awareness about mutual funds
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INTRODUCTION OF MUTUAL FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS INTRODUCTION OF MUTUAL FUNDS:-
Awareness about mutual funds
A mutual fund is a company that invests in a diversified portfolio of securities. People who buy shares of a mutual fund are its owners or shareholders. Their investments provide the money for a mutual fund to buy securities such as stocks and bonds. A mutual fund can make money from its securities in two ways: a Security can pay dividends or interest to the fund or a security can rise in value. A fund can also lose money and drop in value. Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. A mutual fund pools the money of many investors to invest in a variety of stocks, bonds or other securities. Each fund has its own investment Objective, with some funds investing more aggressively and others Investing more conservatively. When you invest money in a mutual fund, you receive shares of the fund. Each share represents an interest in the fund’s portfolio and the value of your mutual fund shares will raise and fall depending upon the performance of the securities in the portfolio. While the returns of mutual funds are not guaranteed, they do offer many advantages, especially for the inexperienced investor. Mutual Funds allow you to invest in a variety of industries and investments, performance of the securities in the portfolio which may be difficult to do individually without having large amounts of money to invest. The purpose of this publication is to help you understand how mutual funds work and assist you in selecting funds to create a well-balanced Portfolio. Pools the money of many investors to invest in a variety of stocks, Bonds or other securities A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, Bonds, short- term money market instrument and other securities. Mutual funds have a fund manager who invests the money on beta. lf of the investors by buying / selling stocks, bonds etc.
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Awareness about mutual funds Currently, the worldwide value of all mutual funds totals more than $US 26 trillion. The United States leads with the number of mutual fund schemes. There are more than 8000 mutual fund schemes in the U.S.A. Comparatively, India has around 1000 mutual fund schemes, but this number has grown exponentially in the last few years. The Total Assets under Management in India of all Mutual funds put together touched a peak of Rs. 5, 44,535 crs. at the end of August 2008. There are various investment avenues available to an investor such as real estate, bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more type of Investment Avenue available to investors. There are many reasons why investors prefer mutual funds. Buying shares directly from the market is one way of investing. But this requires spending time to find out the performance of the company whose share is being purchased, understanding the future business prospects of the company, finding out the track record of the promoters and the dividend, bonus issue history of the company etc. An informed investor needs to do research before investing. However, many investors find it cumbersome and time consuming to pore over so much of information, get access to so much of details before investing in the shares. Investors therefore prefer the mutual fund route. They invest in a mutual fund scheme which in turn takes the responsibility of investing in stocks and shares after due analysis and research. The investor need not bother with researching hundreds of stocks. It leaves it to the mutual fund and its professional fund management team. Another reason why investors prefer mutual funds is because mutual funds offer diversification. An investor’s money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the sectors. This diversification investor’s portfolio across different companies and
helps in reducing the overall risk of the portfolio. It is also less expensive to invest in a mutual fund since the minimum investment amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be able to buy only a few stocks and not get the desired diversification. These are some of the reasons why mutual funds have gained in popularity over the years.
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Awareness about mutual funds
HISTORY OF MUTUAL FUNDS:The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management. Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores. Third Phase – 1993-2003 (Entry of Private Sector Funds) with the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,
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Awareness about mutual funds 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. The graph indicates the growth of assets over the years.
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Awareness about mutual funds
CONCEPT OF MUTUAL FUNDS:A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.
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DEFINITION OF MUTUAL FUNDS:The securities and exchange board of India regulations, 1993 defines “a mutual fund as a fund establish in the form of the trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations”. According to Weston j. Fred and Brigham, Eugene f., unit trusts are “corporations which accept dollars from savers and then use this dollar to buy stock, long term bonds, short term debt instruments issued by business or government units; these corporations pool funds and thus reduce risk by diversification” Thus a 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. The flow chart below describes broadly the working of a mutual fund:
Mutual Fund Operations Flow Chart
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Awareness about mutual ORGANISATION OF A MUTUAL funds
FUND
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS
There CHAPTER 1 INTRODUCTION OF MUTUAL FUNDSorganisational are many entities involved and the diagram below illustrates the set up of a mutual fund:
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS
ORGANISATION OF A 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. SEBI Regulations require that 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. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
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A TYPICAL MUTUAL FUND IN INDIA HAS THE FOLLOWING CONSTITUENTS:◘ FUND SPONSOR:A ‘sponsor’ is a person who, acting alone or in combination with another corporate body, establishes a MF. In order to register with SEBI as MF, the sponsor should have a sound financial track record of over five years and general reputation of fairness and integrity in all his business transaction. The sponsor should contribute at least 40% of the net worth of the AMC.The sponsor initiates the idea to set up a mutual fund. It could be a registered company, scheduled bank or financial institution. For Birla Mutual Fund, the sponsor is Birla Growth Funds. In a joint venture like Sun F&C Mutual Fund, Foreign & Colonial Emerging Markets is the sponsor and SUN Securities (India) Ltd, the co-sponsor. A sponsor has to satisfy certain conditions, such as on capital, track record (at least five years' operation in financial services), default-free dealings and a general reputation of fairness. The sponsor appoints the trustees, AMC and custodian. Once the AMC is formed, the sponsor is just a stakeholder. However, sponsors do play a key role in bailing out an AMC during a crisis
◘ MUTUAL FUND:A MF is established in the form of a trust under the Indian Trusts Act, 1882. The instrument of trust is executed by the sponsor in favour of trustees and is registered under the Indian Registration act, 1908. The investor subscribes to the units issued by the Mutual Funds. These assets are held by the trustee for the benefit of unit holders.
◘ TRUSTEES:The MF can either be managed by the Board of Trustees, which is the body of individuals, or by Trust Company, which is the corporate body. Most of the funds 8
Awareness about mutual funds in India are managed by a Board of Trustees. The trustees are appointed with the approval of SEBI. The Trustees, however, do not directly manage the portfolio of MF. It is managed by the AMC as per the defined objectives. Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Sometimes, as with Canara Bank, the trustee and the sponsor are the same. For others, like SBI Funds Management, State Bank of India is the sponsor and SBI Capital Markets the trustee. Trustees float and market schemes, and secure necessary approvals. They check if the AMC's investments are within defined limits, whether the fund's assets are protected, and also ensure that unit holders get their due returns. Trustees also review any due diligence done by the AMC. For major decisions concerning the fund, they have to take unit holders' consent. They submit reports every six months to SEBI; investors get an annual report. Trustees are paid annually out of the fund's assets -- 0.05 per cent of the weekly average net asset value.
◘ ASSET MANAGEMENT COMPANY:The AMC, appointed by the sponsor or the Trustees and approved by SEBI, acts like the investment manager of the Trust. The AMC should have at least a net worth of Rs. 10 crore. It functions under the supervision of its Board of Directors, Trustees and the SEBI. The regulations require non-interfering relationship between the fund sponsors, trustees, custodians and AMC. The AMC appoints distributors or brokers to sell units on behalf of the Fund, also serve as investment advisers. They are the ones who manage your money. An AMC takes investment decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes and secondary market unit transactions. It also exercises due diligence on investments, and submits quarterly reports to the trustees. A fund's AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below Rs 10 crore. And, its fee should not exceed 1.25 per cent if collections are below Rs 100 crore and 1 per cent if collections are above Rs 100 crore. SEBI can pull up an AMC if it deviates from its prescribed role.
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◘ CUSTODIAN:
Often an independent organisation, it takes custody of securities and other assets of a mutual fund. Among public sector mutual funds, the sponsor or trustee generally also acts as the custodian. A custodian's responsibilities include receipt and delivery of securities, collecting income, distributing dividends, safekeeping of units and segregating assets and settlements between schemes. Their charges range between 0.15-0.2 per cent of the net value of the holding. Custodians can service more than one fund.
STRUCTURE OF MUTUAL FUNDS:For anybody to become well aware about mutual funds, it is imperative for him or her to know the structure of a mutual fund. How does a mutual fund come into being? Who are the important people in a mutual fund? What are their roles? etc. We will start our understanding by looking at the mutual fund structure in brief. Mutual Funds in India follow a 3- tier structure. There is a Sponsor (the First tier), who thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI), which are the market regulator and also the regulator for mutual funds. Not every one can start a mutual fund. SEBI checks whether the person is of integrity, whether he has enough experience in the financial sector, his net worth etc. Once SEBI is convinced, the sponsor creates a Public Trust (the Second tier) as per the Indian Trusts Act, 1882. Trusts have no legal identity in India and cannot enter into contracts, hence the Trustees are the people authorized to act on behalf of the Trust. Contracts are entered into in the name of the Trustees. Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund. It is important to understand the difference between the Sponsor and the Trust. They are two separate entities. Sponsor is not the Trust; i.e. Sponsor is not the Mutual Fund. It is the Trust which is the Mutual Fund. The Trustees role is not to manage the money. 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.
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ROLE AND IMPORTANCE OF Awareness about mutual funds MUTUAL FUNDS
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS IMPORTANCE:- 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER
When you invest in a mutual fund, you are investing in a company that, in turn, buys shares of stock and debt obligations issued by companies and governments. Mutual funds are called pass-through investments since federal law requires them to distribute, or "pass through," most of the earnings on their investments to shareholders. Mutual funds have been around since the 1920s and are regulated by the Investment Company Act of 1940.A mutual fund sells you shares of itself to raise cash. The fund invests these proceeds in a portfolio of securities. These securities are also referred to as a portfolio's holdings. A team of professional fund managers and analysts is tasked with managing a mutual fund. The team selects individual securities that have the risk-return characteristics that are consistent with the fund's investment strategy. The fund team monitors the investment performance of the portfolio daily. If one of the portfolio's holdings falls out of favor, the team may sell the security and buy another. Alternatively, instead of immediately reinvesting the cash elsewhere, it may decide to park the money temporarily and earn a risk-free interest rate until a better investment opportunity comes along. 1) WIDE PORTFOLIO INVESTMENT:Small and medium investors used to burn their fingers in stock exchange operations with a relatively modest outlay. If they invest in a select few shares, some may even sink without a trace never to rise again. Now, these investors can enjoy wide portfolio investment held by mutual fund. 2) OFFERING TAX BENEFITS:Certain fund offers tax benefits to its customers. Thus, apart from dividend, interest and capital appreciation, investors also stand to get the benefit of tax concession.
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Awareness about mutual funds
3) SUPPORTING CAPITAL MARKET:Mutual funds play a vital role in supporting the development of capital markets. The mutual funds make the capital market active by means of providing a sustainable domestic source of demand for capital market instruments. In other words, the savings of the people are directed towards investments in capital market through these mutual funds. 4) CHANNELISING SAVINGS FOR INVESTMENT:Mutual funds act as a vehicle in galvanizing the savings of the people by offering various schemes to the various classes of customers for the development of the economy as a whole. A number of schemes are being offered by Mutual Funds so as to meet the varied requirements of the masses, and thus, savings are directed towards capital investments directly. 5) PROVIDING BETTER YIELDS:The pooling of funds from a large number of customers enables the fund to have large funds at its disposal. Due to these large funds are able to buy cheaper and sell dearer than the small and medium investors. Thus they are able to command better yields to their customers. They also enjoy the economies of large scale and can reduce the cost of capital market participation. 6) PROMOTE INDUSTRIAL DEVELOPMENT:The economic development of any nation depends upon its industrial advancement and agricultural development. All industrial units have to raise their funds by resorting to the capital market by the issue of shares and debentures.
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7) RENDERING EXPERTISED SERVICE AT LOW COST:The management of the fund is generally assigned to professionals who are well trained and have experience in the field of investment. The investments decisions of these professionals are always backed by informed judgment and experience. Thus investors are assured of quality services in their best interest. 8) PROVIDING RESEARCH SERVICE:A mutual fund is able to command vast resources and hence it is possible for it to have an in-depth study and carry out research on corporate securities. Each fund maintains a large research team which constantly analyses the companies and the industries, recommends the fund to buy or sell particular share. 9) INTRODUCING FLEXIBLE INVESTMENT SCHEDULE:Some mutual funds have permitted the investors to exchange their units from one scheme to another and this flexibility is a great boon to investors. Income units can be exchanged for growth units depending upon the performances of the funds. 10)
REDUCING THE MARKETING COST OF NEW ISSUES:Moreover the mutual funds help to reduce the marketing cost of new issues. The promoters used to alloy a major share of Initial Public Offering to the mutual funds and thus they are saved from the marketing cost of such issues.
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11)
SIMPIFIED RECORD KEEPING:An investor with just an investment in 500 shares or so in 3 or 4 companies has to keep proper records of dividend payments, bonus issues, price movements, purchase or sale instruction, brokerage or related items. It is very tedious and consumes a lot of time. One may even forget to record the right issue and may have to forfeit the same. Thus, record keeping is the biggest problem for small and medium investors.
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ACTING
AS
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INITIAL
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In most cases investors are not able to get allotment in IPO’s of companies because they are often oversubscribed many times. Moreover they have to apply for minimum of 500 shares which is very difficult particularly for small investors. But, in mutual funds, allotment is more or less guaranteed.
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TYPES OF MUTUAL FUNDS
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS
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TYPES OF MUTUAL FUNDS:1. On The Basis Of Execution & Operation. 2. On The Basis Of yield & Investment Pattern.
ON THE BASIS OF EXECUTION & OPERATION:A. CLOSE-ENDED FUNDS:Under this scheme, the corpus of the fund and its duration are prefixed. In other words, the corpus of the fund and the number of units are determined in advance. Once the subscription reaches the predetermined level, the entry of investors is closed. After the expiry of the fixed period, the entire corpus is disinvested and the proceeds are distributed to the various unit holders in proportion to their holding. Thus, the fund ceases to be a fund, after the final distribution. A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. 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 they are listed. Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.
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B. OPEN-ENDED FUNDS:It is just the opposite of close ended funds. Under this scheme, the size of the fund and the period of the fund are not pre-determined. The investors are free to buy and sell any number of units at any point of time. For instance, the Unit Scheme (1964) of the Unit Trust of India is an open-ended one, both in terms period and target amount. Anybody can buy this unit at any time and sell it also at any time at his discretion. Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value. Open-end funds are required to calculate their net asset value (NAV) daily. Since the NAV of an open-end fund is calculated daily, it serves as a useful measure of its fair market value on a per-share basis. The NAV of the fund is calculated by dividing the fund's assets minus liabilities by the number of shares outstanding. Open-end funds usually charge an entry or exit load from the investors. Most of the open-end funds are actively managed and the fund manager picks the stocks as per the objective of the fund. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations. Some of the benefits of open-end funds include diversification, professional money management, liquidity and convenience. But open-end funds have one negative as compared to closed-end funds. Since open-end funds are constantly under redemption
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Awareness about mutual funds pressure, they always have to keep a certain amount of money in cash, which they otherwise would have invested. This lowers the potential returns.
ON THE BASIS OF YIELD AND INVESTMENT:I. EQUITY FUNDS:Equity Funds are defined as those funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities. This is important from taxation point of view, as funds investing 100% in international equities are also equity funds from the investors’ asset allocation point of view, but the tax laws do not recognize these funds as Equity Funds and hence investors have to pay tax on the Long Term Capital Gains made from such investments (which they do not have to in case of equity funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities).
AGGRESSIVE GROWTH FUNDS:These funds are just the opposite of bond
funds. These funds are capital gains oriented and thus the thrust area of these funds is ‘capital gains’. Hence these funds are generally invested in speculative stocks. In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds. GROWTH FUNDS (Growth Oriented Funds):Unlike the income funds, growth funds concentrate mainly on long run gains i.e. capital appreciation. They do not offer regular income and they aim at capital appreciation in the long run. Hence, they have been described as “Nest Eggs” investments. Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future. 18
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EQUITY INCOME OR DIVIDEND YIELD:As the very name suggests, this Fund aims at generating and distributing regular income to the members on a periodical basis. It concentrates more on the distribution of regular return is higher than that of the income from bank deposits. The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.
