SECTION-2

INVESTING IN MUTUAL FUNDS.

I. FACE VALUE OF A UNIT OF MF.

Mutual fund mobilize the funds from several investors and issue
them units as per prevailing Net Asset value on the date of the
investment. The face value of one unit of a mutual fund scheme
is generally Rs. 10.00. That is, he will issue unit of a value of Rs.
lO.OOfor the investment of Rs.10.00 made when a new scheme is
floated by any mutual fund the investor subject to the applicable
loads. A few of the mutual fund scheme have their unit face value
as Rs.1000, RslOO or even Rs.1.00. The face value of a unit has
significance only for the payment of dividend as the dividends are
normally expressed and paid as a percentage of the face value of
the units.

II. WHO CAN INVEST IN MUTUAL FUNDS?

Individuals (both resident and non -resident), adult individuals,

minor

through their percent or guardian, Hindu undivided

families,

proprietary and partnership firms, companies, Trusts and

charitable
Institutions, Bank, Provident funds, Insurance companies, oversea

corporate bodies other mutual funds can invest in mutual funds

in

India.

III. HOW CAN A MINOR CAN INVEST IN MUTUAL FUND?

A minor can invest in schemes of mutual funds through his

guardian who could be either of his parent or any other adult
major. The investment of the minor should be in the name of
the guardian is
required to be stated on the application form. The minor's signature is not
required on the application but the guardian's signature in mandatory. The
cheque for the investment can be from the guardian's account but the statutory
bank details are to be provided for the minor's bank account and not the
guardian bank account, for investment in excess of Rs 50,000 the PAN of the
minor or in case the sanu is not available a declaration in form no 60 duly
signed by the guardian is required to be given. Also it is mandatory to provide
the detect of the PAN of the guardian of the minor on the application form along
with a photocopy of the same. Any one or two other adult individuals other than
the guardian can be joint holders for the minors investment
IV. NON-RESIDENT INDIAN AND MUTUAL FUNDS.
Non-resident Indian (NRIs), Oversea corporate Bodies and person of India
Origin residing aboard can invest in mutual fund scheme floated by funds in
India. No Approval of the reserve Bank of India is required for such investment.
A NRI may, without limit purchase on repatriation basic unit of any approved
mutual funds in India. The payment for purchase consideration must be through
an inward remittance in foreign exchange or by debit to the investor's
NRE/FCNR bank account. In case of payment of rupee drafts purchased from
aboard or from FCNR/NRE accounts an account debit certificate from the bank
issuing the draft confirming the application form no permission is required to
purchase or sell units provided the transfer/ sale is through tender of the issues
for repurchase or for payment of maturity proceeds. The net sale/maturity
proceeds (after payment of taxes) of such securities shall allowed to be remitted
abroad or at the investor's option or credited to NRE/FCNR/Account.
An NRI, OCB or person of India Origin can invest in the units of mutual fund
scheme on a non repatriation basis if the investment are made through a
cheque/demand draft drawn out of the Non resident Ordinary (NRO) accounts,
Non resident special rupee Accounts (NRSR) and non Resident Non- Reparable
accounts (NRNR) payable at the city where the application is accepted.
DOCUMENT REQUIRED FOR INVESTMENTS IS MUTUAL FUNDS
:-
The application form for investment in any mutual fund scheme should be
complete in all respect and should be signed by the sole holder or the
representative in case of non-individual investor's karat of a Hindu undivided
family and by all the individual in case of investment in joint names. Along with
the application form an attested photocopy copy of the PAN of all the holders
must be submitted in case of the amount of investment exceeds Rs.50,0007- The
Unique Identification Number is required for all investors in case the investment
exceeds as 1 Lakh with effect from January 2006. In case of non individual
applicants a certified copy of the resolution passed by the board of
Director/Board of Trustees authorizing the investment and granting authority to
the signatory for making the investment along with a copy of the power of
attorney (in case of application being made under of power of attorney)., a copy
of the memorandum and article of association or trust deed partnership deeds , a
certified copy of the specimen signatures of the authorized signatury should be
submitted along with the application forms . Through it is not mandatory to give
