COMMERCE AND MANAGEMENT ASSOCIATION

MUTUAL FUNDSBy : Vinayak Pai ,IInd Bcom, SVS

College BantwalVenue: Academy Hall

Introduction Mutual fund is a mechanism for pooling the

resources by issuing units to the investors & investing funds in securities in accordance with objectives as disclosed in offer document.

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990’s Government allowed public sector banks & institutions to set up mutual funds. In early 1992, Securities and exchange Board of India (SEBI) Act was passed. As far as MFs are concerned, SEBI formulates policies & regulates the MFs to protect the interest of the investors.

Meaning Mutual Fund is a pool of money, which is

collected from many investors and invested by Asset Management Company (AMC) to achieve some common objective of the investors.

Mutual fund is a collective investment process. AMC invests collected money in various securities to generate returns for the investors. In mutual fund investors are the owners of the funds.

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Definitions According to Praveen N Shroff MF is" a

portfolio of stock market shares and other financial instruments, built with funds collected from small investors, whose primary concern is security of investment’’.

According to SEBI Regulations,1996 “MF means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of public undergone or more schemes for investing in securities, in accordance with regulations’’.

Objectives

Mobilizing small savings

Diversification of portfolio

Investors education

Investment research

Stability

Safe investment

SEBI (MF) Regulations,1996 regulates the structures of MFs in India. MFs are constituted in the form of a public trust created under the INDIAN TRUSTS Act 1882. This trust will be created by Sponsor of the MF. The Sponsor will make initial contribution in this trust.

Formation & Management

How Mutual Fund works

MUTUAL FUND

(100 CR)

D investsRs.20000

A invests

Rs.5000

B investsRs.10000

X investsRs.10000

C invests Rs.15000

AMC Launches an

equity scheme

Rs.100 Cr is mobilized during NFO

Rs.100 Cr is mobilized during NFO

INSTRUMENTS AMOUNT(Cr)

Reliance 10

Wipro 9

ONGC 9

Hero Honda 8

Satyam 8

ICICI Bank 8

HDFC 7

Gujarat Ambuja 7

Grasim 7

ZEE Telefilms 7

Govt.Securities 18

Cash/ Liquid 2

TOTAL 100

INSTRUMENTS AMOUNT(Cr)

Reliance 14

Wipro 8

ONGC 11

Hero Honda 7

Satyam 8

ICICI Bank 8.50

HDFC 7.50

Gujarat Ambuja 6

Grasim 11

ZEE Telefilms 7.50

Govt.Securities 18.5

Cash/ Liquid 3

TOTAL 110

AMC Invests the money in

diversified portfolio

After 1 year

The value of the

common portfolio becomes

110Cr.

After one year of investment

MUTUAL FUND

(110 CR)

Value of D’s

investmentRs.22000

Value of A’s

investment Rs.5500

Value B’s investmentRs.11000

Value of X’s

investsRs.11000

Value of C’s

investment Rs.15500

The common

fool rises by 10%

Parties to a Mutual Fund As per these regulations , MF should have the following 3-tier structure, they are:

SponsorTrustee / TrustAsset Management CompanyCustodian Other functionaries

Sponsor

SEBI Regulations define Sponsor as any person who either itself or association with another body corporate establishes a MF.

Sponsor can be compared with a promoter of a company.

E.g.; HDFC Mutual Fund ,UTI MF etc….

Sponsor creates a public trust under Indian Trust Act,1882 (which becomes MF) and appoints Trustees (by approval of SEBI)

Activities of the Sponsor

☻PROMOTING MF

☻CONTRIBUTING CAPITAL

☻APPOINTING OF TRUSTEES

☻TRACK RECORDING

☻PROFIT MAKING

Trust / Trustee

A Mutual Fund is formed as a trust. Trustee manages a trust. They are responsible to the investors in the MF. They take care of the interests of investors in the MF.

Trustees can be formed in two ways

Board of Trustees : Appointed by Sponsor of MF.

Trustee company : A company registered under Companies Act can be appointed as the Trustee company.

Activities of Trustees Ensuring the activities of the MF

(In accordance with SEBI Regulations,1996)

Ensuring the activities of AMC

Approving the schemes floated by AMC

Reporting SEBI, about the activities of AMC

Entering into Investing Management Agreement (IMA) with AMC

Appointing Auditors

Appointing Key Personnel

Dismissing the AMC (in the extreme cases)

ASSET MANAGEMENT COMPANY (AMC)

An AMC is a company ,registered under the Companies Act,1956 . The operational management of a MF is in the hands of the AMC. It is also known as Fund Manager .

It designs various schemes of the MF, analyses corporate performance and securities, and buys and sells securities.

The MF pays a small fee to the AMC for management of its fund.