DIVERSIFIED EQUITY FUNDS (ELSS):Equity Linked Savings Schemes (ELSS) are equity schemes, where investors get tax benefit upto Rs. 1 Lakh under section 80C of the Income Tax Act. These are open ended schemes but have a lock in period of 3 years. These schemes serve the dual purpose of equity investing as well as tax planning for the investor; however it must be noted that investors cannot, under any circumstances, get their money back before 3 years are over from the date of investment.
EQUITY INDEX FUNDS:Equity Schemes come in many variants and thus can be segregated according to their risk levels. At the lowest end of the equity funds risk – return matrix come the index funds while at the highest end come the sectoral schemes or Specialty schemes. These schemes are the riskiest amongst all types Schemes as well. However, since equities as an asset class are risky, there are no guaranteeing returns for any type of fund. Index Funds invest in stocks comprising indices, such as the Nifty 50, which is a broad based index comprising 50 stocks. There can be funds on other indices which have a large number of stocks such as the CNX Midcap 100 or S&P CNX 500. Here the investment is spread across a large 19
Awareness about mutual funds number of stocks. In India today we find many index funds based on the Nifty 50 index, which comprises large, liquid and blue chip 50 stocks.
VALUE FUNDS: Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced SPECIALISED FUNDS:Besides the above, a large number of specialized funds are in existence abroad. They offer special schemes so as to meet the specific needs of specific categories of people like pensioners, widows, etc. There are also funds for investments in securities of specified area. For instance Japan fund, South Korea fund, etc. Again, certain funds may be confined to one particular sector or industry like fertilizer, automobiles, petroleum, etc. These funds carry heavy risks since the entire investors who prefer this type of fund, of course, in such cases; the rewards may commensurate with the risk taken. The best example of this type is the Petroleum Industry Funds in the USA.
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SECTOR FUNDS:Funds that invest in stocks from a single sector or related
sectors are called Sectoral funds. Examples of such funds are IT Funds, Pharma Funds, Infrastructure Funds, etc. Regulations do not permit funds to invest over 10% of their Net Asset Value in a single company. This is to ensure that schemes are 20
Awareness about mutual funds diversified enough and investors are not subjected to undue risk. This regulation is relaxed for sectoral funds and index funds. •
FOREIGN SECURITIES FUNDS:Foreign Securities Equity Funds have the option to invest in one or
more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk. •
MID-CAP OR SMALL-CAP FUNDS:Funds that invest in companies having lower market capitalization
than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky. •
OPTION INCOME FUNDS:While not yet available in India, Option Income Funds write
options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.
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II. MONEY-MARKET MUTUAL FUNDS (MMMFS):These funds are basically open ended mutual funds and as such they have all features of the open ended fund. But, they invest in highly liquid and safe securities like commercial paper, banker’s acceptances, certificates of deposits, treasury bills, etc. These instruments are called money market instruments. They take place of shares, debentures and bonds in a capital market. They pay money market rates of interest. These funds are called ‘money funds’ in the USA and they have been functioning since 1972. Investors generally use it as a “Parking Place” or stop gap arrangements for their cash resources till they finally decide about the proper avenue for their investment i.e., long term financial assets like bonds and stocks. Since MMMFs are a new concept in India, the RBI has laid down certain stringent regulations. For instance, the entry to MMMFs is restricted only to scheduled commercial banks and their subsidiaries.
III. HYBRID FUNDS:As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:
BALANCED FUNDS:This is otherwise called “income-cum-growth” fund. It is nothing but a combination of both income and growth funds. It aims at distributing regular income as well as capital appreciation. This is achieved by balancing the investments between the high growth equity shares and also the fixed income earning securities GROWTH-AND-INCOME FUNDS:Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for 22
Awareness about mutual funds capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.
ASSET ALLOCATION FUNDS:Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.
DEBT/INCOME FUNDS:Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds:
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Awareness about mutual funds
DIVERSIFIED DEBT FUNDS:Debt funds that invest in all securities issued by entities belonging to all
sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.
FOCUSED DEBT FUNDS:Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.
HIGH YIELD DEBT FUNDS:As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors.
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Awareness about mutual funds
ASSURED RETURN FUNDS:Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible.
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 intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period.
IV. GILT FUNDS:Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change
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Awareness about mutual funds in the NAV of debt/gilt funds in an opposite direction.
V. OTHERS:Other types of Mutual Funds are as follows:
COMMODITY FUNDS:Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds.
REAL ESTATE FUNDS:Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation.
EXCHANGE TRADED FUNDS (ETFS):Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked
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Awareness about mutual funds prices) at the same time. Recently introduced in India, these funds are quite popular abroad.
FUND OF FUNDS:Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.
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Awareness about mutual funds
TYPES OF RISK
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL
1) MARKET CHAPTER 1 INTRODUCTION OF MUTUAL RISK:-
FUNDS
FUNDS In general there are certain risks associated with every kind
of investment on shares. They are called as market risk. These market risks can be reduced, but cannot be eliminated even by a good investment management. The prices of the shares are subject to wide price fluctuations depending upon market conditions over which nobody has a control. Moreover, every economy has to pass through a cycle-Boom, Recession, Slump and Recovery. The phase of the business cycle affects the market conditions to a larger extent. 2) SCHEME RISK:There are certain risks inherent in the scheme itself. It all depends upon the nature of the scheme. For instance, in a pure growth scheme, risks are greater. It is obvious because if one expects more returns as in case of a growth scheme, one has to take more risks. 3) INVESTMENT RISK:Whether the mutual funds makes money in shares or losses depends upon the investment expertise of the Asset Management Company (AMC). If the investment advice goes wrong, the fund has to suffer a lot. The investment expertise of various funds different and it is reflected on the returns which they offer to investors.
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Awareness about mutual funds 4) BUSSINESS RISK:The corpus of the mutual fund might have been invested in a company’s shares. If the business of that company suffers any set back, it cannot declare any dividend. It may even go to the extent of winding up its business. Through the mutual fund can withstand such a risk, its incoming paying capacity is affected.
5) POLITICAL RISKS:SUCCESSIVE Governments bring with them fancy new economic ideologies and policies. It is often said many economic decisions are politically motivated. Changes in government bring in the risk of uncertainty which every player in the financial service industry has to face. So mutual funds are no exception to it. 6) INTEREST RATE RISK:This risk can be reduced by adjusting the maturity of the debt fund portfolio, i.e. the Buyer of the debt paper would buy debt paper of lesser maturity so that when the paper matures; he can buy newer paper with higher interest rates. So, if the investor expects interest rates to rise; he would be better off giving short term Loans (when an investor buys a debt paper, he essentially gives a loan to the issuer of the paper). By giving a short-term loan, he would receive his Money back in a short period of time. As interest rates would have risen by then, he would be able to give another loan (again short term), this time at the new higher interest rates. Thus in a rising interest rate scenario, the investor can reduce interest rate risk by investing in debt paper of extremely short-term maturity. 7) INVESTOR PSYCHOLOGY RISK:The investor psychology is such that most of the investors, be it Mutual Fund Investors or Direct Capital Market Investors, behave like reactionaries. E.g. they enter the market when the share prices starts rising and they get panicky & exit as soon as share prices starts falling. Therefore, whether it is shares of company or mutual fund unit investors, investors resort to selling their investments when
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Awareness about mutual funds market starts looking down. Because of this, there will be more than normal demand on Mutual Fund manager to redeem the units. To honor the redemption demands of the exiting unit holders during the worst market times, Mutual Funds are forced to sell more stocks at the prevailing low prices. As a result of this, all the unit holders who have invested in the fund suffer. This means, irrespective of one being a long-term buy and hold investor or not, he suffers because of investing in Mutual Fund.
8) CHOICE RISKS:All the experts recommend different schemes/ funds. Naturally, all of them cannot be and will not be right. Investors are also advised to stay invested for long-term to reap good returns. These experts also suggest different funds at different times. Of course, to be in the well-being fund, one needs to move from fund to fund intermittently. In an tempt to stay invested for a long-term and to be in the well-doing fund, the investor, whether educated and informed, will have to be satisfied with disappointment. 9) COST RISKS: Mutual Funds charge huge fees that they can get away with and that too in the most confusing manner possible. The fund managers never intend to make their costs clear to their clients. It would not be painful for the investors to pay for the expenses and costs of the funds when they derive satisfactory returns. But, the irony is that investors have to pay for the sales charges, annual fees and many other expenses irrespective of how the fund has performed. 10) PREDICTION RISKS: Nobody can predict the capital market perfectly and can always find good investments. Similarly, the fund manager's predictions of future actions and outcomes are, of necessity, subject to error. 11) JARGON RISKS: The newsletters and other documents that are distributed to the investors do report so much and that too in such a language filled with technical
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Awareness about mutual funds jargons that it will not be very easy for an investor to understand and follow the report. 12) COMPETITION RISKS: Return is ultimate measure of job performance for any investment, be it in a mutual fund or otherwise. Performance is the matter of comparison and the evaluation is intended to measure how the fund has performed vis-à-vis its past performance, peers and market. At present, Mutual Funds are required to report their performance including returns on a quarterly basis. Therefore, to prove that the fund is performing well, managers focus on quarterly returns. Buying & Selling of stocks at the end of quarter will be done to report better quarterly returns and to make funds holdings look better based on recent market action. In this process, where the competition is not really productive, fund managers incur expenses & losses that are naturally passed on to the unit holders. 13) RISK OF REDEMPTION RESTRICTIONS: Whether informed in writing or not, normally the liquidity of schemes investments may be restricted by the trading volumes settlement period and transfer procedures.
14) MANAGEMENT CHANGE RISKS: It is not uncommon for a Mutual Fund to have changes in its management. The change in the funds management may effect the achievement of the objectives of the fund. The fund company may, for various reasons, replace a fund manager or may be the fund manager himself may resign from his job for any reason. This change will be significant since the fund manager controls the fund investments.
15) JUDGEMENT RISKS: Investors may not know more than the fund manager about the investment strategy and whatever judgments the investor makes will not be fool proof.
16) FORWARD PRICING RISKS:31
Awareness about mutual funds The prices of a Mutual Fund do not change during the day. Order placed up to a cut off time of 3:00 p.m. get that day's Net Asset Value (NAV) and orders placed after 3:00 p.m. receive the next day's NAV. This is called the rule of forward pricing. This system assures a level playing field for investors. No investor is supposed to have the benefit of post 3:00 p.m. information prior to making an investment decision.
17) BREAKPOINT RISKS: Mutual Fund charge loads such as front end & back end. Few Mutual Fund charge front end sales load will charge lower sales loads for larger investments. The investment level required to obtain a reduced sales load are known as breakpoints. These breakpoints lure investors to invest huge funds to avail the discounts on volumes and end up losing focus on his planned diversification for his Mutual Fund investments.
18) RISKS OF BLIND DIVERSIFICATION: It may happen that a fund is heavily committed to a particular area of the economy at any given time. This is called blind diversification risk and any investor would like to invest in Mutual Fund that concentrate in asset classes that he himself has not invested at his own.
19) RISKS OF CHANGES IN THE REGULATORY NORMS:Mutual Funds are constantly regulated by SEBI and investors are subject to risk of the changes in the norms for the Mutual Funds. Besides the above risks, Mutual Funds will also have the common risks that any investment has. In fact, risk is present in every decision made with regard to the investments in capital markets. Following is the list of some common risks involved while investing in the capital markets and particularly in the mutual funds:
20) COUNTRY RISK:This risk arises from the possibility that political events such as war, national elections etc. and financial problems such as rising inflation or
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Awareness about mutual funds natural disasters such as an earthquake, a poor harvest etc. will weaken a country's economy and cause investments in that country to decline.
21) CREDIT RISK:This is a risk that arises from the possibility that a bond issuer will fail to repay interest and principal in a timely manner. This risk is also called as default risk.
22) CURRENCY RISK:This risk arises from the possibility that returns could be reduced for Indians investing in foreign securities because of a rise in the value of the Indian rupee against dollar, euro or yen etc. This is also known as Exchange Rate Risk.
23) INDUSTRY RISK:This risk arises from the possibility that a group of stocks in a single industry will decline in price due to developments in that industry.
24) MANAGER RISK:This risk arises from the possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively, resulting in the failure of the sated objectives.
25) PRINCIPAL RISK:This risk arises from the possibility that an investment will go down in value, or lose money from the original or invested amount.
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Awareness about mutual funds
CHALLENGES AND OPPORTUNITIES
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHALLENGES AHEAD IN MUTUAL FUND INDIUSRTY:Marketing of funds is indeed a difficult topic to discuss, particularly in the present difficult situation for the mutual fund industry when we consider marketing, we have to see the issues in totality, because we cannot judge an elephant by its trunk or by its tail but we have to see it in its totality. When we say marketing of mutual funds, it means, includes and encompasses the following aspects; assessing of investor needs & market research, responding to investors needs, product designing, studying the macro environment, timing of launch of the product etc. widening, broadening and deepening the markets. There are certain issues which are directly linked with the marketing Mutual funds the first of which is widening, broadening and deepening of the markets for the mutual fund products. Considering the vast nature of this country the first priority is the geographic spread has to be widened and the market has to be deepening secondly, the MF must try to spread their wings not only within the country but also outside the country.
A. MARKETS IN RURAL AND SEMI-URBAN AREAS:The Mutual Fund industry a collectively undertake this job of creating awareness among the rural population about the M F as a new form of savings and translate that awareness into increased fund mobilization.
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Awareness about mutual funds
B. OVERSEAS MARKETS:The second aspect with respect to widening and deepening the market is expanding the overseas investor base. The expansion of the distribution network and quick dissemination of information, coupled with M F as such should consider tapping these markets for expanding the scope of mobilization.
CHALLENGES IN MUTUAL FUND INDUSTRY:A. INVESTOR PREFRENCES:The challenge for Mutual Funds is in the tailoring the right products that will help mobilization saving by targeting investors needs. It is necessary that the common investor understands very clearly and salient and different features of funds. The Indian investor is essentially risk averse and is more passive than active. Our experience
B. PRODUCT INNOVATION:With the debt markets now getting developed, mutual funds can tap the investors who require steady income with safety, by floating funds that are designed to primarily have debt instruments can also design separate funds to attract semi urban & rural investors, keeping their seasonal requirements in mind for haven’t season, festival season, sowing season to name a few.
C. DISTRIBUTION NETWORK:I would now focus on the distribution network, namely retail network versus the wholesale network. It is realize that the character of the market is undergone rapid charge. The market is moving favorably also attract direct investments from retail investor.
D. RETAILING THROUGH AGENTS:35
Awareness about mutual funds The alternative distribution channels that are available are retail selling or using lead managers and brokers along with sub-brokers for selling units. The experience of unit trust of India her been that, if necessary motivation and incentive is provided to retailer agents. In such system one achieves brand loyalty through continuous interaction between agents and investors.
E. ADVERTISEMENT AND PUBLICITY:There are certain issues with reference to advertisement, publicity literature and offer document which deserve attention. Most of Mutual Funds advertisements look similar, focusing on scheme features, returns & incentives
F. MUTUAL FUND INDUSTRY TO FACE GREATER OBSTACLES:
The mutual fund industry in India, although 15 years old, is still to develop into a credible competitor to other segments of the financial services industry, especially insurance. On the face of it, mutual fund investments (in equity schemes) seem more attractive than insurance products, but on the ground the reverse is true. More Indians trust life insurance companies with their savings than they do with mutual funds. According to figures from the Central Statistical Organisation (CSO), life insurance funds accounted for 12% of total household savings in India. In contrast equity & debentures only attracted 7% of household savings in financial year ending March 2008. There are 35 asset management companies (AMCs) in India managing Rs 6, 70,012 crore, according to independent investment information provider, Value Research. The industry’s penetration is estimated at 4-5 % as against 10-15 % for insurance. There are around 3 million agents for insurance products and just 80,000 distributors for mutual funds. Both industries, which started almost half a century ago in India with a single player, now have several competing companies. Still, low customer awareness levels and poor financial literacy have largely stymied the popularity of financial products in India.
