MUTUAL FUNDS

Introduction A mutual fund is a financial intermediary that

pools the savings of investors for collective investment in a diversified portfolio of

securities. A fund is mutual as all of its returns, minus its expenses, are shared by the fund’s

investors.

Definition • “a fund established in the

form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes, for investing in securities, including money market instruments or gold or gold related instruments or real estate assets”

-The SEBI of India (Mutual Fund) regulations 1996

Advantages

• Professional management • Portfolio diversification• Reduction in transaction cost• Liquidity

• Tax benefits• Transparency• Stability to the stock market• Equity research

• Convenience• Flexibility• Protection of interest of investors• Promoting, industrial development of the

country

Limitation of Mutual Funds • Market risk• Misappropriation of funds• Political risk

Mutual fund investors • Resident Indian individuals • Indian companies• Indian trusts/charitable institutions • Banks• Non-banking finance companies• Insurance companies• Provident funds• Non-residents, including Non-resident Indians• Foreign entities(FII’s)

Organization of a mutual fund

• The Sponsor• The Mutual Fund trust• The Asset Management Company• Other Administrative Entities

Sponsor • The sponsor is similar to the promoter of a

company as he gets the fund registered with the SEBI. Criteria’s required are

• Sound track and general reputation for minimum 5 years

• Not have been found of guilty of fraud

• He forms trust and appoints a board of trustees

• Also appoints AMC as fund managers• And appoints a custodian to hold the fund

assets.• The sponsored is required to contribute at

least 40% of the min net worth of the asset management company

A mutual fund is sponsored by• Banks• Financial institutions• Companies(Indian or

foreign or joint venture)

Out of 39 mutual funds• 4 by bank• 1 by LIC• 16 by Indian entities • 5 by foreign entities• Remaining are joint ventures

Mutual fund trust• A mutual fund is a trust that pools the savings

of investors and invests these savings in capital market/money market instruments.

• The duty of the trust is to review the performance of the fund and thereby safeguarding the interest of the investors.

contd

• A mutual fund in India is constituted in the form of a public trust created under the Indian Trusts Act,1882.

• The trust is formed by sponsor and registerd with SEBI

• The fund sponsors act as the settler of the trust, contributes to initial capital and appoints trustees

• Collected funds are managed by board of trustees,who are independent body and acts as a protector of the unit holders interest.

• At least 2/3 of the trustees are independent trusteeseg: HDFC Trustee Company Limited for HDFC mutual fund

Asset Management Company

• Asset management company manages the funds by investing in various securities. It acts like the investment manager of the trust.

• The success or failure of the mutual fund depends upon the efficiency of AMC

• AMC is a company formed and registered under companies act,1956.

• They charge a fee for the service rendered to mutual fund trust.

• Investment manager • Manages the different investment schemes as per

the SEBI regulation and the trust deed.• AMC should be registered with the SEBI• Net worth of atleast Rs.10 crore the form of cash

• Most AMC’s in India are private limited companies

• Eg:HDFC asset management company limited for HDFC mutual fund

Other Administrative Entities• Custodian :A custodian is responsible for safe

keeping of cash securities gold or gold related instruments or real estate mutual fund instruments.

A custodian also participates in the clearing system through approved depository.

• Registrar and transfer agents is a vital communication link between the unit holder and mutual fund.

FIXEDD DEPOSITS MUTUAL FUND SCHEMES

Investment for a fixed period No fixed tenure in open ended schemes

Assured return on fixed deposits No assurance for either returns of capital growth

Low returns High returns

High safety in banks Safety depends upon the investment objective

Objective is to earn income Objective is to earn income and capital growth

Types of Mutual Fund SchemesFunctional Investment

classificationPortfolio classification

Geographical Other

• Open-ended schemes

•Equity fund •Income •Domestic •P/E ratio fund

• Close-ended schemes

•Debt fund •Growth •Off shore •Exchange traded funds

• Interval schemes

•Hybrid fund •Balanced •Gold exchange traded funds•Real estate mutual funds

Functional classification • Open-ended schemes• Close-ended schemes• Interval schemes

Portfolio classification• Income funds• Growth funds• Balanced funds

Geographical classification • Domestic funds • Off shore funds

• Equity fund• Debt fund• Hybrid fund

Investment classification

Investment classificationEquity fund • Diversified• Value• Special• Sectoral• Derivatives arbritage• Tax savings

Debt funds• Money market mutual funds• Short term bond• Long term• Gilt• Floating maturity plans• Fixed maturity plans• Capital protection Schemes

Other classification• P/E ratio fund• Exchange traded funds• Gold exchange traded funds• Real estate mutual funds

Conclusion • In India, mutual funds have a potential to

grow. Mutual fund companies have to create and market innovative products and frame distinct marketing strategies.

• They have coma a long way, but a lot more can be done.

Bibliography

• Info: THE INDIAN FINANCIAL SYSTEM by Bharati V Pathak

• Images: Google

Thank you