mutual fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors who share a common financial goal and invests it in stocks, bonds, short-term money market instruments and other securities depending upon the scheme. These could range from shares to debentures to money market instruments

Mutual funds have a fund manager who invests the money on behalf of the investors by buying/sellinsg stocks, bonds etc. the income earned through these investments and capital appreciation raised are shared by its unit holders in proportion to the number of units owned by them. The net proceeds or losses are typically distributed to the investors annually.

Passed back to

Investors

Returns generated
Invest in securities

Pool money with Fund Manager

Mutual Fund Operation Flow Chart

The beginning
Began with selling of shares in vessels and carvans by Egyptians and Phoenicians to share the risk involved in transactions. MFs are operating successfully in Europe and America for last five decades.

In 1882 : King of Belgium formed the first investment company to facilitate investment in national company In 1868 : The Foreign and Colonial Government Trust was established in London to provide investment opportunity to small investors to invest in Foreign and Colonial companies In USA, investment companies formed at the end of 19th century.

The beginning
According to provisions of these acts continuous and full disclosures were made essential to win the confidence of the investors. Securities Act 1933 Securities and Exchange Act 1934 Investment Company Act 1940 The mutual fund industry in India began with the setting up of the Unit Trust Of India in 1964 By Government of India. During the last 46 years, UTI has grown to be a dominant player in the industry with assets of approximately Rs. 5 lakh crores UTI is governed by UTI Act 1963

The Indian mutual fund has passed through 3 phases: The first phase 1964-1987 and the only player was UTI having asset of 6700 crore by 1998 The second phase 1987-1993 during which eight funds were established, six by SBI, Canara bank etc. one each by LIC & GIC. Total asset grew to 61,028 crore and no. of schemes to 167 The third phase began with the entry of private sector and foreign banks in MFs in 1993. at present there are about 30 Fs managing nearly 1000 schemes.

The worldwide value of all mutual funds totals more than $US 26 trillion. The United States leads with more than 8000 mutual fund schemes. Comparatively, India has around 1000 mutual fund schemes, but this number has grown exponentially in the last few years. The Total Assets under Management in India of all Mutual funds put together touched a peak of Rs. 5,44,535 Crores at the end of August 2008.

The mutual fund is a vehicle which exploits economy in all three areas : Research Investment and Transaction process
The mutual fund is constituted as a trust under Indian Trust Act 1881 and registered with SEBI. The beneficiaries of the trust are the investors who invests in various schemes of mutual fund

ORGANISATION OF A MUTUAL FUND

UNIT HOLDERS

Sponsors
Trustees
Mutual Fund

AMC
Transfer Agent
Custodian

SEBI

Sponsor
Sponsor is like the promoter of a company. It may be a bank or financial institution. The Sponsor has to obtain a license from the Securities & Exchange Board of India (SEBI). The Sponsor is responsible for : Setting up and establishing the mutual fund Setting up of the mutual fund trust Delegates the function to the trustee

Trustees
Trustees are appointed by the sponsors they can either be individual or corporate body Trustees appoint the asset management company Periodically monitors functioning of AMC Secures necessary approvals Holds the properties of various schemes of mutual fund in the trust for the benefit of the investors. Trustees can be accountable for various financial irregularities of the mutual fund

Asset Management Company

The Asset Management Company (AMC), also called investment manager is a separate company appointed by the Trustees to manage investors money. The AMC in return charges fees for their services and this fee is borne by the investors as it is deducted from the money collected from them. Run by professional managers Conducts necessary research and manages the portfolio. Handles the administrative chores

Custodian
Custodian is responsible for coordination with brokers the actual transfer and storage of stock and handling the property of the trust. He is answerable to AMC.

Registrars and transfer agents

Registrars and transfer agents perform the important role of maintaining investor records. All the New Fund Offer (NFO) forms, redemption forms go to the RTAs office where the information is converted from physical to electronic form.

The mutual fund : Templeton

Mutual Fund Sponsor : Templeton International Inc. Trustees : Templeton Trust Service Private Ltd. AMC: Templeton Asset Management (India) Private Ltd.

schemes of Mutual Funds

Aggressive or normal growth schemes Regular or monthly or cumulative schemes Growth or income or balanced schemes Special purpose schemes Sectoral schemes Tax saving plans

Characteristics of Mutual Funds

Disclosure of facts
Fund mobilization Diversification of investment Expert financial management

Sharing of return to investor

Types of Mutual Funds

On the basis of duration of funds OPEN ENDED FUNDS : An open ended scheme allows the investor to enter and exit at his convenience, anytime.