Features of an AMC It is a Private Limited Company

AMC ‘s are registered with SEBI

It must have a minimum net worth of Rs.10Cr at all times

An AMC cannot act as a AMC of more than one MF

All the investments, sale and purchase of securities are done by the AMC

AMC cannot undertake any business other than asset management of MF

PRESENT AMCs OF INDIAI. Bank sponsored (Predominantly Indian)

A) Joint ventures

a) SBI Funds management private limited

B) Others

a) BOB Asset Management Company limited

b) Canbank Investment management services Ltd

c) UTI AMC Private Ltd

II. Institutions

A) Jeevan Bima Sahayoga AMC Ltd

III. Private sector (Predominantly Indian)- Joint ventures

a)Birla Sun life AMC Ltd

b)DSP Merrill Lynch Fund Managers Ltd

c) HDFC AMC Ltd

d) Prudential ICICI AMC Ltd

e) Lotus AMC Ltd

III. Private Sector : Indian AMC’S

a)Benchmark AMC Private Ltd

b) TATA Asset management Ltd

c) Kodak Mahindra AMC Ltd

d) Reliance capital Asset management Ltd

e) Sahara AMC Private Ltd

f) Cholamandalam AMC Ltd

g)Sundaram AMC Ltd

III. Private Sector : Predominantly Foreign

a)Franklin Templeton Asset Management Private Ltd

b) ING Investment management Private Ltd

c) HSBC Asset Management Private Ltd

d) ABN AMRO Asset Management Ltd

e) Standard Charted AMC Private Ltd

Other Functionaries The following functionaries are appointed for

specialized functions-

CUSTODIAN

DEPOSITORY PARTICIPANT

REGISTRAR AND TRANSFER AGENTS

BROKER

SELLING AND DISTIBUTION AGENTS

LEGAL ADVISORS AND AUDITORS

BANKERS

ROLE CUSTODIAN The most important asset of any MF is its

portfolio. Hence, it becomes very important to keep safe the securities. This responsibility is on Custodian. When the securities are held in the demat form, they ensure that the securities bought are transferred to the Demat A/c.

Custodians also do what is necessary regarding any corporate action like bonus issues, rights offer, offer for sale buy-back and such other things on the advice of AMC.

ROLE OF REGISTRAR & TRANSFER AGENT

When the units are sold by MF to the public , the R & T Agents open the Register of Unit Holders. Throughout the life of the fund, purchase & sale of units by the Fund are entered in the Register continuously.

ROLE OF A BROKER Brokers are appointed for purchase & sale of

securities by the AMC as a part of investment. Brokers are members of any recognized stock exchange holding SEBI registration .

ROLE OF SELLING & DISTRIBUTION AGENT

These agents are appointed to popularize the units of MF among the investors. They are marketing agents or salesman for the units of MF. They bring in investors fund for a commission.

ROLE OF A DEPOSITORY PARTICIPANTS AMC purchases corporate and other securities

which may have to be held in the demat form. For this purpose the trustees open a demat a/c with a Depository Participants(DP). DP is any bank or financial service company opening & operating demat accounts on behalf of clients either with NSDL or CDSL.

ROLE OF AUDITOR & LEGAL ADVISOR

AUDITOR : Like the auditor of any other firm, he inspects the books of accounts maintained and the transactions carried on.

LEGAL ADVISOR: Lawyers or Advocates are employed to comply with legal formalities.

KINDS OF MUTUAL FUND SCHEMES

Mutual fund schemes are divided on the basis of its maturity period or on the basis of investment objectives ;

A. On the basis of maturity period

1. Open-ended schemes

2. Close ended schemes

B. On the basis of investment objective

1. Growth / Equity oriented schemes

2. Debt oriented schemes

3. Balanced funds

4. Gilt funds

5. Index funds etc…

OPEN-ENDED SCHEMES

An open-ended funds or schemes is one that is

available for subscription & repurchase on a

continuous basis. These schemes do not have a fixed

maturity period. Investors can conveniently buy & sell

units at Net Asset Value related prices which are

declared on daily basis. Selling & Distribution agents

are used for the sale of units to investors. The key

feature of this type of funds is liquidity. There is no

fixed tenure of the scheme. The scheme will continue

until it is wound up under any of the circumstances

specified in the SEBI regulations, 1996.

CLOSE-END FUNDS

A close-end funds has a stipulated maturity period. The fund is open for subscription only during a specified period at the time of launch of the schemes. Investors can invest in the schemes at the time of the initial public issue & thereafter they can buy or sell the units of the schemes on the stock exchanges where the units are listed. In order to provide an exist route to the investors, some close-ended funds give an option of selling back the units to the MF through periodic repurchase at NAV related prices. These MF schemes disclose NAV generally on weekly basis

GROWTH/ EQUITY SCHEMES

The fund under the scheme is predominantly invested in equity shares of companies. The main aim is to tap capital gains in the medium to long-term. Fluctuations in share prices may affect the growth or value of the fund. It has comparatively high risk, high return potential & highly extremely volatile. An investor entering an equity fund should understand that he is taking risk & should be prepared to remain invested in a scheme for a long tenure.

