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Prepared by
Prof. Rahul Mailcontractor
Assistant Professor,
KLSs Institute of Management Education and Research,
Belgaum, Karnataka
Definition
A trust that pools the savings of investors who share a common
financial goal is known as mutual fund. The money collected is
then invested in financial instruments such as shares,
debentures and other securities the income and capital
appreciation realized are shared by its unit holders in proportion
to the number of units owned by them.
Investment in securities are spread over a wide cross section of
industries and sectors reducing the risk of the portfolio.
Mutual funds are mobilizers of saving of the small investors in
instruments like stock and money market instruments.
Mutual funds are corporation that accept money from investors
and use this money to buy stocks, long term bonds, short term
debt instruments issued by businesses or Govt.
Features
Mobilizing small savings: mutual funds mobilize funds by selling
their own shares known as units. This gives the benefit of convenience
and satisfaction of owning shares in many industries. Mutual fund
invest in various securities and pass on the returns to the investors.
Investment Avenue: the basic characteristic of a mutual fund is that it
provides an ideal avenue for investment for investors and enables
them to earn a reasonable return with better liquidity. It offers
investors a proportionate claim on the portfolio of assets that fluctuate
in value.
Professional management: mutual fund provides investors with the
benefit of professional and expert management of their funds. Mutual
fund employees professionals/experts who manage the investment
portfolios efficiently and profitably. Investors are relieved from the
responsibility of following the markets on a regular basis.
Sponsor
Any corporate body which initiates the launching of a
mutual fund is referred to as The sponsor.
The sponsor is expected to have a sound track record
and experience in financial services for a minimum
period of 5 years and should ensure various
formalities required in establishing a mutual fund.
According to SEBI, the sponsor should have
professional competence, financial soundness and
reputation for fairness and integrity. The sponsor
contributes 40% of the net worth of the AMC. The
sponsor appoints the trustee, The AMC and
custodians in compliance with the regulations.
Trustee
Sponsor creates a public trust and appoints trustees.
Trustees are the people authorized to act on behalf of the
Trust. They hold the property of mutual fund.
Once the Trust is created, it is registered with SEBI after
which this trust is known as the mutual fund. The Trustees
role is not to manage the money but their job is only to see,
whether the money is being managed as per stated
objectives. Trustees may be seen as the internal regulators
of a mutual fund.
A minimum of 75% of the trustees must be independent of
the sponsor to ensure fair dealings.
Trustees appoint the Asset Management Company (AMC),
to manage investors money.
Custodian
A custodians role is keeping custody of the securities that
are bought by the fund manager and also keeping a tab on
the corporate actions like rights, bonus and dividends
declared by the companies in which the fund has invested.
The Custodian is appointed by the Board of Trustees. The
custodian also participates in a clearing and settlement
system through approved depository companies on behalf
of mutual funds, in case of dematerialized securities.
Only the physical securities are held by the Custodian. The
deliveries and receipt of units of a mutual fund are done by
the custodian or a depository participant at the instruction
of the AMC and under the overall direction and
responsibility of the Trustees. Regulations provide that the
Sponsor and the Custodian must be separate entities.
Fund Accountants
Fund accountants are appointed by the AMC. The are in
charge of maintaining proper books of accounts relating
to the fund transactions and management. The perform
the following functions
Computing the net asset value per unit of the scheme on
a daily basis
Maintaining its books and records
Monitoring compliance with the schemes, investment
limitations as well as SEBI regulations
Preparing and distributing reports of the schemes for the
unit holders and SEBI and monitoring the performance
of mutual funds custodians and other service providers.
Lead Manager
Lead manager carry out the following functions:
Selecting and coordinating the activities of
intermediaries such as advertising agency, printers,
collection centers.
Carrying out extensive campaign about the scheme
and acting as marketing associates to attract
investors.
Assisting the AMC to approach potential investors
through
meetings,
exhibitions,
contacts,
advertising, publicity and sales promotion.
Investment Advisors
Investment advisors carry out market and security
analysis.
Advising the AMC to design its investment strategies
on a continuous basis.
They are paid for their professional advice regarding
fund investment on the average weekly value of the
funds net assets.
Legal Advisors
Legal advisors are appointed to offer legal guidance
about planning and execution of different schemes.
A group of advocates and solicitors may be appointed
as legal advisors.
Their fee is not associated with net assets of the fund.
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Regulations
Regulations ensure that schemes do not invest beyond a
certain percent of their NAVs in a single security. Some of
the guidelines regarding these are given below
No scheme can invest more than 15% of its NAV in rated
debt instruments of a single issuer. This limit may be
increased to 20% with prior approval of Trustees. This
restriction is not applicable to Government securities.
No scheme can invest more than 10% of its NAV in
unrated paper of a single issuer and total investment by
any scheme in unrated papers cannot exceed 25% of NAV.
No fund, under all its schemes can hold more than 10% of
companys paid up capital
No scheme can invest more than 10% of its NAV in a
single company.
Characteristics of ETFs
An Exchange Traded Fund (ETF) is essentially a
scheme where the investor has to buy/ sell units from
the market through a broker (just as he would by a
share).
An investor must have a demat account for buying
and selling ETFs.
An important feature of ETFs is the huge reduction in
costs. While a typical Index fund would have
expenses in the range of 1.5% of Net Assets, an ETF
might have expenses around 0.75%
Hedge Funds
Hedge funds are aggressively managed portfolio of
investments that uses advanced investment strategies
such as leveraged, long, short and derivative positions in
both domestic and international markets with the goal of
generating high returns,
Hedge funds are most often set up as private investment
partnerships that are open to a limited number of
investors and require a very large initial minimum
investment
Hedge funds are a more risky variant of mutual funds.
Hedge funds are aimed at high net worth investors. They
operate with high fee structures and are less closely
monitored by the regulatory authorities.