yet, the Wall Street Journal reported thatseparately managed accounts (SMA or SMAs) performed better than mutual funds in 22 of 25categories from 2006 to 2008. This included beating mutual funds performance in 2008, a toughyear in which the global stock market lost US$21 trillion in value.[12][13] In the story,Morningstar, Inc said SMAs outperformed mutual funds in 25 of 36 stock and bond marketcategories. Whether actively managed or passively indexed, mutual funds are not immune torisks. They share the same risks associated with the investments made. If the fund investsprimarily in stocks, it is usually subject to the same ups and downs and risks as the stock market.

Share classes

Mutual funds may offer different types of shares, known as classes. For a given fund, each classwill invest in the same portfolio of securities and will have the same investment objectives andpolicies. But each class will have different shareholder services and/or distribution arrangementswith different fees and expenses. As a result, each class will likely have different performanceresults.[14]


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As an example, a fund may have three classes of shares that are sold to the general public Class A, Class B, and Class C and a class that is sold only to institutional investors Class I.

y Class A shares often have a front-end sales load (a type of fee that investors pay whenthey purchase fund shares).

y

Class B shares often have no front-end sales load, instead having a contingent deferredsales load, or CDSL (a type of fee paid when fund shares are sold, and that typicallydecreases to zero over time) and a 12b-1 fee. Class B shares also may convertautomatically to a class of shares with a lower 12b-1 fee (usually Class A) if held longenough.

y Class C shares might have a 12b-1 fee and a front-end sales load or CDSL, but thesewould be lower than a Class As front-end sales load or a Class Bs CDSL. Class Cshares usually do not convert to another class. [15]

y Class I would be sold only to institutional investors and might have different fees andexpenses. These generally have very high minimum investment requirements. In somecases, by aggregating regular investments made by many individuals, a retirement plan

(such as a 401(k) plan) may qualify to purchase "institutional" shares (and gain thebenefit of their typically lower expense ratios) even though no members of the planwould qualify individually.

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Load and expenses

A front-end load orsales charge is a commission paid to a brokerby a mutual fund when sharesare purchased, taken as a percentage of funds invested. The value of the investment is reduced bythe amount of the load. Some funds have a deferred sales charge orback-end load. In this type of

fund an investor pays no sales charge when purchasing shares, but will pay a commission out ofthe proceeds when shares are redeemed depending on how long they are held. Another derivativestructure is a level-load fund, in which no sales charge is paid when buying the fund, but a back-end load may be charged if the shares purchased are sold within a year.

Load funds are sold through financial intermediaries such as brokers, financial planners, andother types of registered representatives who charge a commission for their services. Shares offront-end load funds are frequently eligible forbreakpoints (i.e., a reduction in the commissionpaid) based on a number of variables. These include other accounts in the same fund family heldby the investor or various family members, or committing to buy more of the fund within a setperiod of time in return for a lower commission "today".

It is possible to buy many mutual funds without paying a sales charge. These are called no-loadfunds. In addition to being available from the fund company itself, no-load funds may be sold bysome discount brokers for a flat transaction fee or even no fee at all. (This does not necessarilymean that the broker is not compensated for the transaction; in such cases, the fund may paybrokers' commissions out of "distribution and marketing" expenses rather than a specific salescharge. The buyer is therefore paying the fee indirectly through the fund's expenses deductedfrom profits.)


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No-load funds include both index funds and actively managed funds. The largest mutual fundfamilies selling no-load index funds are Vanguard and Fidelity, though there are a number ofsmaller mutual fund families with no-load funds as well. Expense ratios in some no-load indexfunds are less than 0.2% per year versus the typical actively managed fund's expense ratio ofabout 1.5% per year. Load funds usually have even higher expense ratios when the load is

considered. The expense ratio is the anticipated annual cost to the investor of holding shares ofthe fund. For example, on a $100,000 investment, an expense ratio of 0.2% means $200 ofannual expense, while a 1.5% expense ratio would result in $1,500 of annual expense. Theseexpenses are before any sales commissions paid to purchase the mutual fund.

Many fee-only financial advisors strongly suggest no-load funds such as index funds. If theadvisor is not of the fee-only type but is instead compensated by commissions, the advisor mayhave a conflict of interest in selling high-commission load funds.


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SEBI

To protect the interest of the investors, SEBI formulates policies and regulates the mutualfunds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time

to time. MF either promoted by public or by private sector entities including one promotedby foreign entities are governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by makinginvestments in various types of securities. Custodian, registered with SEBI, holds thesecurities of various schemes of the fund in its custody. The general power ofsuperintendence and direction over AMC is vested with the trustees.

According to SEBI Regulations, two thirds of the directors of trustee company or board oftrustees must be independent . They should not be associated with the sponsors. 50% of thedirectors of AMC must be independent. All mutual funds are required to be registered with

SEBI before they launch any scheme.