the copy of the MAPIN UIN card it is desirable to give such a copy for
verification purposes. PAN and UIN are
f^\ mandatory for all non- individual investors irrespective of the amount
invested,
SWITCHES FROM ONE SCHEME TO ANOTHER.
A Unit holder of any scheme of a mutual fund can transfer a part a mutual fund
can transfer a part or the entire number of units held by him or a fixed amount
out of his investment to another scheme of the same mutual fund by sending a
switch request to the Asset Management company (AMC). The switch request
should specify the name of the scheme and the plan from where and to which
the amount are to be switched. On receipt of the application for switch the
number of units which are to be switched will be redeemed from the scheme
from which the switch out is made at the closing NAV of the day on which the
switch application is received by the AMC less the exit load as may be
applicable. From the net amount, which has been switched out, the investor will
be allotted units enquired, are allotted units equivalent to the amount which has
been switched The units which are acquired are allotted at the closing NAV
applicable for the scheme where the switch in has been made plus the entry load
as applicable No fresh application form is required to be submitted for such
switch is unless the AMC specifically requires a form which may be during an
initial public offer of the units in which the switches are not permitted from
scheme which are under lock in period. Switches as above can be made from
one scheme to another or from growth to dividend plans of the same scheme or
vice versa or from the dividend payout plans to dividend reinvest plan of the
same scheme switch of units will be considered as a transfer for the purpose of
Income Tax and capital gains provision under the Income Tax Act will apply.
LOCK IN PERIOD
In case of unit of the equity linked saving scheme and pension plans there is a
lock in period of 3 yrs during which the units cannot be redeemed, no switch out
is possible no change in plans or options can be made the investor must hold on
to the unit for the period of such a lock in even if the performance of the scheme
is not satisfactory or the investor is in needs of funds whatever may be the
purpose. At what NAV's do the MF transaction Take place?
Mutual fund transactions take place at the end of the day NAV's of the day on
which the transaction takes place duly adjusted for the entry or exit loads. SEBI
has stipulated that all transaction receive before 3.00 P.M at the AMC's branch
office or the office of the registrar and bearing the date and time stamp placed
by a time machine only will get the closing NAV for the day. Transactions
bearing time stamp after 3.00 p.m. will be considered as the transaction for the
subsequent day and will be done at the next days closing NAV.
SECTION-3
TAXATION
I. 'TAX BENEFITS TO MUTUAL FUNDS
All mutual fund schemes must be registered with SEBI. The entire income of a
fund registered under the securities and Exchange Board of India Act 1992 or
any regulations made there under is exempt from income tax under the
provision of section 10(23D) of the Income Tax Act 1961. Also the income
received by such fund is not liable for TDS under the provision of the Act.
Every mutual fund will be liable to pay securities Transaction Tax (S.T.T.) in
respect of taxable securities entered on any stock exchange in India
II. TAXATION PROVISION FOR UNIT HOLDERS INCOME
DISTRIBUTION (DIVIDEND) RECEIVED FROM A MUTUAL FUND.
Any income received by a unit holder from the mutual fund i.e. any dividend
distributed by the mutual fund to the unit holder is exempt from tax is the hands
of the unit holder under the provision of section 10(35) of the Income Tax Act.
The income distribution (i.e., dividend received or reinvested) from equity
hybrid or debt funds is tax-free is the hand of the unit holder. However the
mutual fund scheme-declaring dividend will have to pay a dividend distribution
tax in respect of the dividend paid/declared by the fund. There is no dividend
distribution tax under section 115R of the Income Tax Act on income
distribution by equity-oriented scheme of mutual funds. A fund other
than equity oriented scheme will have to pay distribution tax at the rate of
12.5% of the dividend distribution to individual unit holders or to HUF's (Hindu
undivided family)
III. SECURITIES TRANSACTION TAX
Under Finance Act the unit holder is liable to pay a securities Transaction Tax
(STT) at the rate of 0.10% for the purchase and sale of a unit of an equity
oriented mutual fund where the transaction of such purchase or sale is entered
into a recognized stock exchange and the contract for purchase and sale is
settled by actual delivery or transfer of such unit. Where the contract for sale of
