Leading asset management Companies

MUTUAL FUND
A mutual fund is a special type of investment

institution that acts as an investment conduit. It pools the savings, particularly of the relatively small investors, and invests them in a well diversified portfolio of sound investment. Mutual funds issue securities(units)to the investors(unit-holders) in accordance with the quantum of money invested by them.

HISTORY
The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The government of India set up Unit Trust of India in 1963 by an act on parliament. UTI functioned under the regulatory and administrative control of the Reserve Bank of India till 1978. The Industrial Development Bank of India took over the regulatory and administrative control that year. UTI continued to be the sole mutual fund until 1987.

 The first scheme launched by UTI was Unit Scheme 1964 or

the infamous Unit 64. The second phase of the mutual fund industry began with the public sector banks and Life Insurance Corporation of India and General Insurance Corporation of India setting up their own mutual funds in 1987. It was only in 1993 that private players were allowed to open shops in the country Finally, in 1993 Kothari Pioneer (now merged with Franklin Templeton) became the first private sector mutual fund to start operations in the country.

 A host of private sector as well as foreign funds set up

shop after that. In 1996, a comprehensive and revised Mutual Fund regulation was put in place. The industry now functions under SEBI (Mutual Fund) regulations, 1996. Today, 32 mutual funds collectively manage Rs 6713575.19 cr under hundreds of schemes.

Meaning
Definition A mutual fund is a trust that pools the savings of a number of investors with common financial goals. The collected money is invested in various instruments like debentures, shares, etc. The income generated from these instruments and the capital appreciation is shared by the investors in proportion to the number of units owned by them

 A mutual fund is set up by a sponsor.

However, the sponsor cannot run the fund directly. He has to set up two arms: a trust and Asset

Management Company. The trust is expected to assure fair business practice, while the AMC manages the money. The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme.

 The income generated by selling securities or capital

appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date.

Various Mutual Fund schemes

Mutual fund schemes are classified on the basis of its

structure and investment objective. 1. By Structure Open-ended funds: Investors can buy and sell units of open-ended funds at NAV-related price every day. Open-end funds do not have a fixed maturity and it is available for subscription every day of the year. Close-ended funds: These funds have a stipulated maturity period, which may vary from three to 15 years. They are open for subscription only during a specified period.

Investors have the option of investing in the scheme during initial public offer period Interval Funds: These funds combine the features of both open and close-ended funds. They are open for sale and repurchase at a predetermined period. 2. By Investment objective Growth funds: They normally invest most of their corpus in equities, as their objective is to provide capital appreciation over the medium-to-long term. Growth schemes are ideal for investors with risk appetite

 Income funds:

The aim of these funds is to provide regular and steady income to investors. They generally invest in fixed income securities like bonds, corporate debentures, and government securities.. Balanced funds: The objective of balanced funds is to provide growth along with regular income. They invest in both equities and fixed income securities as indicated in the offer documents. Money market funds: These funds strive to provide easy liquidity, preservation of capital and modest income. MMFs generally invest in safer short-term instruments like treasury bills, certificates of deposit, commercial paper and inter-bank call money.

3. Other schemes Tax saving schemes:

They generally have a lock-in period of three years. They are ideal for investors looking to exploit tax rebates as well as growth in investments. Special schemes: These schemes invest only in the industries specified in the offer document. Examples are InfoTech funds, FMCG funds, pharmacy funds, etc. Index funds: Index Funds invest their corpus on the specified index such as BSE Sensex, NSE index, etc. as mentioned in the offer document.

Why invest through a Mutual Fund

1. Affordability:
Mutual funds allow you to start with small

investments. For example, if you want to buy a portfolio of blue chips of modest size, you should at least have a few lakh of rupees. A mutual fund gives you the same portfolio for meagre investment of Rs 1,000-5,000.

