What is the difference between an open-end and a closed-end mutual fund?

Answer: What is an open ended mutual fund (MF)? Open ended MFs are more common compared to close ended MFs. In open ended MFs, the fund house continuously buys and sells units from investors. New units are created and issued if there is demand, and old units are eliminated if there is redemption pressure. There is no fixed date on which the units would be permanently redeemed or terminated. If you want to invest in an open ended fund, you buy units from the fund house. Similarly, when you redeem your units, the fund house directly pays you the value of the units. Advantages of an open ended mutual fund (MF) Larger Participation, More choices, No issue expenses Disadvantages of an open ended mutual fund (MF) Large cash positions and Impact on returns, Large corpus What is a close ended mutual fund (MF)? The units of a close-ended mutual fund are very similar to individual shares. The units of a close ended scheme are issued only at the time of the New Fund Offer (NFO). These units are issued with a fixed tenure or duration, for example, 5 years. New units are not issued on an ongoing basis, and existing units are not eliminated before the term of the fund ends. At the time of an NFO, you can buy the units from the fund house, and at the time of the closure of the scheme (and at some other pre-defined intervals, like once every six months), you can redeem the units with the fund house.

But if you want to buy or sell the units of a close ended scheme during the lifetime of the units, you have to do that on a stock exchange. The units of such schemes are listed on the stock exchanges just like ordinary shares, and can be bought and sold through a broker. Open ended funds can issue and redeem units any time during the life of the scheme while close ended funds can not issue new units except in case of bonus or rights issue. Hence, unit capital of Advantages of a close ended mutual fund (MF) No redemption pressure, better returns, Manageable corpus Disadvantages of a close ended mutual fund (MF) Lack of broad participation, Lack of choice, Issue Expenses open ended funds can fluctuate on daily basis while that is not the case for close ended schemes. Other way of explaining the difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes while that is not the case in case of close ended schemes. New investors can buy the units from secondary market only. Any time exit option, The issuing company directly takes the responsibility of providing an entry and an exit. This provides ready liquidity to the investors Open-end funds are by far the most popular among typical investors. With an open-end fund, you can participate in the markets and have a great deal of flexibility regarding how and when you purchase shares. Also, you are never required to purchase shares at a premium. Closed-end funds are typically more volatile and behave more like individual stocks. You need to buy them through a broker, and if you want out (or in), you are bound by whatever price the market bears.

Challenges of mutual funds industry in India Product innovation - The industry needs to come out with new products with market hedging capabilities which can enhance returns for investors as well as Asset Management Companies. There has to be increased level of sophistication in the products offered in the market. In order to obtain better returns for the investments, fund managers have to look towards more structured products and absolute return investment products to increase overall fund performance. For Example- We can have long term funds which tap the retirement money of individuals. Maintaining Right balance between Business and Compliance- There is an increased cost of Compliance and Risk Management with regulations and practices being benchmarked to international standards. Allegations of misconduct have led to rising regulatory standards around the world. The stricter regulatory standards pose a challenge to asset management companies, especially smaller firms lacking economies of scale. The increasing scrutiny of sales of funds is altering the financial relationship between asset management companies and third party distributors. The new environment for distribution will entail far more disclosure than in the past. In additional to regulatory developments, operational and compliance risk has become a top priority for traditional and standalone asset management companies as well Talent retention and Management- The global upheaval in the mutual fund industry seems to be taking its toll on the Indian outfits with many fund managers changing gears. Some have gone off to rival asset management companies, while others have started their own private equity fund. Managing and retaining the right talent will be a key challenge for the fund Industry Lack of awareness & financial education- Investor education especially in small town and cities and rural areas is woefully lacking. While AMFI has been making some efforts in this direction, it is relatively inadequate compared to the size of the