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Awareness about mutual funds
But in the case of insurance, rampant mis-selling has made it more popular than mutual funds. While insurance is indeed an investment for covering your life, it is sold more as a tax-saving investment tool. In rural areas, agents mis-sell it as a fixed deposit and the idea has been so well rooted that in many Indian villages, There is little scope for mis-selling in case of mutual funds - the mis-selling is limited to the extent that the agent assures investors a return that the fund may not able to deliver. In terms of selling, both mutual funds and insurance are ‘push’ products. However, a distributor has a higher incentive to sell the latter because of the opportunity to earn a higher commission. An agent selling insurance earns a commission of 30-40 % of the initial premium and a trail commission of around 5%. However, the commission in case of mutual funds is never more than 2-2 .5%. Insurance generally is a product that cannot be sold multiple times to one investor. Hence, the agent has to be given a high commission to push the product. In case of mutual funds, the agent gets multiple opportunities to sell more than one product to the same investor. As a result, distributors and mutual fund houses exhibit limited interest in continuously engaging with customers post closure of sale as the commissions and incentives are largely in the form of upfront fees from product sales. Limited use of the public sector banks’ network and post offices to distribute mutual funds has also impeded the growth of the industry. The insurance industry, on the other hand, has been able to leverage this to its advantage. While setting up an AMC is relatively easy, getting business during a downturn and withstanding redemption pressures during times of low liquidity is the difficult part. The insurance business is one with a long gestation period and requiring sufficient capital to cover incremental actuarial liability. The breakeven time for an insurance business in India is at least seven years. In this scenario, the most important challenge for the company is to have a robust agency network. Mutual Funds have to face a stricter regulatory environment as the industry is regulated by the conservative capital market regular SEBI. As a result, there is limited
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Awareness about mutual funds flexibility in fixing fees and pricing. Insurance companies have a relatively less stringent environment as the industry is regulated by IRDA, which is less conservative in its regulation. This allows more flexibility for companies to structure their products and fees.
ADVANTAGES AND DISADVANTAGES
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS ADVANTAGES OF MUTUAL FUNDS:A Mutual Fund can be defined as a trust wherein the savings of the investors with the same financial goal are pooled in. The collected money then goes for investment in capital market instruments. These can include debentures, shares and other such securities. These investments in turn yield an income. The income and capital appreciation are distributed amongst its unit holders. The advantages of mutual funds are many. Some of the advantages of mutual funds in India are listed below:
PROFESSIONAL MONEY MANAGEMENT & RESEARCH:Mutual funds are managed by professional fund managers who regularly monitor market trends and economic trends for taking investment decisions. They also have dedicated research professionals working with them who make an in depth study of the investment option to take an informed decision. Investing requires skill. It requires a constant study of the dynamics of the markets and of the various industries and companies within it. Anybody who has surplus capital to be parked as investments is an investor, but to be a successful investor, you need to have someone managing your money professionally. Just as people who have money but not have the requisite skills to run a company (and hence must be content as shareholders) hand over the running of the operations to a qualified CEO, similarly,
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Awareness about mutual funds investors who lack investing skills need to find a qualified fund manager. Mutual funds help investors by providing them with a qualified fund manager. Increasingly, in India, fund managers are acquiring global certifications like CFA and MBA which help them be at the cutting edge of the knowledge in the investing world.
MUTUAL FUNDS COME IN MANY VARIETIES:A mutual fund comes in many types and styles. There are stock funds, bond funds, sector funds, target-date mutual funds, money market mutual funds and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index mutual funds). The availability of different types of mutual funds allows you to build a diversified portfolio at low cost and without much difficulty.
RISK DIVERSIFICATION:Diversification reduces risk contained in a portfolio by spreading it. It is about not putting all your eggs in one basket. As mutual funds have huge corpuses to invest in, one can be part of a large and well-diversified portfolio with very little investment. There is an old saying: Don't put all your eggs in one basket. There is a mathematical and financial basis to this. If you invest most of your savings in a single security (typically happens if you have ESOPs (employees stock options) from your company, or one investment becomes very large in your portfolio due to tremendous gains) or a single type of security (like real estate or equity become disproportionately large due to large gains in the same), you are exposed to any risk that attaches to those investments. In order to reduce this risk, you need to invest in different types of securities such that they do not move in a similar fashion. Typically, when equity markets perform, debt markets do not yield good returns. Note the scenario of low yields on debt securities over the last three years while equities yielded handsome returns. Similarly, you need
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Awareness about mutual funds to invest in real estate, or gold, or international securities for you to provide the best diversification. If you want to do this on your own, it will take you immense amounts of money and research to do this. However, if you buy mutual funds -- and you can buy mutual funds of amounts as low as Rs 500 a month! -- you can diversify across asset classes at very low cost. Within the various asset classes also, mutual funds hold hundreds of different securities (a diversified equity mutual fund, for example, would typically have around hundred different shares).
TRANSPARENCY:Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator.
FLEXIBILITY:Investors also benefit from the convenience and
flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes.
CONVENIENCE:With features like dematerialized account statements, easy subscription and redemption processes, availability of NAV and performance details through journals, newspapers and updates and lot more; Mutual Funds are sure a convenient way of investing.
ECONOMIES OF SCALE:Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay. Since mutual funds collect money from millions of investors, they achieve economies of scale. The cost of running a mutual fund is divided between a larger
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Awareness about mutual funds pool of money and hence mutual funds are able to offer you a lower cost alternative of managing your funds. Equity funds in India typically charge you around 2.25% of your initial money and around 1.5% to 2% of your money invested every year as charges. Investing in debt funds costs even less. If you had to invest smaller sums of money on your own, you would have to invest significantly more for the professional benefits and diversification.
SYSTEMATIC INVESTING AND WITHDRAWALS WITH
MUTUAL FUNDS:It is simple to invest regularly in a mutual fund. Many mutual fund companies allow investors to invest as little as $50 per month directly into a mutual fund. Money can be pulled directly from a bank account and invested directly in the mutual fund. On the other hand, money can be regularly withdrawn from a mutual fund and be deposited into a bank account. There are generally no fees for this service.
LIQUIDITY:One of the greatest advantages of Mutual Fund investment is liquidity. Open-ended funds provide option to redeem on demand, which is extremely beneficial especially during rising or falling Markets
REDUCTION IN COSTS:Mutual funds have a pool of money that they have to invest. So they are often involved in buying and selling of large amounts of securities that will cost much lower than when you invest on your own
TAX ADVANTAGES:Investment in mutual funds also enjoys several tax advantages. Dividends from Mutual Funds are tax-free in the hands of the investor (This however depends upon changes in Finance Act). Also Capital Gain accrued
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Awareness about mutual funds from Mutual Fund investment for a period of over one year is treated as long term capital appreciation and is tax free.
EASE OF PROCESS:If you have a bank account and a PAN card, you are ready to invest in a mutual fund: it is as simple as that! You need to fill in the application form, attach your PAN (typically for transactions of greater than Rs 50,000) and sign your cheque and you investment in a fund is made. In the top 8-10 cities, mutual funds have many distributors and collection points, which make it easy for them to collect and you to send your application to.
WELL REGULATED:India mutual funds are regulated by the Securities and Exchange Board of India, which helps provide comfort to the investors. SEBI forces transparency on the mutual funds, which helps the investor make an informed choice. SEBI requires the mutual funds to disclose their portfolios at least six monthly, which helps you keep track whether the fund is investing in line with its objectives or not. However, most mutual funds voluntarily declare their portfolio once every month. We will look at some of the risks of investing in a mutual fund and the costs of the same in the next article.
FAMILY OF FUNDS:Many mutual funds are part of a “family of funds” (a group of funds managed by the same company but with different investment objectives). The advantage to this is an option known as an exchange privilege or fund switching. Fund switching has become quite popular as fund companies have made it easy to move your money from one fund to another, usually with only a toll-free telephone call. Switching is an easy and convenient way to take advantage of changing market conditions. If the stock market began to decline, for instance, and your money was in
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Awareness about mutual funds a stock fund, you might consider switching your investment into a money market fund within the same family
DISADVANTAGES OF MUTUAL FUNDS: FLUCTUATING RETURNS:Mutual funds are like many other investments without a guaranteed return. There is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be stellar.
MISLEADING ADVERTISEMENTS:The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small-cap or income. The SEC requires funds to have at least 80% of assets in the particular type of investment implied in their names. The remaining assets are under the discretion solely of the fund manager.
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Awareness about mutual funds The different categories that qualify for the required 80% of the assets, however, may be vague and wide-ranging. A fund can therefore manipulate prospective investors by using names that are attractive and misleading. Instead of labeling itself a small cap, a fund may be sold under the heading growth fund. Or, the "Congo High-Tech Fund" could be sold with the title "International High-Tech Fund".
MUTUAL FUNDS HAVE HIDDEN FEES:If fees were hidden, those hidden fees would certainly be on the list of disadvantages of mutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees. While these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in the mutual fund prospectus and can be found on the mutual funds’ web sites. Many mutual funds do not charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual fund that does not charge the fee. Hidden fees cannot make the list of disadvantages of mutual funds because they are not hidden and there are thousands of mutual funds that do not charge 12b1 fees.
MUTUAL FUNDS LACK LIQUIDITY:How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks and closed-end funds? If you sell a mutual fund, you have access to your cash the day after the sale. ETFs, stocks and closedend funds require you to wait three days after you sell the investment. I would call the “lack of liquidity” disadvantage of mutual funds a myth. You can only find more liquidity if you invest in your mattress.
NO INSURANCE:Mutual funds, although regulated by the government, are not insured against losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible (although extremely unlikely) that you could even lose your entire investment.
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Awareness about mutual funds
DILUTION:Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly.
FEES AND EXPENSES:Most mutual funds charge management and operating fees that pay for the fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell
EVALUATING FUNDS:Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, 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 do you know if one fund is better than another?
POOR PERFORMANCE:Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of critics now question whether or not professional money managers have better stock-picking capabilities than the average investor.
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Awareness about mutual funds
LOSS OF CONTROL:The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for you when trying to manage your portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for you. You also should remember that you trust someone else with your money when you invest in a mutual fund.
MANAGEMENT RISK:When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
LEGAL AND REGULATORY FRAMEWORK
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS
Mutual funds are regulated by the SEBI (Mutual Fund) Regulations,
1996.
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Awareness about mutual funds
SEBI is the regulator of all funds, except offshore (international) funds.
Bank-sponsored mutual funds are jointly regulated by SEBI and RBI permission.
If there is a bank-sponsored fund, it cannot provide a guarantee without RBI permission.
RBI regulates money and government securities markets, in which mutual funds invest.
Listed mutual funds are subject to the listing regulations of stock
exchanges.
Since the AMC and Trustee Company are companies, they are regulated by the Department of Company Affairs. They have to send periodic reports to the ROC (Registrar of Companies) and the CLB (Company Law Board) is the appellate authority.
Investors cannot sue (ask) the trust, as they are the same as the trust and can't sue themselves.
UTI does not have a separate sponsor and AMC.
UTI is governed by the UTI Act, 1963 and is voluntarily under SEBI Regulations.
All the UTI schemes, except US 64 are under dual regulation of both SEBI and the UTI Act.
UTI can borrow as well as lend and also engage in other financial services activities.
SRO (Self Regulatory Organisations) is the second tier in the regulatory structure.
SROs (Self Regulatory Organisations) get their powers from the apex regulating agency and act on their instructions.
SRO (Self Regulatory Organisations) cannot do any legislation on their
own.
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Awareness about mutual funds
All stock exchanges (like National Stock Exchange, Bombay Stock Exchange) are SROs (Self Regulatory Organisations) only.
AMFI (Association of Mutual Funds in India) is an industry association of mutual funds.
AMFI is not yet a SEBI registered SRO. AMFI has created code of conduct for mutual funds.
AMFI aims at increasing investor awareness about mutual funds, encouraging best practices and bringing about high standards of professional behaviour in the industry.
AMFI was incorporated in1995.
AMFI is governed by a board of directors elected from mutual funds and is headed by a full time chairman.
Mutual funds cannot invest more than 10 per cent of the total net assets of a scheme in the short-term deposits of a single bank.
Announcing guidelines for parking of funds in short-term deposits of scheduled commercial banks (SCBs) by mutual funds, the regulator said that investment cap would also take into account the deposit schemes of the bank's subsidiaries.
The SEBI has also defined 'short term' for funds' investment purposes as a period not exceeding 91 days.
Besides, the parking of funds in short-term deposits of all SCBs has been capped at 15 per cent of the net asset value (NAV) of a scheme, which can be raised to 20 per cent with prior approval of the trustees.
The parking of funds in short-term deposits of associate and sponsor SCBs together should not exceed 20 per cent of total deployment by the MF in shortterm deposits.
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Awareness about mutual funds
The SEBI said that these guidelines are aimed at ensuring that funds collected in a scheme are invested as per the investment objective stated in the offer document of an MF scheme.
The new guidelines would be applicable to all fresh investments whether in a new scheme or an existing one. In cases of an existing scheme, where the scheme has already parked funds in short-term deposits, the asset management company has been given three-months time to conform to the new guidelines.
The SEBI has also asked the trustees of a fund to ensure that no funds are parked by a scheme in short term deposit of a bank, which has invested in that particular scheme.
The SEBI guidelines say that asset management companies (AMCs) shall not be permitted to charge any investment and advisory fees for parking of funds in short-term deposits of banks in case of liquid and debt-oriented schemes.
It has also asked the trustees to disclose details of all such funds parked in short-term deposits in half-yearly portfolio statements under a separate heading and has said that AMCs should also certify the same in its bi-monthly compliance test report.
All the short-term deposits by mutual funds should be held in the name of the scheme concerned only, it added.
THE INVESTOR’S RIGHTS & OBLIGATIONS:Investors are mutual, beneficial and proportional owners of the scheme’s assets. The investments are held by the trust in fiduciary capacity (The fiduciary duty is a legal relationship of confidence or Trust between two or more parties). In case of dividend declaration, investors have a right to receive the dividend within 30 days of declaration. On redemption request by
49
Awareness about mutual funds investors, the AMC must dispatch the redemption proceeds within 10 working days of the request. In case the AMC fails to do so, it has to pay an interest @ 15%. This rate may change from time to time subject to regulations. In case the investor fails to claim the redemption proceeds immediately, then the applicable NAV depends upon when the investor claims the redemption proceeds. Investors can obtain relevant information from the trustees and inspect documents like trust deed, investment management agreement, annual reports, offer documents, etc. They must receive audited annual reports within 6 months from the financial year end. Investors can wind up a scheme or even terminate the AMC if unit holders representing 75% of scheme’s assets pass a resolution to that respect. Investors have a right to be informed about changes in the fundamental attributes of a scheme. Fundamental attributes include type of scheme, investment objectives and policies and terms of issue. Lastly, investors can approach the investor relations officer for Grievance redressal. In case the investor does not get appropriate solution, he can approach the investor grievance cell of SEBI. The investor can also sue the trustees. The offer document is a legal document and it is the investor’s obligation to read the OD carefully before investing. The OD contains all the material information that the investor would require to make an informed decision. It contains the risk factors, dividend policy, investment objective, expenses expected to be incurred by the proposed scheme, fund manager’s experience, historical performance of other schemes of the fund and a lot of other vital Information.
