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invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal. Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies
As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. More than 80 million people, or one half of the households in America, invest in mutual funds. That means that, in the United States alone, trillions of dollars are invested in mutual funds. In fact, to many people, investing means buying mutual funds. After all, it's common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don't understand. Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't always delivered. Not all mutual funds are created equal, and investing in mutuals isn't as easy as throwing your money at the first salesperson who solicits your business. (Learn about the pros and cons in Mutual Funds Are Awesome - Except When They're Not.)
A Brief History Of The Mutual Fund Mutual funds really captured the public's attention in the 1980s and '90s when mutual fund investment hit record highs and investors saw incredible returns. However, the idea of pooling assets for investment purposes has been around for a long time. Here we look at the evolution of this investment vehicle, from its beginnings in the Netherlands in the 18th century to its present status as a growing, international industry with fund holdings accounting for trillions of dollars in the United States alone.
In the Beginning Historians are uncertain of the origins of investment funds; some cite the closed-end investment companies launched in the Netherlands in 1822 by King William I as the first mutual funds, while others point to a Dutch merchant named Adriaan van Ketwich whose investment trust created in 1774 may have given the king the idea. Ketwich probably theorized that diversification would increase the appeal of investments to smaller investors with minimal capital. The name of Ketwich's fund, Eendragt Maakt Magt, translates to "unity creates strength". The next wave of near-mutual funds included an investment trust launched in Switzerland in 1849, followed by similar vehicles created in Scotland in the 1880s. The idea of pooling resources and spreading risk using closed-end investments soon took root in Great Britain and France, making its way to the United States in the 1890s. The Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S. The creation of the Alexander Fund in Philadelphia in 1907 was an important step in the evolution toward what we know as the modern mutual fund. The Alexander Fund featured semi-annual issues and allowed investors to make withdrawals on demand. Regulation and Expansion By 1929, there were 19 open-ended mutual funds competing with nearly 700 closed-end funds. With the stock market crash of 1929, the dynamic began to change as highly-leveraged closed-end funds were wiped out and small open-end funds managed to survive. Government regulators also began to take notice of the fledgling mutual fund industry. The creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934 put in place safeguards to protect investors: mutual funds were required to register with the SEC and to provide disclosure in the form of a prospectus. The Investment Company Act of 1940 put in place additional regulations that required more disclosures and sought to minimize conflicts of interest. (For further reading, see Policing The Securities Market: An Overview Of The SEC.) The mutual fund industry continued to expand. At the beginning of the 1950s, the number of open-end funds topped 100. In 1954, the financial markets overcame their 1929 peak, and the mutual fund industry began to grow in earnest, adding some 50 new funds over the course of the decade. The 1960s saw the rise of aggressive growth funds, with more than 100 new funds established and billions of dollars in new asset inflows. Hundreds of new funds were launched throughout the 1960s until the bear market of 1969 cooled the public appetite for mutual funds. Money flowed out of mutual funds as quickly as investors could redeem their shares, but the industry's growth later resumed. A Brief of How Mutual Funds Work Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares. Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values).
Are Mutual Funds Risk Free and What are the Advantages? One must not forget the fundamentals of investment that no investment is insulated from risk. Then it becomes interesting to answer why mutual funds are so popular. To begin with, we can say mutual funds are relatively risk free in the way they invest and manage the funds. The investment from the pool is well diversified across securities and shares from various sectors. The fundamental understanding behind this is not all corporations and sectors fail to perform at a time. And in the event of a security of a corporation or a whole sector doing badly then the possible losses from that would be balanced by the returns from other shares. You might try to reduce the risks by taking a for instance 12 month term deposit account. This logic has seen the mutual funds to be perceived as risk free investments in the market. Yes, this is not entirely untrue if one takes a look at performances of various mutual funds. This relative freedom from risk is in addition to a couple of advantages mutual funds carry with them. So, if you are a retail investor and planning an investment in securities, you will certainly want to consider the advantages of investing in mutual funds. • • • Lowest per unit investment in almost all the cases. Your investment will be diversified. Your investment will be managed by professional money managers.