investing population. More grass-root campaigns especially in rural areas need to be undertaken to popularize Mutual funds and their benefits. With the introduction of more asset classes like gold, real estate and commodities through the MF route, investor education will attain paramount importance in the future Challenge of penetration in countrys vast geography- This is another vexed issue that has been worrying SEBI and the finance ministry. It is reported that almost 80% of all MF collections emanate from six metros. This anomaly needs to be corrected at the earliest. While MF houses have been increasing penetration into small towns, they often find the business un-remunerative due to the poor image of Mutual Funds that result in poor collections. Lack of Investor education is an equally important factor responsible for low penetration Establishing Uniformity and common standards: The common bugbear of all MF investors is the amount of paperwork required to tackle purchases and redemptions. No two fund application forms are similar; likewise each fund house has different rules pertaining to switches, redemptions and loads. For the lay investor this means confusion and ultimately chaos. The introduction of the mutual fund identification Number (MIN) was supposed to reduce this clutter but scrapping of the same by the Finance ministry just added to investor woes. Hence, a uniform and common set of standards is the need of the hour. Need for Self regulatory Organization (SRO) - This is by far the most important catalyst for the sustained and orderly growth of mutual funds in the country. In the current dispensation, Securities and Exchange Board of India, through its mutual fund department, is in charge of overseeing the MF industry. While this sounds good on paper, in effect SEBI is quite busy with its governance of the capital markets (and rightly so) and is thus playing a passive role as far as the MF industry is concerned. While SEBI has been pushing Association of Mutual Funds in India (AMFI) to convert itself into a self-regulatory organization, AMFI, being a representative of Mutual fund is quite reluctant to do so due to the inherent multiple conflict of interest. There is a crying need for an independent regulator on the lines of IRDA which could understand the issues on hand and which could devote complete time and energy to the same.

Managing Competition from new entrants- Low barriers to entry and increased competition from other asset Management Companies will squeeze returns and share in the Fund market in India. Though there is lot of untapped opportunity in India it will take its own time to unleash the potential Managing nuances of Distributor driven business- Since the fund business is primarily distributor driven enabling them to reach to common man, there is heightened possibilities of mis-selling. Today there is no restriction on multiple fund and insurance distributorship and as a result the probability of selling a fund with higher commission for the distributor is very high. Also the perennial problem of pass back of commission is a challenging task to handle Compliance with Global Accounting and Reporting standards- Down the years it will become imperative for the Fund houses to move to a more transparent and International accounting and reporting standards like IFRS (International Financial reporting Standards) and GIPS ( Global Investment Performance Standards). This will warrant higher Compliance and technical challenges. IFRS incorporate accounting principles familiar to investors worldwide which will encourage investor confidence in capital markets with various jurisdictions and financial reporting and this will further facilitate investment from both domestic and foreign sources of capital more use of technology- Unlike Equity Market, Mutual fund market is somewhat primitive in terms of technical infrastructure and settlement process. One of the key challenges would be to enhance the use of technology for efficient and seamless investor transactions between all the stakeholders like the Fund House, Registrar and the Bankers. Managing Competition from the Insurance IndustryUnit Linked Insurance Plans (ULIP) account for 80% of the Insurance business in India. They being similar in nature of Mutual funds the challenge is to face the competition both within Asset Management firm and Insurance Company. Though, Insurance firms require more Capital for each insurance policy sold and have more onus of social responsibility, the nature of the ULIP business is similar to the Fund business. It is a challenge which needs to be faced as a cohesive force

Outsourcing challenges- Back office and Middle office outsourcing to specialist third party service providers is the smantra of the day to drive cost effective returns. The industry is seeing more and more of outsourcing enabling them to focus on the core business and avoid fixed overhead and infrastructural costs. The challenge for the Fund houses will be to balance risk and outsourcing driven benefits. What is KYC & Why it is Necessary? Answer: But let us first understand what KYC norms actually mean. In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc, the RBI had directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account. This involves verifying customers' identity and address by asking them to submit documents that are accepted as relevant proof. Mandatory details required under KYC norms are proof of identity and proof of address. Passport, voter's ID card, PAN card or driving license are accepted as proof of identity, and proof of residence can be a ration card, an electricity or telephone bill or a letter from the employer or any recognized public authority certifying the address. Some banks may even ask for verification by an existing account holder. Though the standard documents which are accepted as proof of identity and residence remain the same across various banks, some deviations are permitted, which differ from bank to bank. So, all documents shall be checked against banks requirements to ascertain if those match or not before initiating an account opening process with any bank. Thus opening a new bank account is no longer a cake walk. Those are the basic requirements of KYC to identify a customer at the account opening stage. Let's check other aspects of KYC. To prevent the possible misuse of banking activities for anti-national or illegal activities, the RBI has given various directives to banks: Strengthening the banks' 'Internal Control System' by allocating duties and responsibilities clearly, and periodically monitoring them.