Increase of load more than the level mentioned in the offer document is applicable only toprospective investments by the MFs. For original investments, the offer documents has to beamended to make investors aware of loads at the time of investments.

.

Main requirements under SEBI (Mutual Funds) Regulations, 1996:

The following are the eligibility criteria for grant of a certificate of registration as per regulation 7 of SEBI

(Mutual Funds Regulations) 1996.

For the purpose of grant of a certificate of registration, the applicant has to fulfil the following, namely:-

a) The sponsor should have a sound track record and general reputation of fairness and integrity inall his business transactions;

Explanation: For the purposes of this clause "sound track record" shall mean the sponsor should,-

I. be carrying on business in financial services for a period of not less than five years;

II. the net worth is positive in all the immediately preceding five years; and

III. the net worth in the immediately preceding year is more than the capital contribution ofthe sponsor in the asset management company; and

IV. the sponsor has profits after providing for depreciation, interest and tax in three out of theimmediately preceding five years, including the fifth year.


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a) the applicant is a fit and proper person.

b) in the case of an existing mutual fund, such fund is in the form of a trust and the trust deed hasbeen approved by the Board;

c) the sponsor has contributed or contributes atleast 40% to the net worth of the assetmanagement company;

Provided that any person who holds 40% or more of the net worth of an asset managementcompany shall be deemed to be a sponsor and will be required to fulfil the eligibility criteria specifiedin these regulations;

d) the sponsor or any of its directors or the principle officer to be employed by the mutual fundshould not have been guilty of fraud or has not been convicted of an offence involving moralturpitude or has not been found guilty of any economic offence.

e) appointment of trustees to act as trustees for the mutual fund in accordance with the provisionsof the regulations;

f) appointment of asset management company to manage the mutual fund and operate thescheme of such funds in accordance with the provisions of these regulations;

g) appointment of a custodian in order to keep custody of the securities and carry out the custodianactivities as may be authorised by the trustees.

Application for Registration:

An applicant should apply for registration in form A prescribed under Schedule I of SEBI (Mutual Funds)

Regulations 1996. It may be noted here that as per the proviso to Reg. 7 (c) of the Regulations, any personwho holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor

and will be required to apply in Form A.

While applying, please ensure that the main objects of the memorandum of the sponsor company permit it to

carry on mutual fund activities. An applicant should also submit the following additional information for the

sponsor as well as for the other shareholders in the proposed asset management company.

1. A complete list of your group/associate companies registered with SEBI in any capacity, alsoindicate the capacity in which they are registered and the SEBI Registration number. In case offoreign sponsors, details of registration of sponsor/any of its associate / group companies with any

regulatory agency abroad You may also refer to SEBI (Mutual Funds) Regulations for the definitionof associates, group and control.)

2. Whether any of the sponsor or its group/associate companies are listed in any of the recognisedstock exchange(s) in India. If so, please furnish the details.

3. Whether there have been any instances of violation of or non-adherence to any securitiesrelated regulations and whether any action has been taken against you or any of your


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associate/group companies in this regard, by a regulatory agency in India or abroad; (please providethe following information)

a) Top 10 monetary penalties in case of foreign entities and all monetary penalties in caseof Indian entities, imposed against the sponsor or any associate of the sponsor (forirregularities/ violations in the financial services sector or for defaults in respect of

shareholders / debenture holders and depositors, by by any financial regulatory body orgovernment authority or settlement arrived with any financial regulatory body during the lastfive years and details thereof. Penalties awarded for economic offences may be disclosedonly in case of sponsor.

b) Details of all cases of suspensions and cancellation of certificate of registration (forirregularities/ violations in financial services sector or for defaults in respect of shareholders,debenture holders and depositors) of the sponsor or any associate of the sponsor shall bedisclosed for the last 10 years.

All disclosures on penalties and action taken as per (a) and (b) above against foreign entities may be

limited to the jurisdiction of the country where the principal activities (in terms of income/ revenue) of

the sponsors/ associate companies are carried out or where the headquarter is situated.

4. Declaration in terms of Regulation 7(d) of the Securities and Exchange Board of India (MutualFunds) Regulations, 1996 that your sponsor company or any of your directors have not been foundguilty of fraud or have not been convicted of an offence involving moral turpitude or have not beenfound guilty of any economic offence. If there are such cases, full details should be provided.

5. (a) Details of registration of your company/associate/group companies, which are registered/required to be registered with Reserve Bank of India (RBI) as a Banking company or Non BankingFinance Company or in any other capacity.

(b) Details of disciplinary action taken by RBI against you or any of your group/associate companies.Please also inform us in case there is any default in repayment of deposits by you or any of your

group / associate companies.

