Diapositiva 1

Mutual Funds

Atif GhayasFaculty of Management Studies and ResearchAligarh Muslim University, Aligarh

ContentsIntroduction & Concept of Mutual funds Working of Mutual funds History & Phases of Mutual funds Structure & Composition of Mutual funds Working & Regulations for Mutual FundsTypes of Mutual FundsRecent Innovations In Mutual FundsMutual Fund Players In IndiaTop Mutual Fund Schemes & Fund Managers2

Mutual fundand its Concept

What is a Mutual Fund ?It is a trust that pools the savings of a number of investors who share a common financial goal.

Professional fund managers then invest these funds in a way that helps investors achieve their goal.

How Mutual Fund works?

Pool their money withINVESTORSFUND MANAGERSPassed back toGenerateSECURITIESInvest inRETURNS

Objectives of Mutual Funds

Convenience:Adjusting the denomination of securities to suit the requirement of individual savers.Diversification:Small investors can obtain better diversification through mutual funds than by directly purchasing securities.Expert management:Benefit of trained, experienced & specialized managementLow cost due to economies of scale: Able to exploit economies of scale in investing

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Costs: The investor pays fees as long as he remains with the fund.No tailor-made portfolios: High net-worth individuals may find this to be a constraint as they will not be able to build their own portfolio of shares.Managing a portfolio of funds: large number of funds can provide too much choice for the investor. He may need advice on how to select a fund.Delay in redemption: It takes 3-6 days for redemption of the units and the money to flow back into the investors account.Lower-than-market performance: Consistently beating the market is difficult. Many mutual funds just keep even with overall stock market index

Disadvantages of Mutual Funds

History & Phases Of Mutual Funds

The Boston Personal Property Trust, formed in 1893 was the first close ended mutual fund in U.S.

The creation of Alexander fund in Philadelphia in 1907 was an important step in the evolution toward what we know as the modern mutual fund

History of MFs can be discussed in two parts :1) Emergence through public players2) Emergence through private players

History of mutual fund

History of mutual funds in India can be divided into 5 important phases:

Phase I . 1963-1987

UTI sole market player, created by an Act of parliament in 1963.US 64 even today the single largest mutual fund scheme.UTI created a number of products e.g. monthly income plans, childrens plan,Equity oriented schemes and offshore funds during this period .UTI managed assets of Rs.6700 cr. at the end of this phase.Phases Of Mutual Fund Emergence

Phase II. 1987-1993 (Entry of Public Sector Funds)

Public sector banks and financial institutions entered the mutual funds industry.SBI mutual fund was the first non-UTI MF to be set up in 1987.Significant shift from deposits to MF.Most funds were growth oriented ,closed-ended funds.AUM of UTI grew to Rs.38,247cr. and public sector funds Rs.8750cr.Phases of mutual fund emergence

Phase III 1993-1996. (Entry of Private Sector Funds)

In 1993,the mutual funds industry was open to private sector players both Indian and foreign.SEBIs first set of regulations were formulated.Regulation revised in 1996.Significant innovation in servicing, product design and information disclosure.

Phases of mutual fund emergence

Phase IV 1996-1999 (Entry of Private Sector Funds)

Implementation of new SEBI regulation.Rapid asset growth .Bank mutual funds were recast according to the SEBI recommended structure.UTI came under voluntary SEBI supervision.

Phases of mutual fund emergence

Phase V 1999-2003

Marked by very rapid growth in MF industry.Increase in market share of private players.AUM crossed Rs.100,000cr.Bond funds and liquid funds registered the highest growth(nearly 60% of assets).UTI share dropped to nearly 50%.Phases of mutual fund emergence

Growth in Mutual fund Industry16

Structure & Constitution of Mutual Funds

Structure of Mutual Fund

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The constitution are designed to safeguard investors, check speculative activities of mutual funds & ensuring financial discipline through transparency & fair play.

SEBI ( Mutual Fund ) regulation require a four tier system to organize Mutual Fund. i.e. - Sponsor - Trustee - Asset Management Company - CustodianConstitution of MF in India

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One who thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI), which is the market regulator and also the regulator for mutual funds.SEBI checks a persons integrity ,experience in the financial sector, his net worth etc.Sponsor is to contribute 40 per cent of the net worth of AMC.Mutual fund is created by sponsor as a trust under Indian Trust act 1982.Sponsor appoints a trustee.Sponsors

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A trustee is a person who holds the property of Mutual Fund in trust for the benefit of unit holders.A company is appointed as trustee to manage the mutual fund with approval of SEBI.To ensure fair dealing at least 75 per cent of trustees are to be independent of the sponsors.The trustee role is not to manage money. Their job is only to see , whether the money is being managed as per stated objectives.It is duty of trustee is to provide information to unit holders as well as to SEBI about mutual fund schemes.