Before giving any finance at branch level, making sure that the person has no links with notified terrorist entities and reporting any such 'suspect;' accounts to the government. Regular 'Internal Audit' by internal and concurrent auditors to check if the KYC guidelines are being properly adhered to or not by banks. Most important, banks must keep an eye out for all banking transactions and identify suspicious ones. Such transactions will be immediately reported to the bank's head office and authorities and norms shall also be laid down for freezing of such accounts. In 2004, the RBI had come up with more specific guidelines regarding KYC. These were divided into four parts: Customer Acceptance Policy: All banks shall develop criteria for accepting any person as their customer to restrict any anonymous accounts and ensure documentation mentioned in KYC. Customer Identification Procedures: Customer to be identified not only while opening the account, but also at the time when the bank has a doubt about his transactions. Monitoring of Transactions: KYC can be effective by regular monitoring of transactions. Identifying an abnormal or unusual transaction and keeping a watch on higher risk group of the account is essential in monitoring transactions. Risk management: This is about managing internal work to reduce the risk of any unwanted activity. Managing responsibilities, duties and various audits plus regular employee training for KYC procedures. These guidelines also specify that KYC should be implemented for existing account holders on the basis of materiality and risk segments. Notes on intermediaries of mutual fund ? Intermediaries play a pivotal role in promoting sale of mutual fund; Intermediaries of mutual funds are brokers, or registered financial advisers. These professionals help investors define their investment goals, select appropriate funds, and provide ongoing advice and service. They make the forms available to the clients, explain the schemes and provide administrative and paperwork support to investors, making it easy and convenient for the clients to invest. The institutional agents, MF distribution companies & national brokers play an active role for spearheading the MF schemes and catering to the customers with ease of availability of schemes and service. These intermediaries have excellent reach, since the entry of other intermediaries such as the banks, financial

institutions, secondary market brokers and even post offices. For e.g a bank in Mumbai will be having several branches leading the MF schemes reach to every customer in that area. Financial advisers are compensated for these services, in part, through a particular kind of fund fee, known as a 12b-1 fee, which is included in a funds expense ratio. Funds sold through intermediaries tend to have higher expense ratios than other funds (no-load funds). No-load funds are sold directly to investors or are sold to investors through financial advisers who charge investors separately for investment advice. Thus, noload funds tend to have lower expense ratios than other funds with similar investment objectives. Retailisation of the Indian MF Industry As already stated in brief, the retail push to MFs in India has been spearheaded by the big distribution houses, IFAs and banks, including PSBs. MFs are now expanding their own networks to this end. Online distribution, while catching up among the computer-savvy segment of the public, will not be a very significant contributor, at least in the near future Responsibilities of Trustees? The trustees have a fiduciary responsibility to investors, and are legally appointed and authorized to hold assets in trust for investors. The trustees are accountable to investors for the funds held in trust. In fact, if investors can prove that the trustees have violated their fiduciary responsibilities, the trustees can be jailed and their personal assets attached. Trustees are responsible for the money you give the mutual fund in good faith. The Sebi 1996 Mutual Fund Regulations make sure that the AMC cannot sneeze without reporting to the trustees. Every appointment that the AMC makes, every decision that it takes, every expense that it incurs needs trustee approval. The AMC has to submit quarterly reports on all its functions and has to answer for its performance to the trustees. In fact, many AMCs submit monthly reports to the trustees, simply to hedge their position in case something goes wrong. The trustees have to ensure that all the aforesaid mentioned procedures are followed as it is their duty to ensure the same.

In fact, three out of four members of the trustee company need to be independent. And they are supposed to pay special attention to whether the AMC they have hired is charging higher fees than others in the market, whether the fees paid to the sponsors and other service providers like distributors are reasonable, whether the AMC is indulging in unethical business practices and whether they are sticking to their investment mandate as disclosed in the offer document. If the trustees believe that the AMC has failed in its job or if they find that it has mismanaged the funds or otherwise indulged in practices that are against the interest of investors, they can sack the AMC. Of course, this has not happened till now, but the Sebi chief has asked trustees to raise the bar and get AMCs to perform better (not just in returns but also in controlling the distributors better) and thereby, serve investors more efficiently. Damodaran says that threats of dismissal could stop AMCs from giving in to distributor arm-twisting. The trustees shall ensure before the launch of any scheme that the asset management company has;(a) systems in place for its back office, dealing room and accounting; (b) appointed all key personnel including fund manager(s) for the scheme(s) and submitted their bio-data which shall contain the educational qualifications, past experience in the securities market with the trustees, within 15 days of their appointment; (c) appointed auditors to audit its accounts; (d) appointed a compliance officer to comply with regulatory requirement and to redress investor grievances; (e) appointed registrars and laid down parameters for their supervision; (f) prepared a compliance manual and designed internal control mechanisms including internal audit systems; (g) specified norms for empanelment of brokers and marketing agents. The trustees shall ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker.