INVESTORS RIGHTS AND OBLIGATIONS:INVESTORS RIGHTS:(1) RIGHTS OF PROPORTIONATE “BENEFICIAL OWNERSHIP”:
50
Awareness about mutual funds Unit-holders have the right to beneficial ownership of the scheme’s assets’ otherwise held in trust for them by the trustees of the fund. They also have the right to any dividend or income declared under the scheme. The right to assets, income etc. is in proportion that the units held by the unit holder bears to the total number of the fund units issued and outstanding. Unit-holders have the option to nominate a person in whom all the beneficial ownership rights in the units will vest in the event of his/her death.
(2) RIGHT TO TIMELY SERVICE:Unit-holders are entitled to receive dividend warrants within 30 days of the dividend declaration. Unit-holders have the right to payment of interest at a rate specified by SEBI in the event of failure von the part of the mutual fund to dispatch the redemption or repurchase proceeds within 10 working days. Such interest must be borne by the AMC. Where any investor has failed to claim redemption proceeds or dividends due to him/her, the investor has the right to do so within a period of three years of the due date at a prevailing NAV. After three years, he will be paid at the NAV applicable at the end of the third year. For initial offers in case of open-end schemes, investors have a right to expect the allotment of units and dispatch of account statement to be completed within 30 days from the closure of the issue. Besides the scheme must open ongoing sale and repurchase within 30 days from the closure of the initial offer period. Investors also have the right to receive compensation from the AMC representing the differences in NAV amounts in cases where there has been a variation in NAV calculations on accounts of non-recording of any transaction /s in the scheme accounts in certain cases.
(3) RIGHT TO INFORMATION:-
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Awareness about mutual funds Unit-holders have the right to obtain from the trustees any information that may have an adverse bearing on their investments. Unit-holders have the right to inspect major documents of the fund. Such documents include material contracts (the trust deed, the investment management agreement, the custodian services agreement and the registrar and transfer agency agreement), memorandum and articles of association of the AMC, recent audited financial statements, the texts of SEBI (MF) Regulations, Indian Trusts Act and the offer document of the scheme. Each unit holder has the right to receive a copy of the annual financial statements. Each unit holder has a right to receive a complete statement of scheme portfolio before the expiry of one month from the close of each half year (31st March and 30th September), unless such statement of portfolio is published in one English daily circulating whole of India and in a newspaper published in the language of the region where the head office of the mutual fund is situated.
(4) RIGHT TO WIND UP A SCHEME:Investors can demand the Trustees to wind up a scheme prior to its earlier fixed duration and repay to the investors, if 75% of the investors pass a resolution to this effect. This right applies to both closed ended funds and closed-end or open-end fixed term plan series.
(5) RIGHT TO TERMINATE AMC:The appointment of an AMC of a fund can be terminated by 75% of the unit – holders of the scheme with the prior approval of SEBI.
INVESTORS OBLIGATIONS:It is the investor’s duty to carefully study the offer document before investing in units of scheme. He must appreciate the fundamental attributes of the scheme, the risk factors, his rights and the fund’s and the sponsor’s track record. Failure to
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Awareness about mutual funds effectively study the offer document does not entitle him later to have recourse to the fund, the trustees or the AMC. While applying for a fund investment, the investors are now required by SEBI to mention their Permanent Account Number (or GIR number where PAN has not been allotted), if the application for purchasing units is for Rs.50,000 or more, besides being required to provide their bank account details in the application. The investor must later monitor his investment in a scheme by carefully studying the scheme’s financial statements, its portfolio composition and research reports published by mutual fund tracking agencies. He can certainly exercise in a reasonable way his right to ask the trustees for information that he requires. But, the monitoring is entirely the investor’s own responsibility.
FACILITIES AVAILABLE TO INVESTORS:-
REPURCHASE FACILITIES:The units of closed ended schemes must be compulsorily listed in the recognized stock exchanges. Such units can be brought or sold at market prices. 53
Awareness about mutual funds But, units of open ended schemes are not at all listed and hence they have to be brought only from the fund. So, the fund reserves the buyback the units from its members. This process of buying back of units from investors by the fund is called repurchase facility.
REISSUE FACILITIES:In the case of open ended schemes, units can be brought only from the fund not in the open market. The units bought fro the investors are again reissued to those who are interested in purchasing them. The price fixed for this purpose is called re-issue price.
ROLL OVER FACILITIES:At time of redemption, the investor is given an option to reinvest his entire investment once again for another term. An investor can overcome an adverse market conditions prevailing at the time of redemption by resorting to this Roll over facility. This is applicable in the case of close ended funds.
LATERAL SHIFTING FACILITIES:Some mutual funds permit the investors to shift from one scheme to another on the basis of NET ASSET VALUES with a view to providing total flexibility in their operation. This is done without any discount on the fund and without any additional charges. This is a great privilege given to the investors. This shifting is called ‘lateral shifting’.
COMMON PLATFORM FOR MUTUAL FUNDS:In order to improve the operational and service efficiency of mutual funds, a committee established under Association of Mutual Funds in India (AMFI) is
54
Awareness about mutual funds planning a Common Industry Platform. The objective is to enhance the convenience of distributors and investors. Everything will now be available to them at the click of a button — so all they will have to do is to go online to check the NAV status of the fund or buy or sell funds. The common platform will be operational by the end of March 2010. The new platform will ensure better accessibility to the investors, ease of operation for the distributors and reduce the cost and increase the penetration of asset management companies (AMCs). “Today ore than 50 per cent of the savings go to the banks, nearly 17 percent to insurance and just 7.7 per cent come to mutual funds. By and large, the penetration of mutual funds is low. Moreover, the operating profits in India are 6 basis points lower than the global average and this is mainly due to the high operating costs. The common platform will help in reducing the cost and will offer improved services to the investors,” says Jaideep Bhattacharya, CMO, UTI AMC, who is also the chairman of the panel on the Common Industry Platform for AMFI.
Convenience will be enhanced for investors through this platform as it will give them multiple choices of transaction such as through banks, post offices, distributors, online, direct or through mobile platforms. Moreover, there will be a single point of access and investors will be able to obtain a single or a consolidated statement of all their accounts. As far as the distributors are concerned, 60 percent of their time is consumed in operation and only 40 percent is utilised for sales. The new platform intends to reduce the operation time and increase the sales time, thereby increasing the efficiency of the distributors.
NET ASSET VALUE:The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV).
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Awareness about mutual funds
The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquefied, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV ignoring the “per unit”. We also abide by the same convention. Mutual Funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on a day to day basis The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a Mutual Fund scheme is INR20m and the Mutual Fund has issued ten million units of INR10 each to the investors, then the NAV per unit of the fund is INR20. NAV is required to be disclosed by the Mutual Funds. The Net Asset Value is the fund’s share price. The NAV is calculated by dividing the current value of the portfolio by the number of fund units (shares) outstanding. NAV for most funds is calculated on daily basis and is available in daily financial papers. Funds on a regular basis - daily or weekly - depending on the type of scheme.
CALCULATION OF NAV:The Term Net Asset Value (NAV) is used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund.
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Awareness about mutual funds The value of a collective investment fund based on the market price of securities held in its portfolio. Units in open ended funds are valued using this measure. Closed ended investment trusts have a net asset value but have a separate market value. NAV per share is calculated by dividing this figure by the number of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV. Calculating NAVs - Calculating mutual fund net asset values is easy. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.
Net Asset Value (NAV) Formula value of fund = Net Asset Value (NAV) number of shares
Net Asset Value (NAV) Example Rs.50,00,000 total fund value = Rs.50 per share 100,000 shares
FUTURE OF MUTUAL FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION country with a bigFUNDS the OF MUTUAL bang. With Mutual funds have arrived in the
fast increasing number of unit holding accounts, investor service is likely to become a
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Awareness about mutual funds key area of concern for mutual funds in future. Banking and postal systems, two main infrastructural support services, will have to place in line with mutual funds. On their part, Mutual Funds will take advantage of computer and with the growth of mutual funds, their shareholding in relatively good companies, would tend to increase progressively, which may give rise to fear of destabilization among management and industrial group. Introduction of non-voting shares for mutual funds and lowering 0f debt-equity ratio will help these apprehensions. Non-voting shares would ensure that Mutual Funds are not misused for takeover or any such destabilizing and unhealthy activity. Growth of Mutual Funds in future will depend on the growth of household savings, buoyancy of capital market, number of instruments and penetration of mutual funds in the rural areas. Success of mutual funds, however, will depend on product innovation, marketing, customer service and investor relations, fund management, liquidity and competitive yield. These, in turn, will depend on customer oriented work culture and committed manpower as well as professional management of funds. Thus, once Mutual Funds succeed in achieving these objectives and gain credibility and faith among the common man, they are going to be a very significant force in financial sector. However, mutual funds can suffer from one major disadvantage. Despite the security a large fund offers by virtue of its size, the larger it grows, the less nimble it tends to become. As investments gain size, operations become more difficult. It becomes difficult for large funds to be purchase, as they often trigger off a bull signal. But if the yield is lower than market indices, it points to problems. These may be temporary in nature, or could point to a deeper malaise
As the funds grew in number, size and variety, some adverse comments have of late been made about their impact on the capital market. Some experts have opined that overtrading indulged in by several funds may result in losses and erosion of their credibility in the market. There are, however, optimists who are confident of the professional expertise of the funds management. Now that Indian capital market has developed considerably, the Funds will able to give investors the promised return and 58
Awareness about mutual funds growth. India being a country of continental size with large population and great diversity of investing population, there is tremendous need and scope for a large variety of mutual funds in the country. It is felt that so long as mutual funds are able to give marginally higher returns than are available from other risk investments, their survival and growth are fully assured in the years to come and they occupy important place in the Indian savings and capital market.
FUTURE OF MUTUAL FUNDS IN INDIA - AN OVERVIEW
Financial experts believe that the future of Mutual Funds in India will be very bright. It has been estimated that by March-end of 2010, the mutual fund industry of India will reach Rs 40,90,000 crore, taking into account the total assets of the Indian commercial banks. The estimation was based on the December 2004 asset value of Rs 1, 50,537 crore. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9% annually. Based on the current rate of growth, it can be forecasted that the mutual fund assets will be double by 2010.
INDIAN MUTUAL FUNDS FUTURE - GROWTH FACTS
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Awareness about mutual funds
In the past 6 years, Mutual Funds in India have recorded a growth of
100 %.
In India, the rate of saving is 23 %.
In the future, there lies a big scope for the Indian Mutual Funds industry to expand. Several asset management companies which are foreign based are now entering the Indian markets. A number of commodity Mutual Funds will be introduced in the future. The SEBI (Securities Exchange Board of India) has granted the permission for the same.
More emphasis is put on the effective Mutual Funds governance.
There is also enough scope for the Indian Mutual funds to enter into the semiurban and rural areas. Financial planners will play a major role in the Mutual Funds market by providing people with proper financial planning.
Looking at the past developments and combining it with the current trends it can be concluded that the future of Mutual Funds in India has lot of positive things to offer to its investors.
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Awareness about mutual funds
COMMON PLATFORM FOR MUTUAL FUNDS:In order to improve the operational and service efficiency of mutual funds, a committee established under Association of Mutual Funds in India (AMFI) is planning a Common Industry Platform. The objective is to enhance the convenience of distributors and investors. Everything will now be available to them at the click of a button — so all they will have to do is to go online to check the NAV status of the fund or buy or sell funds. The common platform will be operational by the end of March 2010. The new platform will ensure better accessibility to the investors, ease of operation for the distributors and reduce the cost and increase the penetration of asset management companies (AMCs). “Today ore than 50 per cent of the savings go to the banks, nearly 17 percent to insurance and just 7.7 per cent come to mutual funds. By and large, the penetration of mutual funds is low. Moreover, the operating profits in India are 6 basis points lower than the global average and this is mainly due to the high operating costs. The common platform will help in reducing the cost and will offer improved services to the investors,” says Jaideep Bhattacharya, CMO,UTI AMC, who is also the chairman of the panel on the Common Industry Platform for AMFI.
Convenience will be enhanced for investors through this platform as it will give them multiple choices of transaction such as through banks, post offices, distributors, online, direct or through mobile platforms. Moreover, there will be a single point of access and investors will be able to obtain a single or a consolidated statement of all their accounts. As far as the distributors are concerned, 60 percent of their time is consumed in operation and only 40 percent is utilised for sales. The new platform intends to reduce the operation time and increase the sales time, thereby increasing the efficiency of the distributors.
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CONCLUSION mutual funds Awareness about
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS For carrying out1 INTRODUCTION possible, the information has been CHAPTER this project in best way OF MUTUAL FUNDS accumulated on mutual funds, current market etc. and studied the market scenario
through interaction with individual, agents, distributors etc. of mutual funds and conducting survey of people. Having done all this, I conclude by saying that:The awareness and knowledge about the concept and existence of mutual funds amongst the common public appears to be good and adequate. This necessitates adoption of more innovative and vigorous marketing strategy on the part of mutual companies. Mutual funds act as a vehicle in galvanizing the savings of the people by offering various schemes suitable to various classes of customers for the development of economy as a whole. A number of schemes are being offered by Mutual Funds so as to meet the varied requirements of the masses, and thus, savings are directed towards capital investments directly. In the absence of Mutual Funds, these savings would have remained idle. Thus, the whole economy benefits due to cost efficient and optimum use and allocation of scarce financial and real resources in the economy for its speedy development. The recent biggest economic crisis in US has claimed a number of Wall Street biggies and is threatening even the European Union. Ramification of the same is felt in India too. The prevailing circumstances will several lessons for the investor but will not drive them away from mutual funds in the wake failing returns because they are still among the best investment avenues available to them. The primary of the lessons learnt is, not to chase returns. One of the biggest flaws in the process of investing is to chase the performance of funds alone. While they do give an indication to how well a fund can perform, they still remain just indicative, for all good reasons. Investors should not be influenced only by shortterm performance of any schemes.
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QUESTIONAIRE OFAwareness about mutual funds MUTUAL FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL 1) Are you aware about Mutual FUNDS Funds?
1. YES 2. NO
YE S
N O
2) If Yes, Have you ever invested in Mutual funds? 1. YES 2. NO
YS E N O
3) What is your primary objective for your investment? 1. PRESERVATION OF PRINCIPAL 2. 3. 4. CURRENT INCOME GROWTH INCOME
P EE V T N RSR AIO O P IN IP L F R CA C RE T U RN IN O E CM GO T R WH IN O E CM
CONSERVATIVE INCOME
4) Name of the company where you have invested? 1. SBI 2. HDFC 3. RELIANCE 4. LIC
SI B HF DC RL N E EIA C L IC
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Awareness about mutual funds
5) How long do you want to invest? 1. 1 YEAR 2. 2 TO 5 YEAR 3. 6 TO 10 YEAR 4. 11 TO 20 YEAR
1Y EA R 2-5Y EA RS 6-10years 11-20years
6) Being a Mutual Fund Investor, Are you aware of the various schemes offered by the Asset Management Companies? 1. MOST 2. SOME 3. VERY FEW
MOST SOME VERY FEW
7) Would you be interested to know more about Mutual Funds? 1. YES 2. NO
YS E N O
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Awareness about mutual funds
8) Which of the following has the lowest risk? 1. 2. 3. 4. LIQUID FUND (MMMF) GILT FUND
GILT
LIQUID
DIVERSIFIED DEBT FUND DIVERSIFIED EQUITY FUND
DIVERSIFIED DEBT DIVERSIFIED EQUITY
9) Which of the following has the highest level of liquidity? 1. 2. 3. 4. EQUITY PPF COMPANY FIXED DEPOSITS MUTUAL FUNDS
EQUITY PPF COM PANIED FD M UTUAL FUNDS
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CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS INTRODUCTION OF MUTUAL FUNDS:-
Awareness about mutual funds
A mutual fund is a company that invests in a diversified portfolio of securities. People who buy shares of a mutual fund are its owners or shareholders. Their investments provide the money for a mutual fund to buy securities such as stocks and bonds. A mutual fund can make money from its securities in two ways: a Security can pay dividends or interest to the fund or a security can rise in value. A fund can also lose money and drop in value. Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. A mutual fund pools the money of many investors to invest in a variety of stocks, bonds or other securities. Each fund has its own investment Objective, with some funds investing more aggressively and others Investing more conservatively. When you invest money in a mutual fund, you receive shares of the fund. Each share represents an interest in the fund’s portfolio and the value of your mutual fund shares will raise and fall depending upon the performance of the securities in the portfolio. While the returns of mutual funds are not guaranteed, they do offer many advantages, especially for the inexperienced investor. Mutual Funds allow you to invest in a variety of industries and investments, performance of the securities in the portfolio which may be difficult to do individually without having large amounts of money to invest. The purpose of this publication is to help you understand how mutual funds work and assist you in selecting funds to create a well-balanced Portfolio. Pools the money of many investors to invest in a variety of stocks, Bonds or other securities A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, Bonds, short- term money market instrument and other securities. Mutual funds have a fund manager who invests the money on beta. lf of the investors by buying / selling stocks, bonds etc.