CLOSE ENDED FUNDS : A close ended scheme restricts the freedom of entry and exit.

On the basis of portfolio composition Equity funds Invested in equities No fixed return Appreciation in equity is beneficial to investors

Bond funds Invested in bonds and debentures Regular income Less risk in price fluctuation

Money market funds Invested in short term liquid assets Lower rates of return Entail the least risk Real estate funds Invested in securities of real estate Return equals appreciation of real estate International funds or offshore funds Launched to raise resources abroad Invested in own Country Country and currency risk

Funds of funds Invest in other underlying mutual funds Double diversification Exchange-traded funds Investors buy/sell from the stock exchange Relatively lesser costs Gold and Indices

Sectoral funds Invest in stocks from a single sector or related sectors Examples are IT Funds, Pharma Funds, Infrastructure Funds, etc. Free from regulation to invest over 10% of their NAV in a single company. Venture capital unit funds CEFs for institutional investors Invest in Venture capital companies

Index Fund Replicate the performance of a well established market index Invest in stocks comprising indices, such as the Nifty 50

Leveraged funds Allow money borrowings from banks Under this policy the size of a portfolio of a fund is increased to the extent of borrowed capital

ADVANTAGES OF MUTUAL FUNDS

Easy investment decision : non involvement of investors in tedious security transaction Easy portfolio management :experts of mutual fund organisation handle the portfolio on investors behalf Flexibility : MF instruments are tradable at stock exchanges thus can be sold whenever desired

Easy liquidity : MFs provide buy back facility after the gap of certain period
Expert managerial services : MF organisation employ persons of high caliber and expertise for portfolio management Tax benefit : Under section 80L and 88 of Income Tax Act and Wealth Tax Act, some MF schemes get tax benefit

DISADVANTAGES OF MUTUAL FUNDS

High promotional cost : large expenditures on advertisement, paying high commission to agents ultimately reducing investors return High operational cost : mutual fund organisation require big establishment to operate their activities

High managerial cost: experts of financial management are appointed by MF operators at high salaries borne ultimately by the investors Redemption cost : some MF schemes assure buy back facility but the instruments are redeemed after deducting the cost of redemption

Involvement in unfair trade practices : the actual financiaries of some of the mutual funds involve themselves in unfair trade practices with the connivance of some industrialists and security agents for their personal benefit. It is suspected that during April- May 92 UTI purchased 36 lakh shares of reliance industries, which increased the price of its shares in the market. It is believed that it was done to boost the EURO issue of reliance industries.

Involvement in security scam : being the managers of large funds of public, the operates are likely to Involve in security scam activities

As per SEBI reports Canbank MF was involved with four stock brokers namely Hiten Dalal, Ajay Kayans C.Makertich & Co, Shrenik Jhavery and N.Harakchand & Co. out of Rs.2000 crore of Canbank MF Rs.850 crore were routed through these brokers. Rs. 20.5 crore out of Rs. 32 crore of festival bonanza scheme of Bank Of India MF were collected from firms belonging to Harshad Mehta and that too after two weeks of closure of that scheme.

GUIDELINES GIVEN BY SECURITIES AND EXCHANGE BOARD OF INDIA

AMCs should be headed by an independent non interested and non executive chairman. Managing director and other executive staff should be full time employee of AMCs. The SEBI has granted three year of to them to fulfill the requirement.

GUIDELINES GIVEN BY SECURITIES AND EXCHANGE BOARD OF INDIA

The board of director shall not be entitled to any remuneration other than sitting fes. The managing director and other executive shall be full time employees of AMC. The AMCs will not be permitted to conduct other activities such as merchant banking or issue management.

THE SEBI NORMS FOR PRIVATE SECTOR MUTUAL FUNDS

Mutual funds should be sponsored by registered companies with a sound track record and established in the form of trusts.

The mutual fund should be operated only established assets management company.
AMC should at all time have a minimum worth of Rs. 5 crores a sound track recorded and general reputation.

 An AMC should not be allowed to act as the trustees of a unit trust and under take any other business activity
Trusteeship function should be carried out by separately established trust companies. The AMC should submit a quarterly report on the functioning of the mutual fund to the trustees. The mutual funds should use the services of custodian registered with SEBI.

 For open ended schemes mutual funds should repurchases units of predetermined prices based on net asset value and such prices should be published once a week.
Each schemes should have a clearly identified and responsible fund management. Mutual funds will be allowed to interest in transferable securities