Trustees

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The sponsor or trustees appoint an AMC, also known as Investment Manager, to manage the affair of mutual fund.The AMC has to be approved by SEBI. The AMC functions under the supervision of its Board of Directors, and also under the direction of the Trustees and SEBI.It is the AMC, which in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities.Whenever the fund intends to launch a new scheme, the AMC has to submit a Draft Offer Document to SEBI. This draft, after getting SEBI approval becomes the offer document (OD) of the scheme.

Asset Management Company (AMC)

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A custodians role is safe keeping of securities and also keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested.

The Custodian is appointed by the Board of Trustees.

SEBI requires that each mutual fund shall have a custodian who is not in any way associated with AMC.Custodians

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Working & Regulations for Mutual Funds

Working Mechanism Of AMCFund Manager: To decide when , where & how much & at what rate securities are to be bought & sold.

Committees in mutual fund:In bank sponsored funds , committees are created to handle investments:Investment committee- broad committee deciding about primarymarket investmentsMarket Operations Committee- having the assignment ofdivestments & interaction with secondary market .

Research & Planning cellCreated by AMC for the requirement of sensitive & technical informationThe research can be with respect to securities as well as prospective investors

Dealers: To execute the sale/purchase transactions in capital or money market , a separate section may be created under the charge of a person called dealer having deep understanding of stock market operations

Functions of Asset Management Company Receiving & processing the application form of investorsIssuing unit certificatesSending refund orders Recording all transfer of unitsRepurchasing the units redemption of unitsIssuing dividend or income warrantsMay hire the service of registrars & transfer agents if quantum of work is huge & need specialized services

Fund Accounting:Computing net asset value per unit of the schemeMaintaining its books & recordsMaintaining compliance with the scheme investment limitations and SEBI regulationsLead mangers are appointed to coordinate the activities of ad agency, printers , collection centers & marketing of their services. They get fees on the basis of funds mobilized. They are normally engaged by AMCs for extensive campaign of the scheme to attract the investorsDuring the planning & execution of scheme , a lot of legal exercise is undertaken for which a group of advocates & solicitors may be appointed as legal advisors.

RegulationsGoverned by SEBI (Mutual Fund) Regulation 1996All MFs registered with it, constituted as trusts ( under Indian Trusts Act, 1882)

Bank operated MFs supervised by RBI too

AMC registered as Companies registered under Companies Act, 1956

SEBI- Very detailed guidelines for disclosures in offer document, offer period, investment guidelines etc.NAV to be declared everyday for open-ended, every week for closed endedDisclose on website, AMFI, newspapersHalf-yearly results, annual reportsSelect Benchmark depending on scheme and compare

rcandco@gmail.com29AMFI: a forum where mutual funds have been able to present their views, debate and participate in creating their own regulatory framework. the body that is consulted on matters long before regulations are framed, and it often initiates many regulatory changes that prevent malpractices that emerge from time to time.Receive Unit certificates within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund.Receive dividend within 42 days of their declarationReceive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase.

Operations of Mutual Funds : Regulatory MechanismRegistration of mutual fund with SEBIConstitution & management of mutual funds & operation of trustConstitution & management of AMC & custodianSchemes of mutual fundsInvestment objectives & valuation policiesReal state mutual fund schemesGeneral obligationsInspection& auditProcedure for action in case of default

Registration of mutual fundsTo carry on business , mutual funds must be registered with SEBI . The application for registration , with a non- refundable fees of Rs. 25,000 should be made in the prescribed form

Eligibility criteria for registration of sponsorsShould have a sound track record, reputation of fairness & integrity in all his business transactionsShould contribute at least 40% of net worth of AMCShould not have been guilty of any fraud or economic offenceAppointment of trustees or trustee companyAppointment of AMC set up under the provisions of Cos act Appointment of custodianShould meet the criteria specified in SEBI intermediaries regulations , 2008

Terms & conditions of registrationTrustee/ sponsor/ AMC / custodian would have to comply with SEBI regulationsMF would immediately inform SEBI about any change in info having material impact on registration of SEBIPayment of application fee of 1 lacRegistration fee of 25 lacsAnnual fee based on net assets SEBI may not permit a MF who has not paid the annual fee to launch any scheme

Constitution and Management of an Asset Management Company (AMC) and custodianThe sponsors of MF or trustees would appoint the AMC with the prior approval of SEBI. Its appointment can be terminated by majority of trustees or by 75% unit holders of the scheme. Any change in its appointment would also require prior approval of SEBI as well as the unit holders.