1
Awareness about mutual funds Currently, the worldwide value of all mutual funds totals more than $US 26 trillion. The United States leads with the number of mutual fund schemes. There are more than 8000 mutual fund schemes in the U.S.A. Comparatively, India has around 1000 mutual fund schemes, but this number has grown exponentially in the last few years. The Total Assets under Management in India of all Mutual funds put together touched a peak of Rs. 5, 44,535 crs. at the end of August 2008. There are various investment avenues available to an investor such as real estate, bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more type of Investment Avenue available to investors. There are many reasons why investors prefer mutual funds. Buying shares directly from the market is one way of investing. But this requires spending time to find out the performance of the company whose share is being purchased, understanding the future business prospects of the company, finding out the track record of the promoters and the dividend, bonus issue history of the company etc. An informed investor needs to do research before investing. However, many investors find it cumbersome and time consuming to pore over so much of information, get access to so much of details before investing in the shares. Investors therefore prefer the mutual fund route. They invest in a mutual fund scheme which in turn takes the responsibility of investing in stocks and shares after due analysis and research. The investor need not bother with researching hundreds of stocks. It leaves it to the mutual fund and its professional fund management team. Another reason why investors prefer mutual funds is because mutual funds offer diversification. An investor’s money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the sectors. This diversification investor’s portfolio across different companies and
helps in reducing the overall risk of the portfolio. It is also less expensive to invest in a mutual fund since the minimum investment amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be able to buy only a few stocks and not get the desired diversification. These are some of the reasons why mutual funds have gained in popularity over the years.
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Awareness about mutual funds
HISTORY OF MUTUAL FUNDS:The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management. Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores. Third Phase – 1993-2003 (Entry of Private Sector Funds) with the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,
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Awareness about mutual funds 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. The graph indicates the growth of assets over the years.
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Awareness about mutual funds
CONCEPT OF MUTUAL FUNDS:A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.
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Awareness about mutual funds
DEFINITION OF MUTUAL FUNDS:The securities and exchange board of India regulations, 1993 defines “a mutual fund as a fund establish in the form of the trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations”. According to Weston j. Fred and Brigham, Eugene f., unit trusts are “corporations which accept dollars from savers and then use this dollar to buy stock, long term bonds, short term debt instruments issued by business or government units; these corporations pool funds and thus reduce risk by diversification” Thus a 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. The flow chart below describes broadly the working of a mutual fund:
Mutual Fund Operations Flow Chart
6
Awareness about mutual ORGANISATION OF A MUTUAL funds
FUND
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS
There CHAPTER 1 INTRODUCTION OF MUTUAL FUNDSorganisational are many entities involved and the diagram below illustrates the set up of a mutual fund:
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS
ORGANISATION OF A 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. SEBI Regulations require that 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. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
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Awareness about mutual funds
A TYPICAL MUTUAL FUND IN INDIA HAS THE FOLLOWING CONSTITUENTS:◘ FUND SPONSOR:A ‘sponsor’ is a person who, acting alone or in combination with another corporate body, establishes a MF. In order to register with SEBI as MF, the sponsor should have a sound financial track record of over five years and general reputation of fairness and integrity in all his business transaction. The sponsor should contribute at least 40% of the net worth of the AMC.The sponsor initiates the idea to set up a mutual fund. It could be a registered company, scheduled bank or financial institution. For Birla Mutual Fund, the sponsor is Birla Growth Funds. In a joint venture like Sun F&C Mutual Fund, Foreign & Colonial Emerging Markets is the sponsor and SUN Securities (India) Ltd, the co-sponsor. A sponsor has to satisfy certain conditions, such as on capital, track record (at least five years' operation in financial services), default-free dealings and a general reputation of fairness. The sponsor appoints the trustees, AMC and custodian. Once the AMC is formed, the sponsor is just a stakeholder. However, sponsors do play a key role in bailing out an AMC during a crisis
◘ MUTUAL FUND:A MF is established in the form of a trust under the Indian Trusts Act, 1882. The instrument of trust is executed by the sponsor in favour of trustees and is registered under the Indian Registration act, 1908. The investor subscribes to the units issued by the Mutual Funds. These assets are held by the trustee for the benefit of unit holders.
◘ TRUSTEES:The MF can either be managed by the Board of Trustees, which is the body of individuals, or by Trust Company, which is the corporate body. Most of the funds 8
Awareness about mutual funds in India are managed by a Board of Trustees. The trustees are appointed with the approval of SEBI. The Trustees, however, do not directly manage the portfolio of MF. It is managed by the AMC as per the defined objectives. Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Sometimes, as with Canara Bank, the trustee and the sponsor are the same. For others, like SBI Funds Management, State Bank of India is the sponsor and SBI Capital Markets the trustee. Trustees float and market schemes, and secure necessary approvals. They check if the AMC's investments are within defined limits, whether the fund's assets are protected, and also ensure that unit holders get their due returns. Trustees also review any due diligence done by the AMC. For major decisions concerning the fund, they have to take unit holders' consent. They submit reports every six months to SEBI; investors get an annual report. Trustees are paid annually out of the fund's assets -- 0.05 per cent of the weekly average net asset value.
◘ ASSET MANAGEMENT COMPANY:The AMC, appointed by the sponsor or the Trustees and approved by SEBI, acts like the investment manager of the Trust. The AMC should have at least a net worth of Rs. 10 crore. It functions under the supervision of its Board of Directors, Trustees and the SEBI. The regulations require non-interfering relationship between the fund sponsors, trustees, custodians and AMC. The AMC appoints distributors or brokers to sell units on behalf of the Fund, also serve as investment advisers. They are the ones who manage your money. An AMC takes investment decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes and secondary market unit transactions. It also exercises due diligence on investments, and submits quarterly reports to the trustees. A fund's AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below Rs 10 crore. And, its fee should not exceed 1.25 per cent if collections are below Rs 100 crore and 1 per cent if collections are above Rs 100 crore. SEBI can pull up an AMC if it deviates from its prescribed role.
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Awareness about mutual funds
◘ CUSTODIAN:
Often an independent organisation, it takes custody of securities and other assets of a mutual fund. Among public sector mutual funds, the sponsor or trustee generally also acts as the custodian. A custodian's responsibilities include receipt and delivery of securities, collecting income, distributing dividends, safekeeping of units and segregating assets and settlements between schemes. Their charges range between 0.15-0.2 per cent of the net value of the holding. Custodians can service more than one fund.
STRUCTURE OF MUTUAL FUNDS:For anybody to become well aware about mutual funds, it is imperative for him or her to know the structure of a mutual fund. How does a mutual fund come into being? Who are the important people in a mutual fund? What are their roles? etc. We will start our understanding by looking at the mutual fund structure in brief. Mutual Funds in India follow a 3- tier structure. There is a Sponsor (the First tier), who thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI), which are the market regulator and also the regulator for mutual funds. Not every one can start a mutual fund. SEBI checks whether the person is of integrity, whether he has enough experience in the financial sector, his net worth etc. Once SEBI is convinced, the sponsor creates a Public Trust (the Second tier) as per the Indian Trusts Act, 1882. Trusts have no legal identity in India and cannot enter into contracts, hence the Trustees are the people authorized to act on behalf of the Trust. Contracts are entered into in the name of the Trustees. Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund. It is important to understand the difference between the Sponsor and the Trust. They are two separate entities. Sponsor is not the Trust; i.e. Sponsor is not the Mutual Fund. It is the Trust which is the Mutual Fund. The Trustees role is not to manage the money. 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.
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ROLE AND IMPORTANCE OF Awareness about mutual funds MUTUAL FUNDS
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS IMPORTANCE:- 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER
When you invest in a mutual fund, you are investing in a company that, in turn, buys shares of stock and debt obligations issued by companies and governments. Mutual funds are called pass-through investments since federal law requires them to distribute, or "pass through," most of the earnings on their investments to shareholders. Mutual funds have been around since the 1920s and are regulated by the Investment Company Act of 1940.A mutual fund sells you shares of itself to raise cash. The fund invests these proceeds in a portfolio of securities. These securities are also referred to as a portfolio's holdings. A team of professional fund managers and analysts is tasked with managing a mutual fund. The team selects individual securities that have the risk-return characteristics that are consistent with the fund's investment strategy. The fund team monitors the investment performance of the portfolio daily. If one of the portfolio's holdings falls out of favor, the team may sell the security and buy another. Alternatively, instead of immediately reinvesting the cash elsewhere, it may decide to park the money temporarily and earn a risk-free interest rate until a better investment opportunity comes along. 1) WIDE PORTFOLIO INVESTMENT:Small and medium investors used to burn their fingers in stock exchange operations with a relatively modest outlay. If they invest in a select few shares, some may even sink without a trace never to rise again. Now, these investors can enjoy wide portfolio investment held by mutual fund. 2) OFFERING TAX BENEFITS:Certain fund offers tax benefits to its customers. Thus, apart from dividend, interest and capital appreciation, investors also stand to get the benefit of tax concession.
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Awareness about mutual funds
3) SUPPORTING CAPITAL MARKET:Mutual funds play a vital role in supporting the development of capital markets. The mutual funds make the capital market active by means of providing a sustainable domestic source of demand for capital market instruments. In other words, the savings of the people are directed towards investments in capital market through these mutual funds. 4) CHANNELISING SAVINGS FOR INVESTMENT:Mutual funds act as a vehicle in galvanizing the savings of the people by offering various schemes to the various classes of customers for the development of the economy as a whole. A number of schemes are being offered by Mutual Funds so as to meet the varied requirements of the masses, and thus, savings are directed towards capital investments directly. 5) PROVIDING BETTER YIELDS:The pooling of funds from a large number of customers enables the fund to have large funds at its disposal. Due to these large funds are able to buy cheaper and sell dearer than the small and medium investors. Thus they are able to command better yields to their customers. They also enjoy the economies of large scale and can reduce the cost of capital market participation. 6) PROMOTE INDUSTRIAL DEVELOPMENT:The economic development of any nation depends upon its industrial advancement and agricultural development. All industrial units have to raise their funds by resorting to the capital market by the issue of shares and debentures.
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7) RENDERING EXPERTISED SERVICE AT LOW COST:The management of the fund is generally assigned to professionals who are well trained and have experience in the field of investment. The investments decisions of these professionals are always backed by informed judgment and experience. Thus investors are assured of quality services in their best interest. 8) PROVIDING RESEARCH SERVICE:A mutual fund is able to command vast resources and hence it is possible for it to have an in-depth study and carry out research on corporate securities. Each fund maintains a large research team which constantly analyses the companies and the industries, recommends the fund to buy or sell particular share. 9) INTRODUCING FLEXIBLE INVESTMENT SCHEDULE:Some mutual funds have permitted the investors to exchange their units from one scheme to another and this flexibility is a great boon to investors. Income units can be exchanged for growth units depending upon the performances of the funds. 10)
REDUCING THE MARKETING COST OF NEW ISSUES:Moreover the mutual funds help to reduce the marketing cost of new issues. The promoters used to alloy a major share of Initial Public Offering to the mutual funds and thus they are saved from the marketing cost of such issues.
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11)
SIMPIFIED RECORD KEEPING:An investor with just an investment in 500 shares or so in 3 or 4 companies has to keep proper records of dividend payments, bonus issues, price movements, purchase or sale instruction, brokerage or related items. It is very tedious and consumes a lot of time. One may even forget to record the right issue and may have to forfeit the same. Thus, record keeping is the biggest problem for small and medium investors.
12)
ACTING
AS
SUBSTITUTE
FOR
INITIAL
PUBLIC
OFFERINGS:
In most cases investors are not able to get allotment in IPO’s of companies because they are often oversubscribed many times. Moreover they have to apply for minimum of 500 shares which is very difficult particularly for small investors. But, in mutual funds, allotment is more or less guaranteed.
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Awareness about mutual funds
TYPES OF MUTUAL FUNDS
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS
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Awareness about mutual funds
TYPES OF MUTUAL FUNDS:1. On The Basis Of Execution & Operation. 2. On The Basis Of yield & Investment Pattern.
ON THE BASIS OF EXECUTION & OPERATION:A. CLOSE-ENDED FUNDS:Under this scheme, the corpus of the fund and its duration are prefixed. In other words, the corpus of the fund and the number of units are determined in advance. Once the subscription reaches the predetermined level, the entry of investors is closed. After the expiry of the fixed period, the entire corpus is disinvested and the proceeds are distributed to the various unit holders in proportion to their holding. Thus, the fund ceases to be a fund, after the final distribution. A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. 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 they are listed. Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.
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Awareness about mutual funds
B. OPEN-ENDED FUNDS:It is just the opposite of close ended funds. Under this scheme, the size of the fund and the period of the fund are not pre-determined. The investors are free to buy and sell any number of units at any point of time. For instance, the Unit Scheme (1964) of the Unit Trust of India is an open-ended one, both in terms period and target amount. Anybody can buy this unit at any time and sell it also at any time at his discretion. Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value. Open-end funds are required to calculate their net asset value (NAV) daily. Since the NAV of an open-end fund is calculated daily, it serves as a useful measure of its fair market value on a per-share basis. The NAV of the fund is calculated by dividing the fund's assets minus liabilities by the number of shares outstanding. Open-end funds usually charge an entry or exit load from the investors. Most of the open-end funds are actively managed and the fund manager picks the stocks as per the objective of the fund. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations. Some of the benefits of open-end funds include diversification, professional money management, liquidity and convenience. But open-end funds have one negative as compared to closed-end funds. Since open-end funds are constantly under redemption
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Awareness about mutual funds pressure, they always have to keep a certain amount of money in cash, which they otherwise would have invested. This lowers the potential returns.
ON THE BASIS OF YIELD AND INVESTMENT:I. EQUITY FUNDS:Equity Funds are defined as those funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities. This is important from taxation point of view, as funds investing 100% in international equities are also equity funds from the investors’ asset allocation point of view, but the tax laws do not recognize these funds as Equity Funds and hence investors have to pay tax on the Long Term Capital Gains made from such investments (which they do not have to in case of equity funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities).
AGGRESSIVE GROWTH FUNDS:These funds are just the opposite of bond
funds. These funds are capital gains oriented and thus the thrust area of these funds is ‘capital gains’. Hence these funds are generally invested in speculative stocks. In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds. GROWTH FUNDS (Growth Oriented Funds):Unlike the income funds, growth funds concentrate mainly on long run gains i.e. capital appreciation. They do not offer regular income and they aim at capital appreciation in the long run. Hence, they have been described as “Nest Eggs” investments. Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future. 18
Awareness about mutual funds
EQUITY INCOME OR DIVIDEND YIELD:As the very name suggests, this Fund aims at generating and distributing regular income to the members on a periodical basis. It concentrates more on the distribution of regular return is higher than that of the income from bank deposits. The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.