such unit is settled otherwise than by actual delivery or transfer of such unit then
the unit holder will be liable to pay STT at the rate of 0.02% for sale of a unit of
an equity oriented fund. Further STT at the rate of 0.2% is to be paid by the unit
holder for sale of a unit of equity oriented fund to the mutual fund. The unit of
mutual fund other than equity-oriented funds will be exempt from STT.
IV. CAPITAL GAINS: -
Where any unit are sold by a unit holder being an individual Hindu undivided
family partnership firm India company, Non- Residents (Other than oversea
Financial Institution), the difference between the sale proceeds and the cost of
purchase will be treated as capital gains in the hands of the unit holders. If the
unit holder holds the unit for a period exceeding 12 months, the capital gain so
arising will be treated as a long-term capital gain under the provision of the
Income Tax Act. Capital gains raising in respect of sale or redemption of unit
held for a period of less than twelve months will be considered as a short term
capital gain
I. LEGAL STRUCTURES OF MUTUAL FUNDS IN INDIA:-
In India mutual fund are set up as trusts. The sponsor of the Trust appoints the
Trustees. The Trustees are responsible for the proper management investment
and custody of the investor's money. The mutual fund is established according
to the SEBI (mutual fund) Regulation-1996 that has been subsequently amended
from time to time. SEBI Regulations provide for a three tier structure for the
mutual fund; Sponsor Trustee- Asset Management company (AMC). The
sponsor is the promoter of the mutual fund. The sponsor will create the mutual
fund as a Trust and appoint the trustee, who hold the investor money with them
under trust and is responsible to the investor. The Asset Management company
manager the day-to-day activities and investment of the fund the mutual fund
and the AMC must be registered with SEBI.
II. ASSOCIATION OF MUTUAL FUNDS IN INDIA AMFI.:-
AMFI, the apex body of all the registered asset management companies was
incorporated on August, 22,1995 as a non - profit organization. As of now, all
the Asset Management companies that have launched mutual funds scheme are
its member. AMFI functions under the supervision and guidance of a Board of
Directors other bodies. The objectives of AMFI are: -
> To define and maintenance high professional and ethical standards in all areas
of operation of mutual fund industry.
> To recommend and promote best business practice.
> To interact with the securities and Exchange Board of India (SEBI) and to
represent to SEBI on all matters concerning the fund industry.
> To represent to the government Reserve Bank of India and other bodies on all
matters relating to the mutual fund Industry.
> To develop a card of well trained agent distributors and to implement a
programmer of training and certification for all intermediacies and other
engaged in the industry awareness programmer so as to promote proper
understanding of the concept and working of mutual fund.
III. OFFER DOCUMENT:-
The offer document is the basic document which states the objectives of the
scheme and govern the investment of the scheme In fact it can be considered as
the rules that are applicable to the scheme. The trustees of the mutual fund must
approve every scheme floated by an AMC i.e. they must approve the terms and
conditions set out in the offer document. li) Before the scheme is launched the
offer document containing information about the scheme such as the scheme
objectives, assets allocation and the contain all the disclosures which are
adequate to enable an investor to make well-informed decision regarding
investment in the scheme. It must also contain disclosers on the maximum
investment. The scheme proposes to make in the listed securities of the group
companies of the sponsor.
On receiving the offer document SEBI can instruct the AMC to make changers
in the offer documents in the interest of the investors. SEBI has specified that a
memorandum containing such information must accompany every mutual fund
scheme application form. The offer document should not contain any
information that is misleading or contain any information or opinion that is
misleading or tales.
IV. MUTUAL FUND ADVERTISEMENTS:-
Investor are quite likely to be mislead by the advertisement issued for
solicitation of investment into the scheme for this SEBI has come up with on
elaborate code for issue for advertisement by mutual fund. Every mutual fund
advertisement must be in conformity with the advertisement code specified by
SEBI and must be submitted to the SEBI within 7 days from the date of issue of
the advertisement. The advertisement for every scheme must disclose the