Eligibility criteria for AMCAn existing AMC should have a sound track record / general reputation & fairness in transactions and should be a fit and proper personThe directors of AMC should have adequate professional experience in finance & financial service related fields Key personnel of the AMC have not been found guilty of moral turpitude or been convicted of any economic offence or violation of securities law or worked for any AMC during the period when its registration has been suspendedThe AMC has net worth capital of not less than Rs. 10 crore

Appointment of CustodianThe MF should appoint a custodian to carry out the custodial services for the scheme & send intimation of the same to SEBI within 15 days of the appointment . In case of gold ETF the asset may be kept in the custody of the bank registered as custodian with the SEBIIn case of real estate MF scheme the title deed of the assets held by it may be kept in the custody of SEBI registered custodian

(NAV) represents a fund's per share market value. This is the priceat which investors buy ("bid price")fund shares from a fund company and sell them ("redemption price") to a fund company. It is derived by dividing the total value of all the cash and securities ina fund'sportfolio, less any liabilities, by the number of shares outstanding.An NAVcomputation is undertakenonce at the end ofeach trading day based on the closing market prices ofthe portfolio's securities.The valuation shall be documented and the supporting data in respect of each security so valued shall be preserved at least for a period of five years after the expiry of the scheme.Net Asset value (NAV)

Types Of Mutual Funds

TYPES OF MUTUAL FUNDS

By StructureOpen-Ended anytime enter/exitClose-Ended Schemes listed on exchange, redemption after period of scheme is over. By Investment ObjectiveEquity (Growth) only in Stocks Long Term (3 years or more)Debt (Income) only in Fixed Income Securities (3-10 months)Liquid/Money Market (including gilt) Short-term Money Market (Govt.)Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years) Other SchemesTax Saving SchemesSpecial SchemesULIPTypes of Mutual Fund Schemes

rcandco@gmail.com40Ultra Short term (180 days) debt funds called liquid funds or floating rate fund or cash funds, Bond funds fixed return instruments, term papers, G-Secs, Corporate bonds, interest rate floating depending on interest rate in economy return of 5.5% per annum last year aim: preserve the principal and earn a modest return. Savings bank rate= 3.5% p.a.Balanced funds for those who are not comfortable with 100% exposure to equity. Best of both worlds-Power of equities & stability of debt market instruments- 60:40 equity debt ratio. Performance average 30% return, Volatility (Risk) = ModerateIncome: fixed income securities such as bonds, corporate debentures and Government securities. capital stability and regular income.

Money Market: safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. easy liquidity, preservation of capital and moderate income. Unit Linked Insurance Plan - life insurance as well as an investment like a mutual fund. Part of the premium towards the sum assured (amount you get in a life insurance policy) and the balance invested whichever investments you desire - equity, fixed-return or a mixture of both. benefit under Section 80C.

Gilt funds are those that only invest in government securities and are hence zero credit risk, very safe MIP- 5-25% in stocks, rest in fixed income instruments

These are the schemes which offers units for sale without specifying any duration for redemption.

Sells and repurchase the units of mutual fund on a continuous basis at a price called Net Assets Value.

Essential feature of open ended schemes is the liquidity.

Example- The Unit Scheme-1964.

Open-ended Mutual funds

These are the schemes in which period of redemption is specified.

Limited number of units are sold to investors during a specified period only.

Market price is determined by the market forces of demand and supply.

Liquidity to the investor is provided by the market.Close-ended Mutual funds

These are the schemes which offer capital appreciation as well as dividend opportunities.

Objective is to seek capital appreciation by making investment in securities.

Good and suitable for those investors who invest for long term perspective.

Example- UTI Growth and Value Fund.Growth Funds

Also known as Dividend schemes

Promise a guaranteed return in the form of dividends to the investors.

Portfolio of these schemes consist of fixed income investments i.e. Bonds, Debentures etc.

Ideal for those investors who seek intermediate cash flow.Income Fund

Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn.