DIVERSIFIED EQUITY FUNDS (ELSS):Equity Linked Savings Schemes (ELSS) are equity schemes, where investors get tax benefit upto Rs. 1 Lakh under section 80C of the Income Tax Act. These are open ended schemes but have a lock in period of 3 years. These schemes serve the dual purpose of equity investing as well as tax planning for the investor; however it must be noted that investors cannot, under any circumstances, get their money back before 3 years are over from the date of investment.
EQUITY INDEX FUNDS:Equity Schemes come in many variants and thus can be segregated according to their risk levels. At the lowest end of the equity funds risk – return matrix come the index funds while at the highest end come the sectoral schemes or Specialty schemes. These schemes are the riskiest amongst all types Schemes as well. However, since equities as an asset class are risky, there are no guaranteeing returns for any type of fund. Index Funds invest in stocks comprising indices, such as the Nifty 50, which is a broad based index comprising 50 stocks. There can be funds on other indices which have a large number of stocks such as the CNX Midcap 100 or S&P CNX 500. Here the investment is spread across a large 19
Awareness about mutual funds number of stocks. In India today we find many index funds based on the Nifty 50 index, which comprises large, liquid and blue chip 50 stocks.
VALUE FUNDS: Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced SPECIALISED FUNDS:Besides the above, a large number of specialized funds are in existence abroad. They offer special schemes so as to meet the specific needs of specific categories of people like pensioners, widows, etc. There are also funds for investments in securities of specified area. For instance Japan fund, South Korea fund, etc. Again, certain funds may be confined to one particular sector or industry like fertilizer, automobiles, petroleum, etc. These funds carry heavy risks since the entire investors who prefer this type of fund, of course, in such cases; the rewards may commensurate with the risk taken. The best example of this type is the Petroleum Industry Funds in the USA.
•
SECTOR FUNDS:Funds that invest in stocks from a single sector or related
sectors are called Sectoral funds. Examples of such funds are IT Funds, Pharma Funds, Infrastructure Funds, etc. Regulations do not permit funds to invest over 10% of their Net Asset Value in a single company. This is to ensure that schemes are 20
Awareness about mutual funds diversified enough and investors are not subjected to undue risk. This regulation is relaxed for sectoral funds and index funds. •
FOREIGN SECURITIES FUNDS:Foreign Securities Equity Funds have the option to invest in one or
more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk. •
MID-CAP OR SMALL-CAP FUNDS:Funds that invest in companies having lower market capitalization
than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky. •
OPTION INCOME FUNDS:While not yet available in India, Option Income Funds write
options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.
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Awareness about mutual funds
II. MONEY-MARKET MUTUAL FUNDS (MMMFS):These funds are basically open ended mutual funds and as such they have all features of the open ended fund. But, they invest in highly liquid and safe securities like commercial paper, banker’s acceptances, certificates of deposits, treasury bills, etc. These instruments are called money market instruments. They take place of shares, debentures and bonds in a capital market. They pay money market rates of interest. These funds are called ‘money funds’ in the USA and they have been functioning since 1972. Investors generally use it as a “Parking Place” or stop gap arrangements for their cash resources till they finally decide about the proper avenue for their investment i.e., long term financial assets like bonds and stocks. Since MMMFs are a new concept in India, the RBI has laid down certain stringent regulations. For instance, the entry to MMMFs is restricted only to scheduled commercial banks and their subsidiaries.
III. HYBRID FUNDS:As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:
BALANCED FUNDS:This is otherwise called “income-cum-growth” fund. It is nothing but a combination of both income and growth funds. It aims at distributing regular income as well as capital appreciation. This is achieved by balancing the investments between the high growth equity shares and also the fixed income earning securities GROWTH-AND-INCOME FUNDS:Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for 22
Awareness about mutual funds capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.
ASSET ALLOCATION FUNDS:Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.
DEBT/INCOME FUNDS:Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds:
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Awareness about mutual funds
DIVERSIFIED DEBT FUNDS:Debt funds that invest in all securities issued by entities belonging to all
sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.
FOCUSED DEBT FUNDS:Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.
HIGH YIELD DEBT FUNDS:As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors.
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Awareness about mutual funds
ASSURED RETURN FUNDS:Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible.
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 intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period.
IV. GILT FUNDS:Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change
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Awareness about mutual funds in the NAV of debt/gilt funds in an opposite direction.
V. OTHERS:Other types of Mutual Funds are as follows:
COMMODITY FUNDS:Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds.
REAL ESTATE FUNDS:Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation.
EXCHANGE TRADED FUNDS (ETFS):Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked
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Awareness about mutual funds prices) at the same time. Recently introduced in India, these funds are quite popular abroad.
FUND OF FUNDS:Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.
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TYPES OF RISK
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL
1) MARKET CHAPTER 1 INTRODUCTION OF MUTUAL RISK:-
FUNDS
FUNDS In general there are certain risks associated with every kind
of investment on shares. They are called as market risk. These market risks can be reduced, but cannot be eliminated even by a good investment management. The prices of the shares are subject to wide price fluctuations depending upon market conditions over which nobody has a control. Moreover, every economy has to pass through a cycle-Boom, Recession, Slump and Recovery. The phase of the business cycle affects the market conditions to a larger extent. 2) SCHEME RISK:There are certain risks inherent in the scheme itself. It all depends upon the nature of the scheme. For instance, in a pure growth scheme, risks are greater. It is obvious because if one expects more returns as in case of a growth scheme, one has to take more risks. 3) INVESTMENT RISK:Whether the mutual funds makes money in shares or losses depends upon the investment expertise of the Asset Management Company (AMC). If the investment advice goes wrong, the fund has to suffer a lot. The investment expertise of various funds different and it is reflected on the returns which they offer to investors.
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Awareness about mutual funds 4) BUSSINESS RISK:The corpus of the mutual fund might have been invested in a company’s shares. If the business of that company suffers any set back, it cannot declare any dividend. It may even go to the extent of winding up its business. Through the mutual fund can withstand such a risk, its incoming paying capacity is affected.
5) POLITICAL RISKS:SUCCESSIVE Governments bring with them fancy new economic ideologies and policies. It is often said many economic decisions are politically motivated. Changes in government bring in the risk of uncertainty which every player in the financial service industry has to face. So mutual funds are no exception to it. 6) INTEREST RATE RISK:This risk can be reduced by adjusting the maturity of the debt fund portfolio, i.e. the Buyer of the debt paper would buy debt paper of lesser maturity so that when the paper matures; he can buy newer paper with higher interest rates. So, if the investor expects interest rates to rise; he would be better off giving short term Loans (when an investor buys a debt paper, he essentially gives a loan to the issuer of the paper). By giving a short-term loan, he would receive his Money back in a short period of time. As interest rates would have risen by then, he would be able to give another loan (again short term), this time at the new higher interest rates. Thus in a rising interest rate scenario, the investor can reduce interest rate risk by investing in debt paper of extremely short-term maturity. 7) INVESTOR PSYCHOLOGY RISK:The investor psychology is such that most of the investors, be it Mutual Fund Investors or Direct Capital Market Investors, behave like reactionaries. E.g. they enter the market when the share prices starts rising and they get panicky & exit as soon as share prices starts falling. Therefore, whether it is shares of company or mutual fund unit investors, investors resort to selling their investments when
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Awareness about mutual funds market starts looking down. Because of this, there will be more than normal demand on Mutual Fund manager to redeem the units. To honor the redemption demands of the exiting unit holders during the worst market times, Mutual Funds are forced to sell more stocks at the prevailing low prices. As a result of this, all the unit holders who have invested in the fund suffer. This means, irrespective of one being a long-term buy and hold investor or not, he suffers because of investing in Mutual Fund.
8) CHOICE RISKS:All the experts recommend different schemes/ funds. Naturally, all of them cannot be and will not be right. Investors are also advised to stay invested for long-term to reap good returns. These experts also suggest different funds at different times. Of course, to be in the well-being fund, one needs to move from fund to fund intermittently. In an tempt to stay invested for a long-term and to be in the well-doing fund, the investor, whether educated and informed, will have to be satisfied with disappointment. 9) COST RISKS: Mutual Funds charge huge fees that they can get away with and that too in the most confusing manner possible. The fund managers never intend to make their costs clear to their clients. It would not be painful for the investors to pay for the expenses and costs of the funds when they derive satisfactory returns. But, the irony is that investors have to pay for the sales charges, annual fees and many other expenses irrespective of how the fund has performed. 10) PREDICTION RISKS: Nobody can predict the capital market perfectly and can always find good investments. Similarly, the fund manager's predictions of future actions and outcomes are, of necessity, subject to error. 11) JARGON RISKS: The newsletters and other documents that are distributed to the investors do report so much and that too in such a language filled with technical
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Awareness about mutual funds jargons that it will not be very easy for an investor to understand and follow the report. 12) COMPETITION RISKS: Return is ultimate measure of job performance for any investment, be it in a mutual fund or otherwise. Performance is the matter of comparison and the evaluation is intended to measure how the fund has performed vis-à-vis its past performance, peers and market. At present, Mutual Funds are required to report their performance including returns on a quarterly basis. Therefore, to prove that the fund is performing well, managers focus on quarterly returns. Buying & Selling of stocks at the end of quarter will be done to report better quarterly returns and to make funds holdings look better based on recent market action. In this process, where the competition is not really productive, fund managers incur expenses & losses that are naturally passed on to the unit holders. 13) RISK OF REDEMPTION RESTRICTIONS: Whether informed in writing or not, normally the liquidity of schemes investments may be restricted by the trading volumes settlement period and transfer procedures.
14) MANAGEMENT CHANGE RISKS: It is not uncommon for a Mutual Fund to have changes in its management. The change in the funds management may effect the achievement of the objectives of the fund. The fund company may, for various reasons, replace a fund manager or may be the fund manager himself may resign from his job for any reason. This change will be significant since the fund manager controls the fund investments.
15) JUDGEMENT RISKS: Investors may not know more than the fund manager about the investment strategy and whatever judgments the investor makes will not be fool proof.
16) FORWARD PRICING RISKS:31
Awareness about mutual funds The prices of a Mutual Fund do not change during the day. Order placed up to a cut off time of 3:00 p.m. get that day's Net Asset Value (NAV) and orders placed after 3:00 p.m. receive the next day's NAV. This is called the rule of forward pricing. This system assures a level playing field for investors. No investor is supposed to have the benefit of post 3:00 p.m. information prior to making an investment decision.
17) BREAKPOINT RISKS: Mutual Fund charge loads such as front end & back end. Few Mutual Fund charge front end sales load will charge lower sales loads for larger investments. The investment level required to obtain a reduced sales load are known as breakpoints. These breakpoints lure investors to invest huge funds to avail the discounts on volumes and end up losing focus on his planned diversification for his Mutual Fund investments.
18) RISKS OF BLIND DIVERSIFICATION: It may happen that a fund is heavily committed to a particular area of the economy at any given time. This is called blind diversification risk and any investor would like to invest in Mutual Fund that concentrate in asset classes that he himself has not invested at his own.
19) RISKS OF CHANGES IN THE REGULATORY NORMS:Mutual Funds are constantly regulated by SEBI and investors are subject to risk of the changes in the norms for the Mutual Funds. Besides the above risks, Mutual Funds will also have the common risks that any investment has. In fact, risk is present in every decision made with regard to the investments in capital markets. Following is the list of some common risks involved while investing in the capital markets and particularly in the mutual funds:
20) COUNTRY RISK:This risk arises from the possibility that political events such as war, national elections etc. and financial problems such as rising inflation or
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Awareness about mutual funds natural disasters such as an earthquake, a poor harvest etc. will weaken a country's economy and cause investments in that country to decline.
21) CREDIT RISK:This is a risk that arises from the possibility that a bond issuer will fail to repay interest and principal in a timely manner. This risk is also called as default risk.
22) CURRENCY RISK:This risk arises from the possibility that returns could be reduced for Indians investing in foreign securities because of a rise in the value of the Indian rupee against dollar, euro or yen etc. This is also known as Exchange Rate Risk.
23) INDUSTRY RISK:This risk arises from the possibility that a group of stocks in a single industry will decline in price due to developments in that industry.
24) MANAGER RISK:This risk arises from the possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively, resulting in the failure of the sated objectives.
25) PRINCIPAL RISK:This risk arises from the possibility that an investment will go down in value, or lose money from the original or invested amount.
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Awareness about mutual funds
CHALLENGES AND OPPORTUNITIES
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHALLENGES AHEAD IN MUTUAL FUND INDIUSRTY:Marketing of funds is indeed a difficult topic to discuss, particularly in the present difficult situation for the mutual fund industry when we consider marketing, we have to see the issues in totality, because we cannot judge an elephant by its trunk or by its tail but we have to see it in its totality. When we say marketing of mutual funds, it means, includes and encompasses the following aspects; assessing of investor needs & market research, responding to investors needs, product designing, studying the macro environment, timing of launch of the product etc. widening, broadening and deepening the markets. There are certain issues which are directly linked with the marketing Mutual funds the first of which is widening, broadening and deepening of the markets for the mutual fund products. Considering the vast nature of this country the first priority is the geographic spread has to be widened and the market has to be deepening secondly, the MF must try to spread their wings not only within the country but also outside the country.
A. MARKETS IN RURAL AND SEMI-URBAN AREAS:The Mutual Fund industry a collectively undertake this job of creating awareness among the rural population about the M F as a new form of savings and translate that awareness into increased fund mobilization.
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Awareness about mutual funds
B. OVERSEAS MARKETS:The second aspect with respect to widening and deepening the market is expanding the overseas investor base. The expansion of the distribution network and quick dissemination of information, coupled with M F as such should consider tapping these markets for expanding the scope of mobilization.
CHALLENGES IN MUTUAL FUND INDUSTRY:A. INVESTOR PREFRENCES:The challenge for Mutual Funds is in the tailoring the right products that will help mobilization saving by targeting investors needs. It is necessary that the common investor understands very clearly and salient and different features of funds. The Indian investor is essentially risk averse and is more passive than active. Our experience
B. PRODUCT INNOVATION:With the debt markets now getting developed, mutual funds can tap the investors who require steady income with safety, by floating funds that are designed to primarily have debt instruments can also design separate funds to attract semi urban & rural investors, keeping their seasonal requirements in mind for haven’t season, festival season, sowing season to name a few.
C. DISTRIBUTION NETWORK:I would now focus on the distribution network, namely retail network versus the wholesale network. It is realize that the character of the market is undergone rapid charge. The market is moving favorably also attract direct investments from retail investor.
D. RETAILING THROUGH AGENTS:35
Awareness about mutual funds The alternative distribution channels that are available are retail selling or using lead managers and brokers along with sub-brokers for selling units. The experience of unit trust of India her been that, if necessary motivation and incentive is provided to retailer agents. In such system one achieves brand loyalty through continuous interaction between agents and investors.
E. ADVERTISEMENT AND PUBLICITY:There are certain issues with reference to advertisement, publicity literature and offer document which deserve attention. Most of Mutual Funds advertisements look similar, focusing on scheme features, returns & incentives
F. MUTUAL FUND INDUSTRY TO FACE GREATER OBSTACLES:
The mutual fund industry in India, although 15 years old, is still to develop into a credible competitor to other segments of the financial services industry, especially insurance. On the face of it, mutual fund investments (in equity schemes) seem more attractive than insurance products, but on the ground the reverse is true. More Indians trust life insurance companies with their savings than they do with mutual funds. According to figures from the Central Statistical Organisation (CSO), life insurance funds accounted for 12% of total household savings in India. In contrast equity & debentures only attracted 7% of household savings in financial year ending March 2008. There are 35 asset management companies (AMCs) in India managing Rs 6, 70,012 crore, according to independent investment information provider, Value Research. The industry’s penetration is estimated at 4-5 % as against 10-15 % for insurance. There are around 3 million agents for insurance products and just 80,000 distributors for mutual funds. Both industries, which started almost half a century ago in India with a single player, now have several competing companies. Still, low customer awareness levels and poor financial literacy have largely stymied the popularity of financial products in India.