Advantages Of Mutual Funds Since their creation, mutual funds have been a popular investment vehicle for investors. Their simplicity along with other attributes provide great benefit to investors with limited knowledge, time or money. To help you decide whether mutual funds are best for you and your situation, we are going to look at some reasons why you might want to consider investing in mutual funds. 1.Diversification : One rule of investing, for both large and small investors, is asset diversification. Diversification involves the mixing of investments within a portfolio and is used to manage risk. For example, by choosing to buy stocks in the retail sector and offsetting them with stocks in the industrial sector, you can reduce the impact of the performance of any one security on your entire portfolio. To achieve a truly diversified portfolio, you may have to buy stocks with different capitalizations from different industries and bonds with varying maturities from different issuers. For the individual investor, this can be quite costly. By purchasing mutual funds, you are provided with the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. One caveat, however, is that simply purchasing one mutual fund might not give you adequate diversification - check to see if the fund is sector or industry specific. For example, investing in an oil and energy mutual fund might spread your money over fifty companies, but if energy prices fall, your portfolio will likely suffer.
when you buy a dozen donuts. especially after deducting commissions. which trade any time during market hours.as you can see the costs begin to add up. Imagine if you had to buy the 10-20 stocks needed for diversification. you are able to diversify without the numerous commission charges.Liquidity : Another advantage of mutual funds is the ability to get in and out with relative ease. Mutual funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors.Divisibility : Many investors don't have the exact sums of money to buy round lots of securities. you can get in right away with mutual funds. the price per donut is usually cheaper than buying a single one. Also. 4 .Economies of Scale : The easiest way to understand economies of scale is by thinking about volume discounts. Investors can purchase mutual funds in smaller denominations. the cheaper that product becomes. Therefore. it is important to watch out for any fees associated with selling. With mutual funds. rather than having to wait until you have enough money to buy higher-cost investments. 5. One to two hundred dollars is usually not enough to buy a round lot of a stock. The commission charges alone would eat up a good chunk of your savings. In general. in many stores. This provides an additional advantage .liquidity. you can make transactions on a much larger scale for less money.000 minimums. However. you have a mutual fund's money manager to handle it for you. When you buy a mutual fund. 4. 3. For example. So. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. mutual funds transact only once per day after the fund's net asset value (NAV) is calculated.2. unlike stocks and exchange-traded funds (ETFs). If you buy only one security at a time.Professional Management : When you buy a mutual fund. you are also choosing a professional money manager. This also occurs in the purchase and sale of securities. you are able to sell your mutual funds in a short period of time without there being much difference between the sale price and the most current market value. Smaller denominations of mutual funds provide mutual fund investors the ability to make periodic investments through monthly purchase plans while taking advantage of dollar-cost averaging. rather than having to thoroughly research every investment before you decide to buy or sell. including back-end load fees. Add to this the fact that you would have to pay more transaction fees every time you wanted to modify your portfolio . the transaction fees will be relatively large. the more of one product you buy. ranging from $100 to $1.
government. 3. but money sitting around as cash is not working for you and thus is not very advantageous. such as bonds and Treasury bills. but it comes at a cost. the fees are classified into two categories: shareholder fees and annual operating fees. Some funds may be incorrectly labelled as growth funds. in the forms of loads and redemption fees. How the remaining assets are invested is up to the fund manager. the "Congo High-Tech Fund" could be sold with the title "International High-Tech Fund".Misleading Advertisements : The misleading advertisements of different funds can guide investors down the wrong path. When deciding on a particular fund to buy. Another important thing to know is that mutual funds are not guaranteed by the U. these fees only magnify losses. are paid directly by shareholders purchasing or selling the funds.Cash. Cash and More Cash: As you know already.usually ranging from 1-3%. a mutual fund will not be insured by the Federal Deposit Insurance Corporation (FDIC). Unlike a bank deposit. The annual fund operating fees are charged as an annual percentage . funds typically have to keep a large portion of their portfolios as cash. Having ample cash is great for liquidity. so in the case of dissolution.Disadvantages of mutual funds 1. the different categories that qualify for the required 80% of the assets may be vague and wide-ranging. a fund may be sold as a "growth fund". you need to research the risks involved .just because a professional manager is looking after the fund. while others are classified as small cap or income funds. that doesn't mean the performance will be stellar. However. mutual funds pool money from thousands of investors. In mutual funds. Funds will typically have a range of different fees that reduce the overall payout. 5 . This is especially important for investors in money market funds. 2. A fund can therefore manipulate prospective investors by using names that are attractive and misleading. 4. you won't get anything back. The shareholder fees. mutual funds experience price fluctuations along with the stocks that make up the fund. As you can imagine. Instead of labelling itself a small cap.S.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. Or. Unlike fixed-income products. The Securities and Exchange Commission (SEC) requires that funds have at least 80% of assets in the particular type of investment implied in their names. To maintain liquidity and the capacity to accommodate withdrawals.Costs : Mutual funds provide investors with professional management. in years when the fund doesn't make money. so everyday investors are putting money into the fund as well as withdrawing investments. These fees are assessed to mutual fund investors regardless of the performance of the fund.