2. Professional management:
The major advantage of investing in a mutual fund is

that you get a professional money manager for a small fee. You can leave the investment decisions to him and only have to monitor the performance of the fund at regular intervals

3. Diversification: Considered the essential tool in risk management,

mutual funds makes it possible for even small investors to diversify their portfolio. A mutual fund can effectively diversify its portfolio because of the large corpus. 4) Convenience: 5) Mutual funds offer tailor-made solutions like systematic investment plans and systematic withdrawal plans to investors, which is very convenient to investors.

 Investors also do not have to worry about the

investment decisions or they do not have to deal with their brokerage or depository, etc. for buying or selling of securities. 5) Cost effectiveness: A small investor will find that a mutual fund route is a cost effective method. AMC fee is normally 2.5% and they also save a lot of transaction costs as they get concession from brokerages

6) Liquidity:
You can liquidate your investments anytime you want.

Most mutual funds dispatch checks for redemption proceeds within two or three working days. 7) Tax breaks: You do not have to pay any taxes on dividends issued by mutual funds. 8) Transparency: Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a regular basis.

Different agencies involved in MF

A mutual fund is set up in the form of a trust, which

has the following members 1. Sponsor 2. Trustee 3. Asset Management Company(AMC) 4. Custodian

 Sponsor Who is/are like promoters of the company. Sponsor must contribute at least 40% of the net worth of the

Investment Managed and meet the eligibility criteria prescribed under the SEBI(Mutual Funds) Regulations, 1996. The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund. Trustee The trustee of the MF hold its property for the benefit of the unit holders. The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.

 AMC (ASSET MANAGEMENT COMPANY) It manages the funds by making investments in various types of

securities. The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times

 Custodian

They holds the securities of various schemes of the fund in its custody . The bank or trust company that maintains a mutual fund's assets, including its portfolio of securities or some record of them Provides safe keeping of securities but has no role in portfolio management.

What is NAV?
NAV or Net Asset Value of the fund is the cumulative

market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAVrelated prices. NAV is calculated as follows:
NAV= Market value of the fund's investments + Receivables+ Accrued Income- Liabilities-Accrued Expenses ________________________________ Number of Outstanding units

How often is the NAV declared?

Declared at least once a week. Many Mutual Fund

declare NAV for their schemes on a daily basis. As per SEBI Regulations, the NAV of a scheme shall be calculated and published at least in two daily newspapers at intervals not exceeding one week. However, NAV of a close-ended scheme targeted to a specific segment or any monthly income scheme (which are not mandatorily required to be listed on a stock exchange) may be published at monthly or quarterly intervals.

What is Entry Load?

The non refundable fee paid to the Asset Management

Company at the time of purchase of mutual fund units is termed as Entry Load. Entry Load is added to the NAV (purchase price) when you are purchasing Mutual Fund units.

Latest Circular
The Securities Exchange Board of India (SEBI), has

instituted a new regulation which will take effect from August 1, 2009, which has an immediate impact on what you pay whenever you buy a mutual fund scheme. Technically speaking what all buyers of mutual fund schemes were paying the distributors, in industry jargon is called entry load. Typically this is 2.25% of the total amount taken from the amount you invested in most Equity based mutual fund schemes.

To illustrate this better by way of an example

Iet us say you invested Rs. 1,00,000/- in an equity based mutual

fund scheme. Out of this Rs. 1,00,000, an amount of Rs. 2,250/- (i.e. 2.25%) was earmarked as sales commission to the distributor of the scheme. What this means is the amount that you invested is actually Rs. 97,750/(i.e. Rs. 1,00,000/- minus Rs. 2,250/-). With effect from August 1, 2009, your entire Rs. 1,00,000/- will be invested in the mutual fund scheme that you choose. This will immediately improve your return by 2.25% from this investment in the first year itself.

How will the distributor get his revenue

In accordance with the new SEBI regulations, the

distributor will now have to communicate to investors any upfront commission payable to distributors by the investor. Such fees will be based on investor assessment of various factors including services rendered by the distributor. While each distributor will have his own charges that he has to mandatorily communicate to his customers

What is Exit Load?