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Awareness about mutual funds
But in the case of insurance, rampant mis-selling has made it more popular than mutual funds. While insurance is indeed an investment for covering your life, it is sold more as a tax-saving investment tool. In rural areas, agents mis-sell it as a fixed deposit and the idea has been so well rooted that in many Indian villages, There is little scope for mis-selling in case of mutual funds - the mis-selling is limited to the extent that the agent assures investors a return that the fund may not able to deliver. In terms of selling, both mutual funds and insurance are ‘push’ products. However, a distributor has a higher incentive to sell the latter because of the opportunity to earn a higher commission. An agent selling insurance earns a commission of 30-40 % of the initial premium and a trail commission of around 5%. However, the commission in case of mutual funds is never more than 2-2 .5%. Insurance generally is a product that cannot be sold multiple times to one investor. Hence, the agent has to be given a high commission to push the product. In case of mutual funds, the agent gets multiple opportunities to sell more than one product to the same investor. As a result, distributors and mutual fund houses exhibit limited interest in continuously engaging with customers post closure of sale as the commissions and incentives are largely in the form of upfront fees from product sales. Limited use of the public sector banks’ network and post offices to distribute mutual funds has also impeded the growth of the industry. The insurance industry, on the other hand, has been able to leverage this to its advantage. While setting up an AMC is relatively easy, getting business during a downturn and withstanding redemption pressures during times of low liquidity is the difficult part. The insurance business is one with a long gestation period and requiring sufficient capital to cover incremental actuarial liability. The breakeven time for an insurance business in India is at least seven years. In this scenario, the most important challenge for the company is to have a robust agency network. Mutual Funds have to face a stricter regulatory environment as the industry is regulated by the conservative capital market regular SEBI. As a result, there is limited
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Awareness about mutual funds flexibility in fixing fees and pricing. Insurance companies have a relatively less stringent environment as the industry is regulated by IRDA, which is less conservative in its regulation. This allows more flexibility for companies to structure their products and fees.
ADVANTAGES AND DISADVANTAGES
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS ADVANTAGES OF MUTUAL FUNDS:A Mutual Fund can be defined as a trust wherein the savings of the investors with the same financial goal are pooled in. The collected money then goes for investment in capital market instruments. These can include debentures, shares and other such securities. These investments in turn yield an income. The income and capital appreciation are distributed amongst its unit holders. The advantages of mutual funds are many. Some of the advantages of mutual funds in India are listed below:
PROFESSIONAL MONEY MANAGEMENT & RESEARCH:Mutual funds are managed by professional fund managers who regularly monitor market trends and economic trends for taking investment decisions. They also have dedicated research professionals working with them who make an in depth study of the investment option to take an informed decision. Investing requires skill. It requires a constant study of the dynamics of the markets and of the various industries and companies within it. Anybody who has surplus capital to be parked as investments is an investor, but to be a successful investor, you need to have someone managing your money professionally. Just as people who have money but not have the requisite skills to run a company (and hence must be content as shareholders) hand over the running of the operations to a qualified CEO, similarly,
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Awareness about mutual funds investors who lack investing skills need to find a qualified fund manager. Mutual funds help investors by providing them with a qualified fund manager. Increasingly, in India, fund managers are acquiring global certifications like CFA and MBA which help them be at the cutting edge of the knowledge in the investing world.
MUTUAL FUNDS COME IN MANY VARIETIES:A mutual fund comes in many types and styles. There are stock funds, bond funds, sector funds, target-date mutual funds, money market mutual funds and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index mutual funds). The availability of different types of mutual funds allows you to build a diversified portfolio at low cost and without much difficulty.
RISK DIVERSIFICATION:Diversification reduces risk contained in a portfolio by spreading it. It is about not putting all your eggs in one basket. As mutual funds have huge corpuses to invest in, one can be part of a large and well-diversified portfolio with very little investment. There is an old saying: Don't put all your eggs in one basket. There is a mathematical and financial basis to this. If you invest most of your savings in a single security (typically happens if you have ESOPs (employees stock options) from your company, or one investment becomes very large in your portfolio due to tremendous gains) or a single type of security (like real estate or equity become disproportionately large due to large gains in the same), you are exposed to any risk that attaches to those investments. In order to reduce this risk, you need to invest in different types of securities such that they do not move in a similar fashion. Typically, when equity markets perform, debt markets do not yield good returns. Note the scenario of low yields on debt securities over the last three years while equities yielded handsome returns. Similarly, you need
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Awareness about mutual funds to invest in real estate, or gold, or international securities for you to provide the best diversification. If you want to do this on your own, it will take you immense amounts of money and research to do this. However, if you buy mutual funds -- and you can buy mutual funds of amounts as low as Rs 500 a month! -- you can diversify across asset classes at very low cost. Within the various asset classes also, mutual funds hold hundreds of different securities (a diversified equity mutual fund, for example, would typically have around hundred different shares).
TRANSPARENCY:Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator.
FLEXIBILITY:Investors also benefit from the convenience and
flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes.
CONVENIENCE:With features like dematerialized account statements, easy subscription and redemption processes, availability of NAV and performance details through journals, newspapers and updates and lot more; Mutual Funds are sure a convenient way of investing.
ECONOMIES OF SCALE:Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay. Since mutual funds collect money from millions of investors, they achieve economies of scale. The cost of running a mutual fund is divided between a larger
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Awareness about mutual funds pool of money and hence mutual funds are able to offer you a lower cost alternative of managing your funds. Equity funds in India typically charge you around 2.25% of your initial money and around 1.5% to 2% of your money invested every year as charges. Investing in debt funds costs even less. If you had to invest smaller sums of money on your own, you would have to invest significantly more for the professional benefits and diversification.
SYSTEMATIC INVESTING AND WITHDRAWALS WITH
MUTUAL FUNDS:It is simple to invest regularly in a mutual fund. Many mutual fund companies allow investors to invest as little as $50 per month directly into a mutual fund. Money can be pulled directly from a bank account and invested directly in the mutual fund. On the other hand, money can be regularly withdrawn from a mutual fund and be deposited into a bank account. There are generally no fees for this service.
LIQUIDITY:One of the greatest advantages of Mutual Fund investment is liquidity. Open-ended funds provide option to redeem on demand, which is extremely beneficial especially during rising or falling Markets
REDUCTION IN COSTS:Mutual funds have a pool of money that they have to invest. So they are often involved in buying and selling of large amounts of securities that will cost much lower than when you invest on your own
TAX ADVANTAGES:Investment in mutual funds also enjoys several tax advantages. Dividends from Mutual Funds are tax-free in the hands of the investor (This however depends upon changes in Finance Act). Also Capital Gain accrued
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Awareness about mutual funds from Mutual Fund investment for a period of over one year is treated as long term capital appreciation and is tax free.
EASE OF PROCESS:If you have a bank account and a PAN card, you are ready to invest in a mutual fund: it is as simple as that! You need to fill in the application form, attach your PAN (typically for transactions of greater than Rs 50,000) and sign your cheque and you investment in a fund is made. In the top 8-10 cities, mutual funds have many distributors and collection points, which make it easy for them to collect and you to send your application to.
WELL REGULATED:India mutual funds are regulated by the Securities and Exchange Board of India, which helps provide comfort to the investors. SEBI forces transparency on the mutual funds, which helps the investor make an informed choice. SEBI requires the mutual funds to disclose their portfolios at least six monthly, which helps you keep track whether the fund is investing in line with its objectives or not. However, most mutual funds voluntarily declare their portfolio once every month. We will look at some of the risks of investing in a mutual fund and the costs of the same in the next article.
FAMILY OF FUNDS:Many mutual funds are part of a “family of funds” (a group of funds managed by the same company but with different investment objectives). The advantage to this is an option known as an exchange privilege or fund switching. Fund switching has become quite popular as fund companies have made it easy to move your money from one fund to another, usually with only a toll-free telephone call. Switching is an easy and convenient way to take advantage of changing market conditions. If the stock market began to decline, for instance, and your money was in
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Awareness about mutual funds a stock fund, you might consider switching your investment into a money market fund within the same family
DISADVANTAGES OF MUTUAL FUNDS: FLUCTUATING RETURNS:Mutual funds are like many other investments without a guaranteed return. There is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be stellar.
MISLEADING ADVERTISEMENTS:The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small-cap or income. The SEC requires funds to have at least 80% of assets in the particular type of investment implied in their names. The remaining assets are under the discretion solely of the fund manager.
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Awareness about mutual funds The different categories that qualify for the required 80% of the assets, however, may be vague and wide-ranging. A fund can therefore manipulate prospective investors by using names that are attractive and misleading. Instead of labeling itself a small cap, a fund may be sold under the heading growth fund. Or, the "Congo High-Tech Fund" could be sold with the title "International High-Tech Fund".
MUTUAL FUNDS HAVE HIDDEN FEES:If fees were hidden, those hidden fees would certainly be on the list of disadvantages of mutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees. While these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in the mutual fund prospectus and can be found on the mutual funds’ web sites. Many mutual funds do not charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual fund that does not charge the fee. Hidden fees cannot make the list of disadvantages of mutual funds because they are not hidden and there are thousands of mutual funds that do not charge 12b1 fees.
MUTUAL FUNDS LACK LIQUIDITY:How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks and closed-end funds? If you sell a mutual fund, you have access to your cash the day after the sale. ETFs, stocks and closedend funds require you to wait three days after you sell the investment. I would call the “lack of liquidity” disadvantage of mutual funds a myth. You can only find more liquidity if you invest in your mattress.
NO INSURANCE:Mutual funds, although regulated by the government, are not insured against losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible (although extremely unlikely) that you could even lose your entire investment.
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Awareness about mutual funds
DILUTION:Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly.
FEES AND EXPENSES:Most mutual funds charge management and operating fees that pay for the fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell
EVALUATING FUNDS:Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, 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 do you know if one fund is better than another?
POOR PERFORMANCE:Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of critics now question whether or not professional money managers have better stock-picking capabilities than the average investor.
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Awareness about mutual funds
LOSS OF CONTROL:The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for you when trying to manage your portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for you. You also should remember that you trust someone else with your money when you invest in a mutual fund.
MANAGEMENT RISK:When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
LEGAL AND REGULATORY FRAMEWORK
FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS
Mutual funds are regulated by the SEBI (Mutual Fund) Regulations,
1996.
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Awareness about mutual funds
SEBI is the regulator of all funds, except offshore (international) funds.
Bank-sponsored mutual funds are jointly regulated by SEBI and RBI permission.
If there is a bank-sponsored fund, it cannot provide a guarantee without RBI permission.
RBI regulates money and government securities markets, in which mutual funds invest.
Listed mutual funds are subject to the listing regulations of stock
exchanges.
Since the AMC and Trustee Company are companies, they are regulated by the Department of Company Affairs. They have to send periodic reports to the ROC (Registrar of Companies) and the CLB (Company Law Board) is the appellate authority.
Investors cannot sue (ask) the trust, as they are the same as the trust and can't sue themselves.
UTI does not have a separate sponsor and AMC.
UTI is governed by the UTI Act, 1963 and is voluntarily under SEBI Regulations.
All the UTI schemes, except US 64 are under dual regulation of both SEBI and the UTI Act.
UTI can borrow as well as lend and also engage in other financial services activities.
SRO (Self Regulatory Organisations) is the second tier in the regulatory structure.
SROs (Self Regulatory Organisations) get their powers from the apex regulating agency and act on their instructions.
SRO (Self Regulatory Organisations) cannot do any legislation on their
own.
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Awareness about mutual funds
All stock exchanges (like National Stock Exchange, Bombay Stock Exchange) are SROs (Self Regulatory Organisations) only.
AMFI (Association of Mutual Funds in India) is an industry association of mutual funds.
AMFI is not yet a SEBI registered SRO. AMFI has created code of conduct for mutual funds.
AMFI aims at increasing investor awareness about mutual funds, encouraging best practices and bringing about high standards of professional behaviour in the industry.
AMFI was incorporated in1995.
AMFI is governed by a board of directors elected from mutual funds and is headed by a full time chairman.
Mutual funds cannot invest more than 10 per cent of the total net assets of a scheme in the short-term deposits of a single bank.
Announcing guidelines for parking of funds in short-term deposits of scheduled commercial banks (SCBs) by mutual funds, the regulator said that investment cap would also take into account the deposit schemes of the bank's subsidiaries.
The SEBI has also defined 'short term' for funds' investment purposes as a period not exceeding 91 days.
Besides, the parking of funds in short-term deposits of all SCBs has been capped at 15 per cent of the net asset value (NAV) of a scheme, which can be raised to 20 per cent with prior approval of the trustees.
The parking of funds in short-term deposits of associate and sponsor SCBs together should not exceed 20 per cent of total deployment by the MF in shortterm deposits.
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Awareness about mutual funds
The SEBI said that these guidelines are aimed at ensuring that funds collected in a scheme are invested as per the investment objective stated in the offer document of an MF scheme.
The new guidelines would be applicable to all fresh investments whether in a new scheme or an existing one. In cases of an existing scheme, where the scheme has already parked funds in short-term deposits, the asset management company has been given three-months time to conform to the new guidelines.
The SEBI has also asked the trustees of a fund to ensure that no funds are parked by a scheme in short term deposit of a bank, which has invested in that particular scheme.
The SEBI guidelines say that asset management companies (AMCs) shall not be permitted to charge any investment and advisory fees for parking of funds in short-term deposits of banks in case of liquid and debt-oriented schemes.
It has also asked the trustees to disclose details of all such funds parked in short-term deposits in half-yearly portfolio statements under a separate heading and has said that AMCs should also certify the same in its bi-monthly compliance test report.
All the short-term deposits by mutual funds should be held in the name of the scheme concerned only, it added.
THE INVESTOR’S RIGHTS & OBLIGATIONS:Investors are mutual, beneficial and proportional owners of the scheme’s assets. The investments are held by the trust in fiduciary capacity (The fiduciary duty is a legal relationship of confidence or Trust between two or more parties). In case of dividend declaration, investors have a right to receive the dividend within 30 days of declaration. On redemption request by
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Awareness about mutual funds investors, the AMC must dispatch the redemption proceeds within 10 working days of the request. In case the AMC fails to do so, it has to pay an interest @ 15%. This rate may change from time to time subject to regulations. In case the investor fails to claim the redemption proceeds immediately, then the applicable NAV depends upon when the investor claims the redemption proceeds. Investors can obtain relevant information from the trustees and inspect documents like trust deed, investment management agreement, annual reports, offer documents, etc. They must receive audited annual reports within 6 months from the financial year end. Investors can wind up a scheme or even terminate the AMC if unit holders representing 75% of scheme’s assets pass a resolution to that respect. Investors have a right to be informed about changes in the fundamental attributes of a scheme. Fundamental attributes include type of scheme, investment objectives and policies and terms of issue. Lastly, investors can approach the investor relations officer for Grievance redressal. In case the investor does not get appropriate solution, he can approach the investor grievance cell of SEBI. The investor can also sue the trustees. The offer document is a legal document and it is the investor’s obligation to read the OD carefully before investing. The OD contains all the material information that the investor would require to make an informed decision. It contains the risk factors, dividend policy, investment objective, expenses expected to be incurred by the proposed scheme, fund manager’s experience, historical performance of other schemes of the fund and a lot of other vital Information.
