Chapter - I Mutual Funds in India
Chapter - I Mutual Funds in India
Chapter - I Mutual Funds in India
INTRODUCTION
equity financing thus entailing even greater scope for the Mutual Funds
sectors in the Indian capital and financial markets. The mutual fund
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Management of the Mutual Fund Industry as on 31 December, 2007
fund that meets his risk acceptance and his risk capacity levels and
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These uncertainties can be tackled
this task is left to a professional. i.e. a Fund Manager who applies his
environment is a tough task and this process can become fairly time
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unparalleled array and level of services. This has resulted due to entry
Industry has emerged. These fund houses brought in with them the
Mutual Funds mobilize the savings, particularly from the small &
individuals and institutions that may not have such a high degree of
spread risk and to ensure steady return. It receives money from the
unit holders, invests it, earns on it, attempts to make it grow and
agrees to share prosperity with the unit holders. The income earned
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through these investments and the capital appreciation realized is
by them.
1. EQUITY FUNDS
funds and each one of them falls in different risk bracket. Types of
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Equity Funds are listed below according to descending risk levels-
mercurial.
run. Growth Funds are also called 'Nest Eggs' investments. An investor
who selects such funds should be able to assume higher than normal
degree of risk.
company-specific risk.
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(e) Equity Index Funds - Equity Index Funds match the performance
of the same companies that form the index and is constituted in the
same proportion as the index. Equity index funds that follow broad
indices (like S&P CNX Nifty, SENSEX) are less risky than equity index
funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank
Index etc) as Narrow indices are less diversified and are more risky.
(f) Value Funds - Value Funds invest in those companies that have
funds with a long-term time horizon as risk in the long term, to a large
extent, is reduced
and their portfolio comprises of only those companies that meet their
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concentrated and are comparatively riskier than diversified funds.
than sector funds. These funds are exposed to foreign exchange rate
market.
companies, and then sell options against their stock positions, which
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generate stable income for investors. These funds are not available in
India.
liquid funds are exposed to the interest rate risk. Investment options
3.HybridFunds
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appreciation and issuing high dividends. The level of risks involved in
these funds is lower than growth funds and higher than income funds.
assets like real estate, commodities etc. Asset allocation funds adopt a
over from one asset class to another at any time depending upon their
outlook for specific markets. Fund managers may switch over to equity
if they expect equity market to provide good returns and switch over
over from one asset class to another is a decision by the fund manager
markets and the success of these funds depends upon the skill of a
Income Funds. Debt funds are low risk profile funds that seek to
investors. Debt securities are comparatively less risky than equities but
they are subjected to credit risk. i.e. risk of default by the issuer at the
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generally invest in securities from those issuers, which are rated by
investment objectives:
which results in reduction of risk. All investors share any loss incurred,
4b High Yield Debt funds -High Yield Debt Funds prefer securities
4c Assured Return Funds -It is not necessary that a fund will meet
funds that come with a lock-in period and offer assurance of annual
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adequate net-worth to guarantee returns in the future2.In the past, UTI
had offered assured return schemes like Monthly Income Plans that
assured specified returns to investors in the future. UTI was not able to
investors.
4d Fixed Term Plan Series - Fixed Term Plan Series usually are
closed-end schemes having short term maturity period (of less than
one year) that offer a series of plans and issue units to investors at
regular
2. www.appuonline.com
intervals. Fixed term plans are not listed on the exchanges. Fixed term
plan series usually invest in debt / income schemes and target short-
5. GiltFunds
have very less risk of default and provide safety of principal to the
investors. Gilt funds are also exposed to interest rate risk. Interest
rates and prices of debt securities are inversely related and any
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funds in an opposite direction.
6. OTHERS-
6a -Commodity Funds
fund and bears less risk than a specialized commodity fund. "Precious
Metals Fund" and Gold Funds that invest in gold, gold futures or shares
These Funds follow stock market indices and are traded on stock
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Funds are quite high on account of compounding expenses of
company. The trustees of the mutual fund hold its property for the
REGULATORY REGIME
money through the sale of mutual fund units to the public. The
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(a) Mutual Fund
The Mutual Fund Regulations lay down several criteria that need to be
Trusts Act, 1882. The instrument of trust must be in the form of a deed
between the sponsor and the trustees of the mutual fund duly
(b) Sponsor
at least 40% to the net worth of the AMC. However, if any person holds
the Mutual Fund Regulations. The sponsor or any of its directors or the
(c) Trustees
i.e. two thirds of the trustees should be independent persons who are
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or any of its officer(s) or employee(s) is not eligible to act as a trustee
its directors can act as trustees of any other trust provided that the
object of such other trust is not in conflict with the object of the mutual
The trustees are responsible for ensuring that the AMC has all its
systems in place, all key personnel, auditors, registrars etc. have been
responsibility of the trustees to ensure that the AMC does not act in a
impact on the unit holders. The trustees are also required to ensure
any broker. The Mutual Fund Regulations further mandates that the
trustees should prevent any conflicts of interest between the AMC and
the unit holders in terms of deployment of net worth. The trustees are
also responsible for ensuring that there is no change carried out in the
expenses payable or any other change that would modify the scheme
and affect the interest of unit holders, unless each unit holder is
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provided with written communication thereof.