The non refundable fee paid to the Asset Management

Company at the time of redemption/ transfer of units between schemes of mutual funds is termed as exit load. It is deducted from the NAV(selling price) at the time of such redemption/ transfer. Exit Load varies for different schemes and is generally charged as a percentage of NAV. The Exit load normally varies between 0.25% to 2% of the redemption value. Some mutual funds however do not charge any exit load. Such mutual funds are referred to as 'No Load Funds'.

What is Purchase price?

Purchase price is the price paid by you to purchase a

unit of a mutual fund scheme. If the fund levies an entry load, then the purchase price would be equal to the sum of the NAV and the entry load levied.

What is redemption price?

Redemption price is the price received on selling units

of open-ended scheme. If the fund does not levy an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the NAV in case the fund levies an exit load.

What is repurchase price?

Repurchase price is the price at which a close-ended

scheme repurchases its units. Repurchase can either be at NAV or can have an exit load.

What is a Switch?
Some Mutual Funds provide the investor with an

option to shift his investment from one scheme to another within that fund. For this option the fund may levy a switching fee. Switching allows the Investor to alter the allocation of their investment among the schemes in order to meet their changed investment needs, risk profiles or changing circumstances during their lifetime.

What is Shut-Out Period?

After the closure of the Initial Offer Period, the Trustee reserves a right to declare

Shut-Out period not exceeding 5 days at the end of each month/quarter/half-year, as the case may be, for the investors opting for payment of dividend under the respective Dividends Plans. To facilitate the AMC/the Registrar to determine the Units of the unitholders eligible for receipt of dividend under the various Dividend Options. Further, the Shut-Out period will also help in expeditious processing and despatch of dividend warrants. During the Shut-Out period investors may make purchases into the Scheme but the Purchase Price for subscription of units will be calculated using the NAV as at the end of the first Business Day in the following month/quarter/half-year as the case may be, depending on the Dividend Plan chosen by the investor. If investments are made during the Shut -Out period, Units to the credit of the Unitholder's account will be created only on the first Business Day of the following month/ quarter/half year, as the case may be, depending on the dividend plan chosen by the investor. The Shut-Out period applies to new investors in the Scheme as well as to Unitholders making additional purchases of Units into an existing folio. The Trustee reserves the right to change the Shut-Out period and prescribe new ShutOut period, from time to time

REGULATORY MECHANISM
The RBI had issued a set of guidelines in 1987 for bank

sponsored MF. In 1991, the government of India initiated the process of creating a common regulation for all MF and to permit the entry of private mutual funds. In October 1991, the SEBI issued guidelines for the formation of AMCs for MFs. In 1993, the SEBI issued comprehensive mutual fund regulations. This was replaced by another framework in 1996 by SEBI

 The main elements of the SEBI regulatory mechanism

of mutual funds are: 1. Registration of MF with SEBI 2. Constitution and management of MF & operation of trusts 3. Constitution and management of AMC(asset mgt company) and custodian 4. Schemes of MFs. 5. Investment objectives and valuation policies,

6) General obligations
7) Inspection and audit 8) Procedure for action in case of default.

1.Registration of MF
The MF must be registered with SEBI .
The application for registration, together with a non

refundable fee of Rs 25000 should be made in the prescribed form . The procedure prescribed by the SEBI is out lined

SEBI MF regulation Registration of MF Constitution and mgt of MF & operation of trusts Constitution and mgt of AMC and custodian Schemes of MFs. Investment objectives and valuation policies, General obligations Inspection and audit Procedure for action in case of default

SEBI MF Guidelines Responsibilities of AMCs & trustees participation by MF in derivative trading, stock lending scheme Advertisement by MF valuation of securities Introduction of benchmark Code of conduct for MF intermediaries Investment in unlisted Equity shares Investment in foreign securities Risk mgt for MF

MF schemes /product s

ELIGIBILITY CRITERIA
The eligibility criteria for registration of sponsors who can

establish MF are given below: 1. Carrying on business in financial services for at least 5 years 2. Positive net worth in all the immediately preceding 5 years 3. Net worth in the immediately preceding year should be more than the capital contribution of the sponsor in the asset mgt company & 4. Profit after providing for depreciation , interest and tax in three out of the immediately proceeding 5 years, including the fifth year

2) The sponsor should contribute at least 40 % of the

net worth of the net worth of the AMC 3) The sponsor to be employed by the MF should not have been guilty of any fraud f an offence involving morale guilty of any economic offence 4) Appointment of trustee company to act as trustee for the Mf who hold the property of the MF in trust for the benefit of the unit holders 5) Appointment of AMC set up under the provision of the companies act to manage the MF and perate its scheme.

