CONCEPT (Shazad)

A Mutual Fund is a trust that pools the savings of number of investors who share a common financial goal. The money collected is then invested in capital market instruments such as shares, debentures and other securities. Mutual funds can thus be considered as financial intermediaries who collect funds from the public and invest on behalf of the investors. The income earned through these investments are shared by its unit holders in proportion to the number of units owned by them. A mutual fund is required to be registered with SEBI which regulates securities market before it can collect funds from the public.

Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. 1

Mutual Fund Operation Flow Chart

History of Mutual Funds in India and role of SEBI in mutual funds industry
In the year 1963 -Unit Trust of India was the first mutual fund set up in India
In early 1990 -Government allowed public sector banks and institutions to

set up mutual funds.

In the year 1992- Securities and exchange Board of India (SEBI) Act was

passed. The objectives of SEBI are to protect the interest of investors in securities and to promote the development of and to regulate the securities market.
SEBI issues guidelines to the mutual funds from time to time to protect the

interests of investors
All mutual funds whether promoted by public sector, private sector or by

foreign entities are governed by the same set of Regulations and all are subject to monitoring and inspections by SEBI.
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Issuers of Mutual funds in India Unit Trust of India was the first mutual fund which began operations in 1964. Public sector banks

SBI, Canara Bank, Bank of India,

Institutions IDBI, ICICI, GIC, LIC Foreign Institutions Alliance, Morgan Stanley, Templeton, Principal, JM financial, Deutsche etc. Private financial companies Kothari Pioneer, DSP Merrill Lynch, JM financial, Sundaram, Kotak Mahindra, Cholamandalam, Reliance, Birla, Tata, ABN Amro, Sahara, Escorts, ING Vysya, HSBC, Standard Chartered etc.
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Set up of Mutual fund

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian.
The trust is established by a sponsor or more than one sponsor who is like

promoter of a company.
The trustees of the mutual fund hold its property for the benefit of the

unit-holders.
Asset Management Company (AMC) approved by SEBI manages the funds

by making investments in various types of securities.

Custodian, who is registered with SEBI, holds the securities of various

schemes of the fund in its custody.

The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
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Organization of a Mutual Fund

 At least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.

Advantages of Mutual Funds (Umair)

Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

Types of mutual fund schemes

On the basis of Objective Growth / Equity Oriented Scheme The aim of growth funds/schemes 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. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.
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Sector specific funds/scheme These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. Generally these funds give higher returns. They are more risky compared to diversified funds.

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Index Funds/Scheme Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Diversified funds/scheme These funds invest in companies spread across sectors. These funds are generally meant for risk-taking investors who are not bullish about any particular sector.
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Income / Debt funds The aim of income funds/schemes 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.

The NAVs of such funds are affected because of change in interest rates, if the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa.

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Tax Saving funds/scheme These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

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Gilt Fund/scheme

These funds invest in Central and State Government securities.

They give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Hedge Funds/scheme
These funds adopt highly speculative trading strategies. They hedge risks in order to increase the value of the portfolio.

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Balanced Fund/scheme The aim of balanced funds is to provide both growth and regular income to investors. Such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. These funds are also affected because of fluctuations in share prices in the stock markets and NAVs of such funds are likely to be less volatile compared to pure equity funds.

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Money Market or Liquid Fund/scheme 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.

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 On the basis of Flexibility (Dipika)

Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period.

Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis.
The key feature of open-end schemes is liquidity.

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Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices.

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Interval funds/scheme These funds combine the features of both openended and close-ended funds wherein the fund is close-ended for the first couple of years and open-ended thereafter. Some funds allow fresh subscriptions and redemption at fixed times every year (say every six months) in order to reduce the administrative aspects of daily entry or exit, yet providing reasonable liquidity.

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On the basis of geographic location Domestic funds/scheme These funds mobilize the savings of nationals within the country. Offshore Funds/scheme These funds facilitate cross border fund flow. They invest in securities of foreign companies. They attract foreign capital for investment.

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Mutual Funds plans

Growth Plan and Dividend Plan A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realises capital appreciation on the investment. This plan appeals to investors in the high income bracket. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income.

Dividend Reinvestment Plan

Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested on behalf of the investor, thus increasing the number of units held by the investors.
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Automatic Investment Plan Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan (SIP), the investor is given the option for investing in a specified frequency of months in a specified scheme of the Mutual Fund for a constant sum of investment. AIP allows the investors to plan their savings through a structured regular monthly savings program.

Automatic Withdrawal Plan

Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan (SWP), a facility is provided to the investor to withdraw a pre-determined amount from his fund at a pre-determined interval.

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Factors that influence the performance of Mutual Funds (Amir)

Stock market Equity funds Performance of company Sector funds Interest rate and Credit quality Bond funds As interest rates rise, bond prices fall, and vice versa. Bond funds with higher credit ratings are less influenced by changes in the economy. Economy

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Investment restrictions
Mutual fund will be allowed to invest in transferable securities in the money market or in the capital market including any privately place debentures or security debt. MF are not allow to give term loan for any purpose No MF under all its schemes taken together should invest more than 10% of its fund in share or debentures or other securities of a single company. No MF under all its schemes taken together should invest more than 15% of its fund in share and debentures of any specific industry (cotton, textile, tea, tires etc.)

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 No scheme should invest in or lend to another scheme under the same AMC

MF must take and give delivery of script when purchased and sold.
Transfer of script from one scheme to another in the same MF shall be allowed at the prevailing market price for quoted instrument and in case of unquoted instrument transfer should be done with the approval of board of trustee.

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Frequently Used Terms

Net Asset Value (NAV) of a scheme The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). Net Asset Value is the market value of the securities held by the scheme. NAV per unit = Market value of securities of a scheme total number of units of the scheme on any particular date.

= Market value of the funds investments + Receivables + Accrued Income - Liabilities - Accrued Expenses Number of Outstanding units Market value of securities changes every day, NAV of a scheme also varies on day to day basis.
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Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price Is the price at which open-ended schemes repurchase their units and closeended schemes redeem their units on maturity. Such prices are NAV related.

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Sales Load or Front-end load

Is a charge (commission) collected by a scheme when it sells the units(1 to 2% of current NAV). Schemes that do not charge a load are called No Load schemes.
Repurchase or Back-end Load

Is a charge collected by a scheme when it buys back the units from the unit holders units(0.5 to 2% of current NAV).
Asset Management Company

An Asset Management Company (AMC) is a highly regulated organization that pools money from investors and invests the same in a portfolio. They charge a small management fee, which is normally 1.5 per cent of the total funds managed.
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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.

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