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The Versatility of Mutual Funds

The Versatility of Mutual Funds

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Published by Himansu S M
Today, one of the best savings instrument cum investment vehicle in India is the Mutual Funds. This is mainly because of the continuous refinement it has been subjected to over the years, particularly the last twelve years, ever since it was launched in 1963.
Today, one of the best savings instrument cum investment vehicle in India is the Mutual Funds. This is mainly because of the continuous refinement it has been subjected to over the years, particularly the last twelve years, ever since it was launched in 1963.

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Published by: Himansu S M on Feb 04, 2010
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Introduction :
 Today, one of the best savings instrument cum investment vehicle in India is the MutualFunds. This is mainly because of the continuous refinement it has been subjected to overthe years, particularly the last twelve years, ever since it was launched in 1963. MutualFunds are for everyone. Around the world millions of investors invest in mutual fundsbecause of their safety, simplicity, ease of investing and the many advantages theyoffer. This article will cover some of its unique features dealing with subjective,emotional and psychological aspects that make it a versatile one.
Concept :
A Mutual Fund is a trust that pools the savings of a number of investors who share acommon financial goal. The money thus collected is then invested in capital marketinstruments such as shares, debentures and other securities. The income earned throughthese investments and the capital appreciation realised are shared by its unit holders inproportion to the number of units owned by them. Thus a Mutual Fund is the mostsuitable investment for the common man as it offers an opportunity to invest in adiversified, professionally managed basket of securities at a relatively low cost. The flowchart below describes broadly the working of a mutual fund:
Mutual Fund Operation Flow Chart
(Pool their Money with)
(Invest in)
(Passed back to)
 There are many entities involved and the diagram below illustrates the organisational setup of a mutual fund. They are given below :1.SEBI2.AMC3.Sponsors4.Trustees5.The Fund6.Custodians7.Registrars
Mutual Fund Structure :
 The structure consists of :1.SPONSOR : The sponsor is the person who acting alone or in combination withanother body corporate establishes a mutual fund. Sponsor must contribute at least40% of the net worth of the Investment Managed and meet the eligibility criteriaprescribed under the Securities and Exchange Board of India (Mutual Funds)Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfallresulting from the operation of the Schemes beyond the initial contribution made byit towards setting up of the Mutual Fund.1
2.TRUST : The Mutual Fund is constituted as a trust in accordance with the provisionsof the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under theIndian Registration Act, 1908.3.TRUSTEE : Trustee is usually a company (corporate body) or a Board of Trustees(body of individuals). The main responsibility of the Trustee is to safeguard theinterest of the unit holders and inter-alia ensure that the AMC functions in theinterest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and theOffer Documents of the respective Schemes. At least 2/3rd directors of the Trusteeare independent directors who are not associated with the Sponsor in any manner.4.ASSET MANAGEMENT COMPANY (AMC) : The AMC is appointed by the Trustee as theInvestment Manager of the Mutual Fund. The AMC is required to be approved by theSecurities and Exchange Board of India (SEBI) to act as an asset managementcompany of the Mutual Fund. At least 50% of the directors of the AMC areindependent directors who are not associated with the Sponsor in any manner. TheAMC must have a net worth of at least 10 Crores at all times.5.REGISTRAR AND TRANSFER AGENT : The AMC if so authorised by the Trust Deedappoints the Registrar and Transfer Agent to the Mutual Fund. The Registrarprocesses the application form, redemption requests and dispatches accountstatements to the unit holders. The Registrar and Transfer agent also handlescommunications with investors and updates investor records.
1.The advantages of investing in a Mutual Fund are:2.Professional Management3.Diversification4.Convenient Administration5.Return Potential6.Low Costs7.Liquidity8.Transparency9.Flexibility10.Choice of schemes11.Tax benefits12.Well regulated
Benefits of Mutual Funds :
 There are numerous benefits of investing in mutual funds and one of the key reasons forits phenomenal success in the developed markets like US and UK is the range of benefitsthey offer, which are unmatched by most other investment avenues. The benefits havebeen broadly split into universal benefits, applicable to all schemes, and benefitsapplicable specifically to open-ended schemes.1.UNIVERSAL BENEFITS :a.Affordability : A mutual fund invests in a portfolio of assets, i.e. bonds, shares,etc. depending upon the investment objective of the scheme. An investor can buy2
in to a portfolio of equities, which would otherwise be extremely expensive. Eachunit holder thus gets an exposure to such portfolios with an investment asmodest as Rs.500/-. This amount today would get you less than quarter of anInfosys share! Thus it would be affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directly in the stockmarket.b.Diversification : The nuclear weapon in your arsenal for your fight against Risk. Itsimply means that you must spread your investment across different securities(stocks, bonds, money market instruments, real estate, fixed deposits etc.) anddifferent sectors (auto, textile, information technology etc.). This kind of adiversification may add to the stability of your returns, for example during oneperiod of time equities might under perform but bonds and money marketinstruments might do well enough to offset the effect of a slump in the equitymarkets. Similarly the information technology sector might be faring poorly butthe auto and textile sectors might do well and may protect your principalinvestment as well as help you meet your return objectives.c.Variety : Mutual funds offer a tremendous variety of schemes. This variety isbeneficial in two ways: first, it offers different types of schemes to investors withdifferent needs and risk appetites; secondly, it offers an opportunity to aninvestor to invest sums across a variety of schemes, both debt and equity. Forexample, an investor can invest his money in a Growth Fund (equity scheme) andIncome Fund (debt scheme) depending on his risk appetite and thus create abalanced portfolio easily or simply just buy a Balanced Scheme.d.Professional Management : Qualified investment professionals who seek tomaximise returns and minimise risk monitor investor's money. When you buy into a mutual fund, you are handing your money to an investment professional thathas experience in making investment decisions. It is the Fund Manager's job to(a) find the best securities for the fund, given the fund's stated investmentobjectives; and (b) keep track of investments and changes in market conditionsand adjust the mix of the portfolio, as and when required.e.Tax Benefits : Any income distributed after March 31, 2002 will be subject to taxin the assessment of all Unit holders. However, as a measure of concession toUnit holders of open-ended equity-oriented funds, income distributions for theyear ending March 31, 2003, will be taxed at a concessional rate of 10.5%. Incase of Individuals and Hindu Undivided Families a deduction up to Rs. 9,000from the Total Income will be admissible in respect of income from investmentsspecified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax.f.Regulations : Securities Exchange Board of India (“SEBI”), the mutual fundsregulator has clearly defined rules, which govern mutual funds. These rules relateto the formation, administration and management of mutual funds and alsoprescribe disclosure and accounting requirements. Such a high level of regulationseeks to protect the interest of investors.2.BENEFITS OF OPEN-ENDED SCHEMES :a.Liquidity : In open-ended mutual funds, you can redeem all or part of your unitsany time you wish. Some schemes do have a lock-in period where an investorcannot return the units until the completion of such a lock-in period.b.Convenience : An investor can purchase or sell fund units directly from a fund,through a broker or a financial planner. The investor may opt for a Systematic3

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