Terms and conditions of registration

The trustee/custodian/sponsor/AMC/would have to comply with the SEBI regulations 2. MF would immediately inform the SEBI if any info. Submitted were misleading which have been bearing on the registration granted by it 3. Payment of registration fee of Rs 25 lakh.
1.

2.Constitution and mgt of MF and operation of trusts

A MF can be constituted in the form of a trust should

be in the form of a deed duly registered The trust deed should not contain 1. Limiting the obligations of the trust in relation to any MF 2. Indemnifying the trustees for loss caused to the unit holders by their acts of negligence/omission

Appointment of trustee
Any person can be appointed as trustee if he

He is a person of ability, integrity and standing 2. He has not been guilty of moral turpitude 3. He has not been convicted of any economic offence/violation of any securities laws such as the SEBI act 1992 4. He has furnished the particulars specified in form C.
1.

 An AMC or employer are not eligible to at as trustee. A

trustee of one MF is eligible to be appointed as trustee of another MF only if: 1. Such person is an independent trustee 2. The MF of which he is a trustee gives approval for such an appointment.

Rights & obligations of trustee.

The trustee and the AMC should with the prior

approval of the SEBI, enter into investment mgt agreement containing, in addition to the clauses specified below. Content of investment mgt agreement The AMC appointed by the trustee, with the prior approval of the SEBI , would be responsible for floating schemes of MF after approval of the same by the trustees, and for managing the funds mobilized under various schemes, in accordance's with the provision of the trust deed & the SEBI regulation.

3.Constitution And Management OF An Asset Management Company

Sponsors of mutual funds or trustees would appoint

the AMC with the prior approval of SEBI. Its appointment can be terminated by a majority of trustees or by 75% of the unit holders of the scheme. Any change in appointment requires prior approval of SEBI as well as unit holders.

Cont
Eligibility Criteria:
For approval of the AMC by the SEBI , the applicant

has to fulfill the following conditions: An existing AMC should have sound track record/general reputation and fairness in transactions and should be a fit and proper person.

Cont.
The directors of the AMC should have adequate professional

experience in finance and financial service related fields and have not been found guilty of moral turpitude or convicted of any economic violence or violation of secruities laws. The key personnel of the AMC have not been found guilty of moral turpitude or been convicted of economic offence or violation of secruities laws or mutual fund or any intermediary during the period when its registration has been cancelled at any time by SEBI.

Cont
The board of directors of such AMC has at least 50%

directors who are not associated in any manner with the sponsor or any of its subsidiaries or the trustees. The chairman of AMC is not a trustee of any mutual fund. The AMC has a net worth of not less than Rs 10 crore.

 Terms and Conditions: The approval granted by SEBI to the AMC is subject to following

conditions: Any director of AMC would not hold the office of the director in another AMC unless he is an independent director and the approval of the Board of AMC. The AMC should forwith inform the SEBI of any material change in the information or particulars previously furnished.

 The appointment of director of an AMC can be made only with

prior approval of the trustees. The AMC undertakes to comply with these regulations. No change can be made in controlling interest of the AMC unless(1)prior approval of trustees and SEBI is obtained(2)written communication about proposed change sent to each unit holder and an advertisement is given in newspaper having nationwide circulation(3)unit holders are given an option to exit prevailing NAV.

 The AMC would furnish such information and

documents to the trustees as and when required by them.

 Restrictions on Business Activities: The AMC cannot act as trustee of any mutual fund . The AMC cannot undertake any other business activities except

activities in nature of portfolio management services ,management and advisory services to offshore funds, pension funds, financial consultancy and exchange of research on commercial basis if any of such activities are not in conflict with the activities of the mutual fund.