the assets of the mutual fund. Under the Mutual Fund Regulations, the
3the AMC must maintain at all times, a minimum net worth of Rs. 100
million;
4the board of directors of such AMC has at least 50% directors, who
are not associate of, or associated in any manner with, the sponsor or
course of business:
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the board of the AMC of which such person is a director, has been
obtained;
such activities are not in conflict with the activities of the mutual fund;.
such activities if it satisfies the Board that the key personnel of the
The AMC is required to take all reasonable steps and exercise due
(e) Custodian
custodial services for the schemes of the fund. Only institutions with
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as custodians. The custodian must be totally de-linked from the AMC
and must be registered with SEBI. Under the Securities and Exchange
holds 50% or more of the voting rights of the share capital of the
(f) Schemes
and the offer document is required to be filed with the SEBI. The offer
the sponsor. If the SEBI does not comment on the contents of the
offering documents within 21 days from the date of filing, the AMC
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obligations on the AMC and the trustee to ensure that the statements
made in the offer documents are true and correct. The AMC is also
in whom the units held by him shall vest in the event of his death. SEBI
offer document of such scheme discloses the option and the period of
redeemed at the end of the maturity period. The SEBI has restricted a
indicating the name of the person who will guarantee the return is
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(g) Investment Criteria
The Mutual Fund Regulations lay down certain investment criteria that
the mutual funds need to observe. There are certain restrictions on the
securitized debts, such fund may invest in asset backed securities and
borrowing cannot exceed 20% of the net asset of a scheme and the
Similarly, a mutual fund is not permitted to advance any loans for any
with the Stock Lending Scheme of SEBI. However, SEBI has permitted
stock exchange for the purpose of hedging and portfolio balancing and
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down several compliance or filing requirements pertaining to reporting
sensitive information on
the stock exchanges. He may not know the developments taking place
in
the share market. Mutual funds have come as a boom to the small
investors and they have emerged as the popular media through which
small and medium investors can reap all the benefits of good
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economies of scale in transaction cost, the risk of lose due to a fall in
scrip’s are to be sold and when they should be bought and sold. The
reinvest the dividends and capital gains. An individual investor may not
mutual fund over other investments is that there is always a market for
its units. Mutual funds are required by the SEBI to provide liquidity to
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investors. Mutual funds are ready on any day (after the initial lock –in-
period is over) to buy back the units from the investors at the Net
schemes.
shelter is also available, the provisions for which vary from country to
country.
regulated by the SEBI. The SEBI acts as a watchdog and tries to protect
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1. Fluctuating Returns:-Mutual funds are like many other
price fluctuations along with the stocks that make up the fund. When
involved.
investing, but many mutual fund investors tend to over diversify. The
many funds that are highly related so they don't get the risk reducing
risky.
fees that reduce the overall payout. In mutual funds the fees are
operating fees.
The shareholder fees, in the forms of loads and redemption fees are
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usually ranging from 1-3%. These fees are assessed to mutual fund
different funds can guide investors down the wrong path. Some funds
itself a small cap, a fund may be sold under the heading growth fund.
evaluating the different funds. Unlike stocks, mutual funds do not offer
earnings per share, etc. A mutual fund's net asset value gives investors
the total value of the fund's portfolio less liabilities, but how an
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document or prospectus. The offer document/prospectus contains:-
(iii) How the funds collected will be invested and in what securities or
(vii) Date of launching the scheme and the date up to which the
Each scheme of the Mutual Fund should be registered with SEBI. The
draft of the offer document (i.e. prospectus or letter or offer and text of
in important centers in one or more banks. After the last date for
applications, scrutinize them and allot units to the applicants and issue
them unit certificates, which are the evidence for owning the units.
Investors are very much aware of the aspects such as returns and
benefits from Mutual Funds Investments, but are not fully aware of the
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risks and problems involved in the Mutual Fund investments. Mutual
The most important thing is that the investors must read the offer
Funds-"Mutual Funds are subject to Market Risks. Please read the offer
guarantee that all the objectives of the fund will be achieved. Past
the fund/scheme does not, in any manner indicate either the quality of
ended schemes. The subscription list for any scheme cannot be kept
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