These schemes invest in both shares and fixed income securities.

Balanced Funds45

The fund collected by these mutual funds are invested in money market instruments such as commercial papers, commercial bill, t bills etc.

Open ended funds.

These funds are very liquid and risk free.

Provide better return than short term bank deposits.Money Market Mutual Fund

Tax saving schemesDesign to avail tax exemption and concession (under section 88 of Income tax act) to the investors.

Also known as Equity-linked saving schemes.

Example- HDFC tax plan, PNB-ELSS etc.

Domestic FundsThese are the schemes which are open for subscription by the investors of the country of origin only.

Most of the mutual funds launched in India are domestic funds.

Off shore funds bring funds to the capital market.48

Off-shore FundsThese are the funds which are to be subscribed abroad. Example- Ind bank off-shore mutual fund, common wealth equity mutual fund.

Unit-Linked Plan (ULIP)Unit-linked plan offers the interesting option of combining protection as well as tax advantages with the attractive prospects of investing in equities. It works on a minimum premium basis and not on a sum assured one. Investor decide the amount contributed at regular intervals. ULIP offers cover till needs are fulfilled, beyond that it becomes an investment avenue.

Fixed Maturity Plans (FMPs)The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. The tenure can be of different maturities, ranging from one month to five years. FMPs can be compared to Fixed Deposits of a bank. While a Fixed Deposit offers a 'guaranteed' return, returns in FMPs are only 'indicative'. The fund house fixes a 'target amount' for a scheme.

Monthly Income Plans (MIPs)

MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments.

MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor.

These are generally monthly, quarterly, half-yearly and annual options.

Under this scheme funds are planned to be invest in a particular region, industry or sector like:-

PharmaceuticalsInformation Technology Fast Moving Consumer Goods (FMCG)Petroleum stocks, etc.Specialized Sector Funds

Gilt Funds Funds of these schemes are invested in government Securities.

These funds are low return and low risk and suitable for risk averse investors.

Example- Gilt plus, FT Gilt, Gilt treasury etc.

Recent Innovations In Mutual Funds

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.

ETFs experience price changes throughout the day as they are bought and sold.

Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.Electronic Traded Funds (ETFs)56

Buying Gold ETF is purchasing gold in electronic form.You buy them just like you buy stock of any company from your broker.Gold ETF makes it easier for you to invest in gold. The investment objective of Gold ETFs is to provide you with returns that closely correspond with the domestic price of real gold. Each Gold ETF unit that you buy is roughly equal to the price of 1 gm of gold.Gold ETF57

Benefits of gold ETFWith GOLD ETF, you don't have to pay any premium, making or delivery charges.

With Gold ETF, since your gold is now in demat form there are no worries of theft and you also save on locker charges.

Gold ETFs can be sold anytime through your broker at transparent prices available for view at NSE's website.

On Gold ETF, you pay no sales tax, securities transaction tax, VAT or wealth tax.

They are easy to buy since you can even buy just one gram at a time.

Over time, you can build up your gold portfolio to the level you want, just as you would with your bank or jeweler, only this is easier.

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Mutual Fund PlayersIn India

Distribution ChannelsMutual Funds are primary vehicles for large collective investments, working on the principle of pooling funds.Agents and distributors are a vital link between the mutual funds and investors.Agents Is a broker between the fund and the investor and acts on behalf of the principal.He is not exclusive to the fund and also sells other financial services. This in a way helps him to act as a financial advisor.

Distribution CompaniesIs a company which sells mutual funds on behalf of the fund.It has several employees or sub-broker under it.It manages distribution for several funds and receives commission for its services.

Distribution ChannelsBanks and NBFCsSeveral banks, particularly private and foreign banks are involved in a fund distribution by providing similar services like that of distribution companies.They work on commission basis

Direct MarketingMutual funds sell their own products through their sales officers and employees of the AMC.This channel is normally used to mobilize funds from high net worth individuals and institutional investors.

Some of the popular firms that deal in mutual funds in India are:Reliance Mutual FundsHDFCBirla Sun LifeDeutsche BankINGHSBCICICI PrudentialLIC

List of Mutual Fund Companies in India

JP MorganKotak MahindraJM FinancialState Bank of India (SBI)Sahara Mutual FundsTataUTIStandard Chartered

Reliance Mutual Fund

HDFC Equity Fund

ICICI Prudential Fund

SBI Mutual FundTop mutual funds in India

Top Fund Managers In India