 The AMC should meet capital adequacy requirements

separately for each activity and obtain separate approval. The AMC is not permitted to invest in any of its schemes unless full disclosure of its intention to invest has been made in the offer document . The AMC is not entitled to charge any fees on its investment to such scheme.

 Obligations: AMC must take reasonable steps and exercise due diligence to ensure

that investment of funds pertaining to any scheme is not contrary to provisions of regulations and trust deed. It should (1) exercise due diligence and care in all its investment decisions as would be exercised by other engaged in same business.(2)be responsible for the acts of commission or omission by its employees or persons whose services has been procured.(3)submit to the trustees quarterly reports of each year of its activities.

 The trustees at the request of the AMC may terminate its assignments

at any time which would become effective only after trustees have accepted the termination of assignments and communicated their decision in writing. The chief executive officer of the AMC should ensure that (1)mutual fund complies with all provisions of SEBI mutual fund regulations /circulars issued from time to time.(2)investment made by the fund managers are in interest of unit holders. He would also be responsible for overall risk management function of the mutual fund. The fund managers should ensure that funds of the scheme are invested to achieve the objectives of the scheme and interest of the unit holders.

 Mutual fund discloses at the time of declaring half yearly

results(1)any underwriting obligations with respect to issue of securities of associate companies.(2)development if any (3)description in issue lead managed by associate companies(4)subscription to any issue of equity /private placement basis where the sponsor /its associates companies have acted as arranger /manager. It has to file with trustees the details of transactions in securities by its key personnel in their own name or on behalf of AMC and also report to SEBI as and when required.

 The AMC is required to file with trustees and SEBI (a) detailed

bio-data of all its directors along with their interest in other companies within fifteen days of their appointment. (b) any change in the interest of directors every six months (c) quarterly report to the trustees giving details and adequate justification about purchase /sale of securities of the group companies of sponsor /AMC by the mutual fund, during relevant quarter.

Appointment Of Custodian
The mutual fund should appoint a custodian to carry

out the custodial services for the scheme and send intimation of the same to the SEBI within fifteen days of appointment. In case of gold exchange traded fund scheme ,the assets may be kept in custody of bank registered as a custodian with SEBI.

 Agreement with custodian:

The mutual fund should enter into custodian

agreement should contain the clauses that are necessary for the efficient and orderly conduct of the affairs of custodian.

4. Schemes of Mutual Fund

The stipulation of SEBI regulations pertaining to

mutual fund schemes are outlined below: Procedure: An AMC can launch a scheme after its approval by the trustees and filing of the document with the SEBI together with filing fee of Rs 25,000.

 Disclosure in the offer document: The offer document should contain adequate disclosure to enable the

investors to make an informed investment decision including disclosure regarding maximum investment proposed to be made by the scheme in the listed securities of the group company of the sponsor. The SEBI can suggest modification in the offer document ,in the interest of the investors which would be binding on the AMC. If no modifications are suggested within 21 working days from the date of filing, it may issue offer document to the public.

 No one should issue form of application for units of a

mutual fund unless the form is accompanied by the memorandum containing such information as specified by SEBI. The AMC should provide an option to unit holders to nominate a person in whom the units held by him would vest in the event of his death.

 In case of joint holding ,the joint unit holders may

together make such nomination in the event of death of all joint unit holders.

 Advertisement Material: An advertisement includes every form of advertising

whether in publication ,by display of notices, signs, labels or by means of circulars, catalogues or other documents by an exhibition of pictures or photographic films ,by way of sound broadcasting or on television or in any other manner.

 All advertisement pertaining to mutual fund scheme should

confirm to advertisement code and should be submitted to SEBI within 7 days from the date of issue. Advertisement for each scheme should disclose investment objectives. All advertisement issued by a mutual fund or its sponsor or AMC should state all investments in mutual and securities are subject to market risk and the net asset value of the scheme may go up or down depending upon the factors and forces affecting the securities market.