INVESTORS RIGHTS AND OBLIGATIONS:INVESTORS RIGHTS:(1) RIGHTS OF PROPORTIONATE “BENEFICIAL OWNERSHIP”:
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Awareness about mutual funds Unit-holders have the right to beneficial ownership of the scheme’s assets’ otherwise held in trust for them by the trustees of the fund. They also have the right to any dividend or income declared under the scheme. The right to assets, income etc. is in proportion that the units held by the unit holder bears to the total number of the fund units issued and outstanding. Unit-holders have the option to nominate a person in whom all the beneficial ownership rights in the units will vest in the event of his/her death.
(2) RIGHT TO TIMELY SERVICE:Unit-holders are entitled to receive dividend warrants within 30 days of the dividend declaration. Unit-holders have the right to payment of interest at a rate specified by SEBI in the event of failure von the part of the mutual fund to dispatch the redemption or repurchase proceeds within 10 working days. Such interest must be borne by the AMC. Where any investor has failed to claim redemption proceeds or dividends due to him/her, the investor has the right to do so within a period of three years of the due date at a prevailing NAV. After three years, he will be paid at the NAV applicable at the end of the third year. For initial offers in case of open-end schemes, investors have a right to expect the allotment of units and dispatch of account statement to be completed within 30 days from the closure of the issue. Besides the scheme must open ongoing sale and repurchase within 30 days from the closure of the initial offer period. Investors also have the right to receive compensation from the AMC representing the differences in NAV amounts in cases where there has been a variation in NAV calculations on accounts of non-recording of any transaction /s in the scheme accounts in certain cases.
(3) RIGHT TO INFORMATION:-
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Awareness about mutual funds Unit-holders have the right to obtain from the trustees any information that may have an adverse bearing on their investments. Unit-holders have the right to inspect major documents of the fund. Such documents include material contracts (the trust deed, the investment management agreement, the custodian services agreement and the registrar and transfer agency agreement), memorandum and articles of association of the AMC, recent audited financial statements, the texts of SEBI (MF) Regulations, Indian Trusts Act and the offer document of the scheme. Each unit holder has the right to receive a copy of the annual financial statements. Each unit holder has a right to receive a complete statement of scheme portfolio before the expiry of one month from the close of each half year (31st March and 30th September), unless such statement of portfolio is published in one English daily circulating whole of India and in a newspaper published in the language of the region where the head office of the mutual fund is situated.
(4) RIGHT TO WIND UP A SCHEME:Investors can demand the Trustees to wind up a scheme prior to its earlier fixed duration and repay to the investors, if 75% of the investors pass a resolution to this effect. This right applies to both closed ended funds and closed-end or open-end fixed term plan series.
(5) RIGHT TO TERMINATE AMC:The appointment of an AMC of a fund can be terminated by 75% of the unit – holders of the scheme with the prior approval of SEBI.
INVESTORS OBLIGATIONS:It is the investor’s duty to carefully study the offer document before investing in units of scheme. He must appreciate the fundamental attributes of the scheme, the risk factors, his rights and the fund’s and the sponsor’s track record. Failure to
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Awareness about mutual funds effectively study the offer document does not entitle him later to have recourse to the fund, the trustees or the AMC. While applying for a fund investment, the investors are now required by SEBI to mention their Permanent Account Number (or GIR number where PAN has not been allotted), if the application for purchasing units is for Rs.50,000 or more, besides being required to provide their bank account details in the application. The investor must later monitor his investment in a scheme by carefully studying the scheme’s financial statements, its portfolio composition and research reports published by mutual fund tracking agencies. He can certainly exercise in a reasonable way his right to ask the trustees for information that he requires. But, the monitoring is entirely the investor’s own responsibility.
FACILITIES AVAILABLE TO INVESTORS:-
REPURCHASE FACILITIES:The units of closed ended schemes must be compulsorily listed in the recognized stock exchanges. Such units can be brought or sold at market prices. 53
Awareness about mutual funds But, units of open ended schemes are not at all listed and hence they have to be brought only from the fund. So, the fund reserves the buyback the units from its members. This process of buying back of units from investors by the fund is called repurchase facility.
REISSUE FACILITIES:In the case of open ended schemes, units can be brought only from the fund not in the open market. The units bought fro the investors are again reissued to those who are interested in purchasing them. The price fixed for this purpose is called re-issue price.
ROLL OVER FACILITIES:At time of redemption, the investor is given an option to reinvest his entire investment once again for another term. An investor can overcome an adverse market conditions prevailing at the time of redemption by resorting to this Roll over facility. This is applicable in the case of close ended funds.
LATERAL SHIFTING FACILITIES:Some mutual funds permit the investors to shift from one scheme to another on the basis of NET ASSET VALUES with a view to providing total flexibility in their operation. This is done without any discount on the fund and without any additional charges. This is a great privilege given to the investors. This shifting is called ‘lateral shifting’.
COMMON PLATFORM FOR MUTUAL FUNDS:In order to improve the operational and service efficiency of mutual funds, a committee established under Association of Mutual Funds in India (AMFI) is
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Awareness about mutual funds planning a Common Industry Platform. The objective is to enhance the convenience of distributors and investors. Everything will now be available to them at the click of a button — so all they will have to do is to go online to check the NAV status of the fund or buy or sell funds. The common platform will be operational by the end of March 2010. The new platform will ensure better accessibility to the investors, ease of operation for the distributors and reduce the cost and increase the penetration of asset management companies (AMCs). “Today ore than 50 per cent of the savings go to the banks, nearly 17 percent to insurance and just 7.7 per cent come to mutual funds. By and large, the penetration of mutual funds is low. Moreover, the operating profits in India are 6 basis points lower than the global average and this is mainly due to the high operating costs. The common platform will help in reducing the cost and will offer improved services to the investors,” says Jaideep Bhattacharya, CMO, UTI AMC, who is also the chairman of the panel on the Common Industry Platform for AMFI.
Convenience will be enhanced for investors through this platform as it will give them multiple choices of transaction such as through banks, post offices, distributors, online, direct or through mobile platforms. Moreover, there will be a single point of access and investors will be able to obtain a single or a consolidated statement of all their accounts. As far as the distributors are concerned, 60 percent of their time is consumed in operation and only 40 percent is utilised for sales. The new platform intends to reduce the operation time and increase the sales time, thereby increasing the efficiency of the distributors.
NET ASSET VALUE:The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV).
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Awareness about mutual funds
The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquefied, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV ignoring the “per unit”. We also abide by the same convention. Mutual Funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on a day to day basis The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a Mutual Fund scheme is INR20m and the Mutual Fund has issued ten million units of INR10 each to the investors, then the NAV per unit of the fund is INR20. NAV is required to be disclosed by the Mutual Funds. The Net Asset Value is the fund’s share price. The NAV is calculated by dividing the current value of the portfolio by the number of fund units (shares) outstanding. NAV for most funds is calculated on daily basis and is available in daily financial papers. Funds on a regular basis - daily or weekly - depending on the type of scheme.
CALCULATION OF NAV:The Term Net Asset Value (NAV) is used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund.
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Awareness about mutual funds The value of a collective investment fund based on the market price of securities held in its portfolio. Units in open ended funds are valued using this measure. Closed ended investment trusts have a net asset value but have a separate market value. NAV per share is calculated by dividing this figure by the number of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV. Calculating NAVs - Calculating mutual fund net asset values is easy. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.
Net Asset Value (NAV) Formula value of fund = Net Asset Value (NAV) number of shares
Net Asset Value (NAV) Example Rs.50,00,000 total fund value = Rs.50 per share 100,000 shares
FUTURE OF MUTUAL FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION country with a bigFUNDS the OF MUTUAL bang. With Mutual funds have arrived in the
fast increasing number of unit holding accounts, investor service is likely to become a
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Awareness about mutual funds key area of concern for mutual funds in future. Banking and postal systems, two main infrastructural support services, will have to place in line with mutual funds. On their part, Mutual Funds will take advantage of computer and with the growth of mutual funds, their shareholding in relatively good companies, would tend to increase progressively, which may give rise to fear of destabilization among management and industrial group. Introduction of non-voting shares for mutual funds and lowering 0f debt-equity ratio will help these apprehensions. Non-voting shares would ensure that Mutual Funds are not misused for takeover or any such destabilizing and unhealthy activity. Growth of Mutual Funds in future will depend on the growth of household savings, buoyancy of capital market, number of instruments and penetration of mutual funds in the rural areas. Success of mutual funds, however, will depend on product innovation, marketing, customer service and investor relations, fund management, liquidity and competitive yield. These, in turn, will depend on customer oriented work culture and committed manpower as well as professional management of funds. Thus, once Mutual Funds succeed in achieving these objectives and gain credibility and faith among the common man, they are going to be a very significant force in financial sector. However, mutual funds can suffer from one major disadvantage. Despite the security a large fund offers by virtue of its size, the larger it grows, the less nimble it tends to become. As investments gain size, operations become more difficult. It becomes difficult for large funds to be purchase, as they often trigger off a bull signal. But if the yield is lower than market indices, it points to problems. These may be temporary in nature, or could point to a deeper malaise
As the funds grew in number, size and variety, some adverse comments have of late been made about their impact on the capital market. Some experts have opined that overtrading indulged in by several funds may result in losses and erosion of their credibility in the market. There are, however, optimists who are confident of the professional expertise of the funds management. Now that Indian capital market has developed considerably, the Funds will able to give investors the promised return and 58
Awareness about mutual funds growth. India being a country of continental size with large population and great diversity of investing population, there is tremendous need and scope for a large variety of mutual funds in the country. It is felt that so long as mutual funds are able to give marginally higher returns than are available from other risk investments, their survival and growth are fully assured in the years to come and they occupy important place in the Indian savings and capital market.
FUTURE OF MUTUAL FUNDS IN INDIA - AN OVERVIEW
Financial experts believe that the future of Mutual Funds in India will be very bright. It has been estimated that by March-end of 2010, the mutual fund industry of India will reach Rs 40,90,000 crore, taking into account the total assets of the Indian commercial banks. The estimation was based on the December 2004 asset value of Rs 1, 50,537 crore. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9% annually. Based on the current rate of growth, it can be forecasted that the mutual fund assets will be double by 2010.
INDIAN MUTUAL FUNDS FUTURE - GROWTH FACTS
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Awareness about mutual funds
In the past 6 years, Mutual Funds in India have recorded a growth of
100 %.
In India, the rate of saving is 23 %.
In the future, there lies a big scope for the Indian Mutual Funds industry to expand. Several asset management companies which are foreign based are now entering the Indian markets. A number of commodity Mutual Funds will be introduced in the future. The SEBI (Securities Exchange Board of India) has granted the permission for the same.
More emphasis is put on the effective Mutual Funds governance.
There is also enough scope for the Indian Mutual funds to enter into the semiurban and rural areas. Financial planners will play a major role in the Mutual Funds market by providing people with proper financial planning.
Looking at the past developments and combining it with the current trends it can be concluded that the future of Mutual Funds in India has lot of positive things to offer to its investors.
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Awareness about mutual funds
COMMON PLATFORM FOR MUTUAL FUNDS:In order to improve the operational and service efficiency of mutual funds, a committee established under Association of Mutual Funds in India (AMFI) is planning a Common Industry Platform. The objective is to enhance the convenience of distributors and investors. Everything will now be available to them at the click of a button — so all they will have to do is to go online to check the NAV status of the fund or buy or sell funds. The common platform will be operational by the end of March 2010. The new platform will ensure better accessibility to the investors, ease of operation for the distributors and reduce the cost and increase the penetration of asset management companies (AMCs). “Today ore than 50 per cent of the savings go to the banks, nearly 17 percent to insurance and just 7.7 per cent come to mutual funds. By and large, the penetration of mutual funds is low. Moreover, the operating profits in India are 6 basis points lower than the global average and this is mainly due to the high operating costs. The common platform will help in reducing the cost and will offer improved services to the investors,” says Jaideep Bhattacharya, CMO,UTI AMC, who is also the chairman of the panel on the Common Industry Platform for AMFI.
Convenience will be enhanced for investors through this platform as it will give them multiple choices of transaction such as through banks, post offices, distributors, online, direct or through mobile platforms. Moreover, there will be a single point of access and investors will be able to obtain a single or a consolidated statement of all their accounts. As far as the distributors are concerned, 60 percent of their time is consumed in operation and only 40 percent is utilised for sales. The new platform intends to reduce the operation time and increase the sales time, thereby increasing the efficiency of the distributors.
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CONCLUSION mutual funds Awareness about
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS For carrying out1 INTRODUCTION possible, the information has been CHAPTER this project in best way OF MUTUAL FUNDS accumulated on mutual funds, current market etc. and studied the market scenario
through interaction with individual, agents, distributors etc. of mutual funds and conducting survey of people. Having done all this, I conclude by saying that:The awareness and knowledge about the concept and existence of mutual funds amongst the common public appears to be good and adequate. This necessitates adoption of more innovative and vigorous marketing strategy on the part of mutual companies. Mutual funds act as a vehicle in galvanizing the savings of the people by offering various schemes suitable to various classes of customers for the development of economy as a whole. A number of schemes are being offered by Mutual Funds so as to meet the varied requirements of the masses, and thus, savings are directed towards capital investments directly. In the absence of Mutual Funds, these savings would have remained idle. Thus, the whole economy benefits due to cost efficient and optimum use and allocation of scarce financial and real resources in the economy for its speedy development. The recent biggest economic crisis in US has claimed a number of Wall Street biggies and is threatening even the European Union. Ramification of the same is felt in India too. The prevailing circumstances will several lessons for the investor but will not drive them away from mutual funds in the wake failing returns because they are still among the best investment avenues available to them. The primary of the lessons learnt is, not to chase returns. One of the biggest flaws in the process of investing is to chase the performance of funds alone. While they do give an indication to how well a fund can perform, they still remain just indicative, for all good reasons. Investors should not be influenced only by shortterm performance of any schemes.
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QUESTIONAIRE OFAwareness about mutual funds MUTUAL FUNDS
CHAPTER 1 INTRODUCTION OF MUTUAL FUNDS CHAPTER 1 INTRODUCTION OF MUTUAL 1) Are you aware about Mutual FUNDS Funds?
1. YES 2. NO
YE S
N O
2) If Yes, Have you ever invested in Mutual funds? 1. YES 2. NO
YS E N O
3) What is your primary objective for your investment? 1. PRESERVATION OF PRINCIPAL 2. 3. 4. CURRENT INCOME GROWTH INCOME
P EE V T N RSR AIO O P IN IP L F R CA C RE T U RN IN O E CM GO T R WH IN O E CM
CONSERVATIVE INCOME
4) Name of the company where you have invested? 1. SBI 2. HDFC 3. RELIANCE 4. LIC
SI B HF DC RL N E EIA C L IC
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Awareness about mutual funds
5) How long do you want to invest? 1. 1 YEAR 2. 2 TO 5 YEAR 3. 6 TO 10 YEAR 4. 11 TO 20 YEAR
1Y EA R 2-5Y EA RS 6-10years 11-20years
6) Being a Mutual Fund Investor, Are you aware of the various schemes offered by the Asset Management Companies? 1. MOST 2. SOME 3. VERY FEW
MOST SOME VERY FEW
7) Would you be interested to know more about Mutual Funds? 1. YES 2. NO
YS E N O
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Awareness about mutual funds
8) Which of the following has the lowest risk? 1. 2. 3. 4. LIQUID FUND (MMMF) GILT FUND
GILT
LIQUID
DIVERSIFIED DEBT FUND DIVERSIFIED EQUITY FUND
DIVERSIFIED DEBT DIVERSIFIED EQUITY
9) Which of the following has the highest level of liquidity? 1. 2. 3. 4. EQUITY PPF COMPANY FIXED DEPOSITS MUTUAL FUNDS
EQUITY PPF COM PANIED FD M UTUAL FUNDS
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