(6) The trustees shall ensure that the asset management company has not given any undue or unfair advantage to any associates or dealt with any of the associates of the asset management company in any manner detrimental to interest of the unitholders. (7) The trustees shall ensure that the transactions entered into by the asset management company are in accordance with these regulations and the scheme. (8) The trustees shall ensure that the asset management company has been managing the mutual fund schemes independently of other activities and have taken adequate steps to ensure that the interest of investors of one scheme are not being compromised with those of any other scheme or of other activities of the asset management company. (9) The trustees shall ensure that all the activities of the asset management company are in accordance with the provisions of these regulations. (10) The trustees shall be responsible for the calculation of any income due to be paid to the mutual fund and also of any income received in the mutual fund for the holders of the units of any scheme in accordance with these regulations and the trust deed. GROWTH FUND The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are

likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

SEBI INVESTOR PROTECTION many investors may not possess adequate expertise/knowledge to take informed investment decisions. Some of them may not be aware of the complete risk-return profile of the different investment options. Some investors may not be fully aware of the precautions they should take while dealing with market intermediaries and dealing in different securities. They may not be familiar with the market mechanism and the practices as well as their rights and obligations.The best way to exercise control over your investments is to have complete knowledge about the stocks in which you invest. This is where transparency and accurate information from the corporate world is desired to enable investors to make informed decisions. Disclosures and Investor Protection guidelines are tools that empower investors with information and also protect them from cases of mismanagement like insider trading. Role of Securities and Exchange Board of India The primary functions of the Securities and Exchange Board of India (SEBI) are to protect the interests of investors in the security markets in India and to regulate the securities market to ensure its orderly operation. With this objective, SEBI issued the SEBI (Disclosure and Investor Protection) Guidelines, 2000. SEBI uses these guidelines as a yardstick to ensure that investor interests are protected. The Disclosure and Investor Protection guidelines apply to the primary market, i.e., public issues made by listed and unlisted companies, rights issues, and offers for sale by listed companies in certain cases

Rights of unit holders 1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared. (2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend. (3) They are entitled to receive redemption cheques within 10 working days from the date of redemption. (4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund. (5) 75% of the unit holders can pass a resolution to wind-up the scheme. Mutual fund Industry Mutual fund industry has seen a lot of changes in past few years with multinational companies coming 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 industry in India. Now investors have a wide range of Schemes to choose from depending on their individual profiles. The Indian mutual fund industry has been growing at a rapid pace. Particularly over the last 4 four years the growth has been phenomenal, thanks to a booming capital market and favorable tax regime. This era of exponential growth has seen changes, refinements, innovations etc in products, practices and channel development of the AMCs. The ultimate beneficiary has been the growing and prospering investors. The distribution channels that have evolved in India are: Independent Financial Advisors (IFA), the big distribution firms, banks and direct selling, including online selling of mutual funds. The various factors which influence the success of distribution channel are trust, customer servicing, including multiple and accessible service points, good infrastructure, including IT support, the comfort factor & exclusivity. An efficient and effective distribution network is as important as any other consumer industry. The customer base is huge here too. The industry since its inception has been trying hard to attract retail investors by taking well

Need for Customer Education: Low Levels of Customer Awareness Given that customer awareness is the pre-requisite for the achievement of the industry growth potential, there is a need for planning, financing and executing initiatives aimed at increasing financial literacy and enhancing investor education across the entire country through a sustained collaborative effort across all stakeholders. 1. Low customer awareness levels and financial literacy pose the biggest challenge to channelizing household savings into mutual funds. 2. The general lack of understanding of mutual fund products amongst Indian investors is pervasive in metros and Tier 2 cities alike and majority of them draw little distinction in their approach to investing in mutual funds 3. A large majority of retail investors lack an understanding of risk-return, asset allocation and portfolio diversification concepts. 4. Low awareness of SIPs in India has resulted in a majority of the customers investing in a lump sum manner. 5. Investor education by AMCs is primarily on focused on metros. The following can be done for customer education to penetrate the mutual funds reach:Financing a Sustainable Nationwide Customer Awareness Program:Creation of the Mutual Fund Education Fund a common corpus of funds from AMCs and distributors through mandatory levy on the investment management fee earned by AMCs and on the commissions earned by distributors from mutual fund sales Conducting a Nationwide Customer Awareness Program NISM along with the industry association to design the content for promoting customer awareness programs on mutual funds. Promoting Financial Planning Awareness in Educational Institutions

WHAT IS ASSET MANAGEMENT AND ITS ROLE? An Asset Management Company (AMC) is an investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management consulting service than is normally available to individual investors.