 They should also disclose prominently the risk factors

as stated in the offer document along with warning document such as: Is only the name of the scheme and does not in any manner indicate either the quality of the scheme ,its future prospects or returns.

 Please read the offer document before investing. No advertisement should state that the scheme has been

subscribed or over subscribed during period it is open for subscription. Advertisement on the performance of a mutual fund or its AMC should compare the past performance only on the basis of per units of statistics as per the regulations. The offer document and advertisement should not be misleading.

Close ended schemes

A close-ended scheme is a scheme of a mutual fund in

which the maturity period is specified. Every close-ended scheme has to be listed on a recognized stock exchange within six months from the closure of the subscription. However, listing of a closed-ended scheme is not mandatory if: a) It provides for periodic repurchase facility to all the unit holders, with restriction, if any, on the extent of such repurchase;

b) It provides for monthly income or caters to special

classes of persons like senior citizens, women, children, widows or physically handicapped or any special class of persons, providing for repurchase of units at regular intervals. c) The details of such repurchase facility are clearly disclosed in the offer document & d) It opens for repurchase within a period of six months from the closure of subscription.

Repurchase of Close-ended Schemes

The AMC may at its option repurchase or reissue the

repurchased units of a close-ended scheme. The units of such schemes may be open for sale or redemption at fixed predetermined intervals if the maximum and minimum amount of sale or redemption of the units and the periodicity of such sale or redemption have been disclosed in the offer document. All the close-ended schemes should be fully redeemed at the end of the maturity period.

The units of such scheme may be converted into an

open-ended scheme if: a) The offer document of such scheme discloses the option and the period of such scheme discloses the option & the period of such conversion; or b) The unit-holders are provided with an option to redeem their units in full, & c) The initial issue expenses have been amortized fully.

Offering Period
No scheme of a mutual fund, other than the initial

offering period of any equity linked savings scheme, can be open for subscription for more than 45 days.

 Computation of Net Asset Value

Every mutual fund should computed the Net Asset Value (NAV) of each scheme by dividing the net asset of the scheme by the number of units outstanding on the valuation of date.

 Pricing of units The price at which the units may be subscribed or sold and repurchased by the mutual fund should be made available to the investors. In case of an open-end scheme that offer units for ale without specifying any duration of redemption , it should publish the sale and purchase price of units , at least once a week,in a daily newspaper with all India circulations.

6. General obligations
Maintain proper book of accounts and records

Every AMC should keep , maintain and preerve proper book of accounts, records and documents for eight years, for each scheme so as to explain its transactions and disclose at any point of time the financial possion.

 Financial Year

The financial year for all the schemes should end as of March 31st of each year. However, for a new scheme commencing during a financial year , the disclosure and reporting requirements would apply for the period beginning from the date of its commencement and ending on March 31st of that financial year.

Limitations of fee and expenses on Issue of schemes All expenses should be clearly identified and appropriated in the individual schemes The AMC may charge the mutual fund with investment and advisory fee that should be fully disclosed in the offer document. Any excess over the 6% initial issue expenses would have to be borne by the AMC.

Cont
The total expenses of the scheme,excluding issue or

redemption expenses , whether initially borne by the mutual fund or the AMC, but including the investment management and advisory fee, are subjected to the following limits : (1) on the first Rs 100 crore of the average weekly net asset ,2.5% (2) on the next Rs 300 crore of the average weekly net asset,2.25% (3) On the next Rs 300 crore of the average weekly net asset,2% (4) On the balance sheet of the assets, 1.75%

 Declaration of dividends

A mutual fund may declare dividends in accordance with the offer document are subject to any guidelines specified by the SEBI.

Annual Report Every mutual fund or AMC must prepare in respect

of each financial year an annual report and annual statement of accounts of the schemes and the mutual fund. some of the basic things to examine: Performance. Since the fund is required to compare its return on your investment with an appropriate benchmark, you will see if your fund did better or worse than its peers. New Management. If the funds manager has changed, this may be good or bad. If the track record of the old manager was part of your reason for choosing the fund, you might want to check out the new managers experience and record.