Evaluating Funds: Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds.5. Be sure not to pick funds only because they have performed well in the past . Always note that mutual fund descriptions/advertisements always include the tagline "past results are not indicative of future returns". sales growth. Unlike stocks. advertisements. earnings per share.yesterday's big winners may be today's big losers. etc. mutual funds do not offer investors the opportunity to compare the P/E ratio. but how do you know if one fund is better than another? Furthermore. 6 . A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities. rankings and ratings issued by fund companies only describe past performance.
and stocks that have fallen out of favour with mainstream investors. usually pay small dividends. During this time. and often choose investments providing dividends as well as capital appreciation. 7 . For instance. or hard times in a particular industry. in between $2 and $1 Billion for mid and below $1 Billion for small. value funds take on lower risk than growth funds. Based on company size. large. some focus on high-risk start up companies that have the potential for double and triple digit growth. They invest in companies that the market has overlooked. Suitability of Value Funds : Value style of investing works particularly well during a bear phase in the stock markets. Finding a mutual fund that fits your investment criteria and style is important. the fund manager has more opportunities to invest in stocks trading at a discount to their fair value. which tend to buy high and sell higher. By buying low and selling high. These stocks are from firms which pay relative high dividends. Thus value funds are particularly suitable for investors with a moderate risk profile. and small cap Stocks from firms with various asset levels such as over $2 Billion for large. Types of mutual funds are: • Value stocks : Stocks from firms with relative low Price to Earning (P/E) Ratio. Investing in value fund involves identifying fundamentally sound stocks that are trading at a discount to their fair value. On the other hand. As value funds react slowly to market movements. either due to changing investor preferences. The investor is looking for income rather than capital gains. usually pay good dividends. The fund manager buys these stocks and holds them until the stock bounce backs to its fair value. some invest only in Blue Chip companies that are more established and are relatively low risk. a poor quarterly earnings report. • Income stock : The investor is looking for income which usually come from dividends or interest.TYPES OF MUTUAL FUNDS Most funds have a particular strategy they focus on when investing. The fund managers identify undervalued stocks in the market on the basis of fundamental analysis techniques. The investor is looking for capital gains rather than income. Value funds are those mutual funds that tend to focus on safety rather than growth. These stocks are then closely reviewed to see which ones have the greatest growth potential and are paying high dividends. but accepts a little more risk and is not limited to stocks. • Growth stock : Stocks from firms with higher low Price to Earning (P/E) Ratio. This fund is much like the value stock fund. In this process stocks with low price to earnings ratios are tagged. mid. they can be a good instrument of investment for those investors who are due to retire shortly. This fund may include bonds which pay high dividends.