(c) Details of the RBI approval, if any required, for the purpose of sponsoring a mutual fund.

6. Whether any of the directors or employees of your company or your group / associatecompanies were ever associated with any organisation as a director or an employee against whomSEBI had initiated action of suspension or cancellation of certificate of registration or initiated anyother action under the provisions of SEBI Act or launched any prosecution for acts committed duringtheir association. If so, please furnish details.


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Onsite Due diligence of Sponsor by SEBI

SEBI may conduct an on-site due-diligence of the existing businesses of the sponsor to study thefollowing:

1. Existing infrastructure for client servicing, complaints handling;

2. Track record of complaint / grievance handling; and

3. Compliance philosophy and practice.

Communication by SEBI:

SEBI will examine the application and a communication will be sent to you about your eligibility status. Ifyou are found eligible, you will be required to undertake the following steps:

1. Incorporation of the Asset Management Company and the Trustee Company/Board oftrustees:

For this purpose, you may submit two copies of the completed Memorandum and Articles ofAssociation of the Asset Management Company and the Trustee Company for our forwarding tothe Registrar of Companies.

Please ensure that these documents contain a clause that notwithstanding anything mentionedin these documents, only those activities will be carried out which are permitted under the SEBI(Mutual Funds) Regulations. All the provisions of the SEBI (Mutual Funds) Regulations, 1996and the Guidelines issued from time to time shall be applicable.

Please also indicate the address of the ROC where these companies would be incorporated.

2. Auditors certificate:

After incorporation of the AMC and the Trustee Company, please submit a certificate from aChartered Accountant certifying that:

a) The sponsor has contributed at least 40% to the net worth of the AMC (Regulation 7(c).

b) The AMC has a net worth of not less than Rupees Ten Crore (Rupees 100 min), asrequired under regulation 21 (1) (f) of SEBI (Mutual Funds) Regulations, 1996 (the networth should be furnished in the following format):

Particulars Amount (Rs)

Paid-up capitalAdd: Free reserves of the company

Less: miscellaneous expenditure to the extent not written-off

Less: accumulated losses, if any

Less: intangible assets, if any

Total Net worth


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3. Filing of executed copies of Trust Deed and Investment ManagementAgreement.

Please file executed copies of trust deed and Investment Management Agreement along with acheck list clearly mentioning where you have incorporated the clauses of contents of the trustdeed and Investment Management agreement as per third schedule and fourth schedule of SEBI(Mutual Funds) Regulations.

4. Setting up of Infrastructure by theApplicant

After complying with the above requirements, a detailed note on the infrastructure facilitiesavailable with the Asset Management Company should be sent to SEBI, providing the followingspecific details:

a) Details of the office premises and address.

b) Organisation chart of the AMC, clearly specifying the responsibilities of variouspersonnel.

c) Profile of the key personnel including the fund managers and equity researchpersonnel.

d) Justification of adequacy of personnel in fund management, equity research and otheroperational areas considering the expected size of mutual fund. At what stage, thenumber of key personnel will be reviewed, should be indicated.

e) Systems support in terms of hardware and software.

f) Arrangement made for investor services.

g) Establishing the financial viability of sponsoring a Mutual Fund giving details ofexpected size of mutual fund over a period of time,

h) Internal systems and control procedures developed to check insider trading and frontrunning

i) Size of funds which the AMC feels competent to manage and the expertise availablewith the sponsor/AMC etc.

j) Whether the compliance manual has been prepared to ensure that all provisions ofSEBI (Mutual Funds) Regulations and Guidelines are complied with. (All guidelinesissued to mutual funds are available on SEBI web site).

k) Submission of completed Form C and Form D, providing details of Trustee Company

and AMC, as given in First Schedule of SEBI (Mutual Funds) Regulations.

l) Bio-data of the directors of the trustee company and the AMC in the prescribedformat (Please refer to SEBI circular dated December 20, 2001 available on web site).

m) Bio data of key personnel in hard and soft copies (Please refer to SEBI circular datedMay 7,1997)

n) Any other information relevant for application for registration.


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5. Grant ofCertificate of Registration

Once all above requirements have been complied with and a requisite fee as per SecondSchedule of Regulations has been paid, SEBI will grant certification of registration as a mutualfund and will approve AMC. SEBI may also conduct infrastructure inspection of the applicantbefore grant of certificate of registration.


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Companys In Mutual Fund In India

The major fund houses to operate in India are:

Fortis

Birla Sunlife

Bank of Baroda

HDFC

ING Vysya

ICICI Prudential

SBI Mutual Fund

Tata

Kotak Mahindra

Unit Trust of India

Reliance

IDFC


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Franklin Templeton

Sundaram Mutual Fund

Religare Mutual Fund

Principal Mutual Fund.

OBJECTIVES OF STUDY (2)

Documents