investment objective of the scheme the advertisement material must not be
misleading on contain any statement or opinion which is incorrect or the
advertisement should not compare one fund with another implicitly unless the
comparison in fair and all information relevant to the comparison is included in
the advertisement no celebrities shall form a pant of advertisement. It is
mandatory for all advertisement issued by a mutual fund on its sponsor or AMC
to state "all investment as mutual funds and securities are subject to market
risks".
OF AGENT IN MUTUAL FUNDS:-
Agent on distributors of mutual fund is not required to service the clients. From
an investor's perspective, the agent's services are limited to the sale of mutual
fund units. The agent can only provide an application form to the investor along
with the key information memorandum. The agent cannot accept money in cash
from the investors not can be takes the cheques drown in favor of the agent. The
cheques for the investment should be drown only in the name of the mutual fund
scheme as specified in the application form. The investor should not take any
after sales service from the agent for granted. Agents and investment advisor
have started providing value
added services such as financial planning, advisory service for mutual fund
investment etc.
VI. INVESTORS RIGHT :-
Investors in mutual funds scheme have several Rights, which can be listed as:
> Every unit holder shall get though mail an abridged Scheme wise annual
report not later than six month From the date of the douser of the relevant
accounting Year and the full annual report shall be available for Inspection at the
head office of the fund and a copy shall be made available to the unit holder on
request at nominal fees, if any within One month of the completion of each half-
year that in March and September the fund must publish its unaudited financial
results in one national English newspaper and one regional newspaper where
The head office of the fund in located.
> The appointment of the AMC can be terminated by a seventy-five musters by
seventy - five percent of the unit holders of the scheme.
> Dispatch of dividend warrants shall be made within 30 days of the dedaration
of the dividend and the dispatch of redemption proceeds will be made within 10
working days from the date of redemption.
> Offer document shall have no douse that in effect limits the jurisdiction for
settlement of daims of the inventor to a specific palace.
> All risk factors induding general and specific risks should appear at a single
place in the offer document instead of giving at different places.
VII. INVESTOR GRIEVANCES:-
For non - receipt of statement of account dividend or for all Matters pertaining
to the investment in the mutual fund, the investor should contact the local
offices of the AMC. If the local offices do not address any of the complaints to
the satisfaction of the investor. The grievanas should be forwarded to the
investor grievances cell set up by the AMC.
The detail of the person to be contacted for investor grievances is mentioned in
the offer document of each mutual fund. On receipt of the complaint the AMC
will take appropriate steps for redressal of the grievances.
If the investor's complaints are not addressed by the AMC to the satisfaction of
the investor, the complaint can be lodged to SEBI. SEBI does entertain the
receipt of the complaints against mutual fund and intervenes with the funds
management to help the unit holder to resolve his complaint SEBI has also
stipulated that every sponsor should appoint a compliance officer for every
scheme of the mutual fund.
Investors also have the power to remove the AMC with a 75% majority but such
resource is available in rare cases. The regulator SEBI has investor protection
almost on its agenda and has designed norms to ensure investor protection and
transference in the functioning of the mutual funds. In case of complaints and
grievances pertaining to mutual funds investor may write to.
SECURITIES AND EXCHANGE BOARD OF INDIA, MUTUAL FUND
DEPT., MITTAL COURT <B' USING NARIMAN POINT, MUMBAI 400021,
PHONE: 2850451-56, 2880962-70
VIII. NO INSURANCE PROTECTION AVAILABLE INVESTOR IN
MUTUAL FUNDS.
Investment in mutual fund is subject to market risks. There is natha any
guarantee of the principle amount nor the guarantee of any return on the
investments. The market values of the units return on the investment as well as
the dividend payment value Unlike the case of bank deposits there is no
insurance cover available to investor for their investment in mutual fund
schemes. Some mutual fund provide group personal accident cover to their unit
holder but such a cover should not be confused as a insurance cover for the
mutual fund investment per se