• Enhanced index : This is an index fund which has been modified by either adding value or reducing volatility through selective stock-picking. • Stock market sector : The securities in this fund are chosen from a particular marked sector such as Aerospace, retail, utilities, etc. • Defensive stock : The securities in this fund are chosen from a stock which usually is not impacted by economic down turns. • Real estate : Stocks from firms involved in real estate such as builder, supplier, architects and engineers, financial lenders, etc. • Socially responsible : This fund would invest according to non-economic guidelines. Funds may make investments based on such issues as environmental responsibility, human rights, or religious views. For example, socially responsible funds may take a proactive stance by selectively investing in environmentally-friendly companies or firms with good employee relations. Therefore the fund would avoid securities from firms who profit from alcohol, tobacco, gambling, pornography etc. • Tax efficient : Aims to minimize tax bills, such as keeping turnover levels low or shying away from companies that provide dividends, which are regular payouts in cash or stock that, are taxable in the year that they are received. These funds still shoot for solid returns; they just want less of them showing up on the tax returns. • Convertible : Bonds or Preferred stock which may be converted into common stock. • Junk bond : Bonds which pay higher that market interest, but carry higher risk for failure and are rated below AAA. • Mutual funds of mutual funds : This funds that specializes in buying shares in other mutual funds rather than individual securities. • Exchange traded funds (ETFs) : Baskets of securities (stocks or bonds) that track highly recognized indexes. Similar to mutual funds, except that they trade the same way that a stock trades, on a stock exchange. Exchange Traded Funds (ETFs) represent a basket of securities that is traded on an exchange, similar to a stock. Hence, unlike conventional mutual funds, ETFs are listed on a recognised stock exchange and their units are directly traded on stock exchange during the trading hours. In ETFs, since the trading is largely done over stock exchange, there is minimal interaction
between investors and the fund house. ETFs can be categorised into close-ended ETFs or open-ended ETFs. ETFs are either actively or passively managed. Actively managed ETFs try to outperform the benchmark index, whereas passively-managed ETFs attempt to replicate the performance of a designated benchmark index. Difference between ETF and Conventional Mutual Funds: • Mutual funds are traded through fund house where as in an ETF, transactions are done through a broker as buying and selling is done on the stock exchange. • In conventional mutual funds units can be bought and redeemed only at the relevant NAV, which is declared only once at the end of the day. ETFs can be bought and sold at any time during market hours like a stock. As a result, ETF investors have the benefit of real time pricing and they can take advantage of intra-day volatility. • Annual expenses charged to investors in an ETF are considerably less than the vast majority of mutual funds. Most of the mutual funds have an entry or exit load varying between 2.00% and 2.25%. ETFs do not have any such loads. Instead ETF investors have to pay a brokerage to the broker while transacting. Which in most cases is not more than 0.5%. • ETFs safeguard the interests of long-term investors. This is because ETFs are traded on exchange and fund managers do have to keep cash in hand in order to meet redemption pressures.
Structure of the Indian Mutual Funds In developed countries like the UK and the US, the mutual funds industry is highly regulated with a view of imparting operational transparency and protecting investors’ interest. Since there is a clear distinction between open ended schemes and close ended schemes, usually two different types of structural and management approaches are followed. Open-ended funds (unit-trusts) in the UK follow the ‘trust approach’, while close-ended schemes follow (investment trusts) follow the ‘corporate approach’. The management and operations of the two types of funds, are, therefore, guided by separate regulatory mechanisms, and the rules are laid down by separate controlling authorities. However, no such distinctions exist in India and both approaches (Trust and Corporate) have been integrated by SEBI. The formation and operations of mutual funds in India are guided solely by the SEBI regulations. The below figure gives an idea of the structure of the Indian mutual funds. A mutual fund consists of four separate entities – sponsor, mutual fund trust, AMC and custodian. These are, of course, assisted by other independent administrative entities, such as banks, registrars and transfer agents.
The mutual fund is managed by the board of trustees or Trustee Company. acting alone or in combination with another corporate body.Establishes MF as a Trust Sponsor Company Managed by a Board of Trustees Holds unit holders’ fund Registers MF with in MF SEBI Mutual Fund Ensures compliance to SEBI Enters MF funds Floats into agreement with AMC Manages funds as per SEBI guidelines and AMC agreement Appointed by BOT Appointed by Trustees Asset Management Company Custodian Appointed by AMC Bankers Appointed by AMC Registrars and Transfer Agents Provides necessary custodian services Provide Banking Services Provide registrar services and act as transfer agents STRUCTURE OF THE INDIAN MUTUAL FUNDS The sponsor for a mutual fund can be any person who. establishes the mutual fund and gets it registered with SEBI. 1908. As per the 1996 regulations. and 11 . ‘A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed. The sponsor is required to contribute at least 40% of the minimum net worth (Rs 10 crore) of the AMC. He must have a sound track record and a reputation for fairness and integrity in all his business transactions. executed by the sponsor in favour of trustees named in such an instrument. duly registered under the provisions of the Indian Registration Act.