DEBT ORIENTED SCHEMES

A scheme, which invests in debt securities, is known as a debt fund or debt oriented fund or income fund. The fund invests funds in bonds, debentures, Govt. securities, commercial paper & other money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunity of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of changes in interest rates in the country.

BALANCED SCHEMES

The aim of balanced funds is to provide both growth & regular income as such schemes invest both in equities & fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity & debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets.

MONEY MARKET OR LIQUID FUNDS

These funds are also income funds & their aim is to provide easy liquidity, preservation of capital & moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificate of deposit, commercial paper & inter-bank call money, Govt. securities ,etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate & individual investors as a mean to park their surplus for short periods.

GILT FUNDS & INDEX FUNDS Gilt funds invest exclusively in government

securities. Govt. securities have no default risk. These funds aim to invest in totally risk free securities. Risk management is total & return is secondary.

Index funds are invested in the shares included in a share index. Amount is allocated among the stocks in such a percentage which each stock claims in the index by way of weightage. The returns are related to the movement in the index.

EQUITY LINKED SAVINGS SCHEME(ELSS)

This scheme was brought into existence in 1992 by a notification of Ministry of Finance. Investors in this scheme are eligible for tax benefits. From the financial year 2005-06 an amount invested in ELSS is eligible to be included in sec 80c deduction up to Rs.1,00,000. There is a lock in period of 3-years. It is eligible for exemption from capital gains. The fund raised through this scheme is invested in equity shares essentially. These schemes also known as Tax Savings schemes.

EXCHANGE TRADED FUND(ETF)

ETFs are open end-funds that trade on the exchange. Like index funds , ETFs are benchmarked to a stock exchange index. An ETF is a fund created out of specified shares or stocks surrendered by the unit holder.

FUND OF FUNDS SCHEME It is a fund that is invested not in the

securities of companies, but in the units of the same MF or in the units of other MFs. MF stands for diversification of investment. E.g.: Franklin Templeton India Life Stage Fund of Funds.

There are some other types of schemes also they are Fixed term plan series, Theme funds, Contra funds and etc…

NET ASSET VALUE(NAV) & ITS COMPUTATION The value of the units of a MF scheme is its net

asset value (NAV) on a particular day. The NAV of a scheme is calculated as follows:

NAV=Market value of investment + Current Assets + other expenses + accrued income – current liabilities- other liabilities- accrued expenses.

All the MFs calculate the NAV continuously & disclose it everyday by posting it on the website of Association of MFs of India(AMFI). The repurchase price & the selling price are calculated on based on the NAV.

PRINCIPLE OF TIME DIVERSIFICATION

This principle of time diversification has

given rise to the concept of:

Systematic Investment Plan (SIP)

Systematic Withdrawal Plan (SWP)

Systematic Transfer Plan (STP)

Systematic Investment Plan(SIP)

This is a mode of investment where by the investor

invests a fixed amount every month in a particular

scheme. It is similar to a recurring bank deposit. As a

concept, it is revolutionary. When the NAV is less, the

investors will receive more number of units ( as in a

declining market) . When the market is booming, he

gets less number of units. But , the total investment

until that date goes up high because of higher NAV.

Systematic Withdrawal Plan (SWP)

SWP is a mirror image of SIP. Under SWP, the investor would withdraw constant amounts periodically. The benefits are the same, namely that through SWP the investor can temper gains & losses, though it does not prevent losses. SWP also has income tax implications.

Systematic Transfer Plan(STP)

BENEFITS OF MUTUAL FUNDS

MF play a very dominant role in the capital formation of the country. The specific benefits of MFs can be as given below:Suitability for Small InvestorsRisk managementWholesale investmentInvestors EducationInvestment ResearchLiquidity of stock marketDevelopment of money market

Savings Mobilization

Higher returns

Diversification

Very high liquidity

Attracting foreign investors

Full time management of the funds

Many schemes

Giving a size to the fund of small investors

Highly regulated

Unit Trust of India (UTI)

Banks

Term Lending Institutions

Insurance Companies

Private Sector

Foreign Funds

Mutual Funds in INDIA

REFERENCE

FINANCIAL MANAGEMENT –

B.V.RAGHUNANDAN

MUTUAL FUND -AKHILESH

GURURANI

INDIAN MUTUAL FUNDS -SUNDAR

SANKARAN

THANK YOU