In case it wants to carry out other fund management business. The trustees are required to submit half-yearly reports to SEBI on the activities of the mutual fund. which must act as per the SEBI guidelines. Its net worth should be in the form of cash and all assets should be held in its name. It is required to disclose the scheme particulars and the base calculation of the 12 . as per SEBI regulations. It is also their responsibility to control the capital property of the mutual fund schemes. At least half the trustees have the right to obtain relevant information from the AMC or its employees cannot act as trustees. The mutual fund raises money through the sale of units under one or more schemes for investment in securities. as well as a quarterly report on its activities. whose activities they supervise. The trustees must see to it that the schemes floated and managed by the AMC are in accordance with the trust deeds and SEBI guidelines. A trustee can be removed only with the prior approval of SEBI The trustees appoint the AMC. The AMC cannot give or guarantee loans. They can also dismiss the AMC under certain conditions.the sponsor executes the trust deeds in favour of the trustees. in accordance with SEBI guidelines. and is prohibited from acquiring any assets (out of the scheme property) which would involve the assumption of unlimited liability. it should satisfy the capital adequacy requirement for each such business independently. the trust deeds. The trustee of a particular mutual fund cannot be appointed as a trustee of any other mutual fund unless he is an independent trustee and obtains prior permission from the mutual fund in which he is a trustee. They appoint a custodian. and the management agreement it has made with the trustees. The AMC should be registered with SEBI. The trustees have the right to obtain relevant information from the AMC.
The appointment of the AMC can be terminated by a decision of 75% of unit-holders or a majority of trustees. he should not be associated with the AMC.NAV. At the time of appointment. The director of the AMC should be a person of repute and high standing. including money market instruments. or a section of the public. under one or more schemes for investment in securities. with at least five years experience in the relevant field. The SEBI regulations provide for the appointment of a custodian by the trustees for ‘carrying on the activity of safekeeping of the securities or participating in the clearing system’ on behalf of the mutual fund. It must submit quarterly reports to the mutual fund. Portfolio management services Management of offshore funds Providing advice to offshore funds Management of pension or provident funds Management of venture capital funds Management of money market funds Management of real estate funds 13 . The revised regulations of 1996 define a mutual fund as a fund established in the form of a trust to raise moneys through the sale of units to the public. Mutual funds are also allowed to diversify their activities in the following areas. or act as a sponsor or trustee to any mutual fund. The custodian must have a sound track record and adequate relevant experience.
listing is not mandatory if the scheme provides for periodic repurchase facilities to all unit-holders. and also. All the schemes to be launched by an AMC need to be approved by the trustees. Copies of the offer document of such schemes are to be filed with SEBI. The AMC must refund the application money if the minimum subscription is not received. However. and should contain adequate disclosures to enable investors to make informed decisions. the excess over-subscription within six weeks of the closure of subscription. the AMC must specify the minimum subscription and the extent of over-subscription which it intends to retain. In the case of oversubscription. No scheme other than unit linked schemes can be opened for subscription for more than 45 days. In the offer document. advertising and listing of mutual funds schemes. The listing of close-ended schemes is mandatory and they should be listed in a recognized stock exchange within six months of the closure of subscription. all those applying for up to 5000 units must be given full allotment subject to oversubscription. or opens for repurchase within six months of the closure of subscription The units of a close-ended scheme can be repurchased or reissued by an AMC. or provides for monthly income or caters to special classes of persons. Advertisements in respect of schemes should be in conformity with the prescribed advertisement code of SEBI. They can also be converted into an open ended scheme or may be rolled over if the majority of shareholders pass a resolution to that effect. 14 .The regulations deal with various issues relating to launching. or discloses details of repurchase in the offer document.
Guaranteed returns can be provided for in a scheme only if they are fully guaranteed by the AMC or sponsor. The regulations provide procedure for the manner in which close-ended scheme is to be wound up. Stringent restrictions were imposed on the launching of guaranteed return schemes. unless it is rolled over. They contained several provisions: They demanded the provision of stringent disclosure norms in the offer document to facilitate informed decision-making by the investors. It should be would up on the redemption date. Standardisation of accounting policies. A code of ethics was introduced for AMCs Transfer agents were entrusted for higher responsibilities to ensure better management of funds. Prudential supervision replaced the quantitative investment restrictions and the AMC was given complete freedom to structure schemes. there should be a statement indicating the name of the person and the manner in which the guarantee to be made must be made in the offer document. It can be would up if 75% of the unit-holders pass a resolution in favour of winding it up. and improve the mechanism of investor protection. or if the trustees so require for ay reason. In such cases. 15 . The regulations of 1996 and the subsequent amendments attempted to enhance transparency and accountability. computation of NAV and valuation of assets. or if SEBI so directs in the interest of the investors.
K. has increased the level of transparency and strengthened the mechanism of investor protection. it was decided to fix certain responsibilities for the trustees to ensure that they remained vigilant and played a more active role. like revision of the codes of conduct. diligence. together with the standardization of several provisions relating to operations. The committee’s report was accepted by SEBI and the following measures were decided upon. were taken to promote integrity.Considering the various irregularities and sharp deterioration in the performance of many mutual funds. 16 . Several other measures. The manner in which the trustees are to fulfil their responsibilities has been spelt out. Trustees can appoint independent auditors. The SEBI appointed a committee under the chairmanship of P. Kaul to examine the issue of responsibilities of trustees. among others. They are required to meet at least once in three months. and fairness among the trustees as well as the AMCs. All this.
One of the options is to invest the money in stock market. investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Mutual funds are highly cost efficient and very easy to invest in. When one investment is down another might be up. as in real terms the value of money decreases over a period of time. Asset Holding Pattern and Resource Mobilization Mutual Funds in India: Mutual Fund is an instrument of investing money. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue. Diversification of investment holdings reduces the risk tremendously.Diagrammatic Representation of Fund Structure and it’s Constituents Fund Sponsor Trustees Asset Management Company (AMC) Depository Agent Custodian 5. Diversification means spreading out money across many different types of investments. Also. one doesn't have to figure out which stocks or bonds to buy. bank rates have fallen down and are generally below the inflation rate. By pooling money together in a mutual fund. A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. But the biggest advantage of mutual funds is diversification. Nowadays. Therefore. keeping large amounts of money in bank is not a wise option. CLASSIFICATION OF MUTUAL FUNDS:- 17 .
Active management Most open-end funds are actively managed. Investors can buy and sell units of these funds at Net Asset Value (NAV) related prices which are published on a daily basis. These types of funds do not have a fixed maturity period. These fees are commonly referred to as 12b-1 fees in U. These charges may represent profit for the fund manager or go back into the fund. which enables the fund to raise money by selling securities at prices very close to those used for valuations.Mutual fund schemes also classified on the basis of its structure and its investment objective. in a manner similar to any other company. if there are no such charges levied. called a 'close-end load. they always have to keep a certain amount of money in cash. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. Some fees are charged by a fund on the sale of these units. Some of these fees are called an initial charge (UK) or 'front-end load' (US). A large portion of most open mutual funds is invested in highly liquid securities.S. It can help to add on the net assets of the company. professional money management. An open-end mutual fund does not have a set number of shares. Fees There may be a percentage charge levied on the purchase of shares or units. Buying and Selling: 18 . Index funds are openend funds that attempt to replicate an index. By Structure: • Open-ended Funds/Schemes: (Tenor based) An open-end fund is one that is available for subscription all through the year. the fund is "no-load" (US). and therefore do not allow the manager to actively choose securities to buy. Some of the fees cover the cost or distributing the fund by paying commission to the adviser or broker that arranged the purchase. Open-end schemes are more liquid in nature. The key feature of open-end schemes is liquidity. These do not have a fixed maturity. meaning that a portfolio manager picks the securities to buy. This lowers the potential returns. Open-end funds raise money by selling shares of the fund to the public. liquidity and convenience. although index funds are now growing in popularity. Some of the benefits of open-end funds include diversification. Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets. Since open-end funds are constantly under redemption pressure. But open-end funds have one negative as compared to closed-end funds. as per the stated objectives of the fund. which they otherwise would have invested. Not all fund have initial charges. Most of the open-end funds are actively managed and the fund manager picks the stocks as per the objective of the fund. It continues to sell shares to investors and will buy back shares when investors wish to sell. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. such as the S&P 500. which sell its stock to raise the capital. An Open-ended Mutual funds are those funds in which the company can issue always more outstanding shares.' that may be waived after several years of owning the fund. Units are bought and sold at their current net asset value.
and it takes a dive. or send a check. it may not impact your total investment as another holding in the fund may be up. some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. To make an investment. Investors can invest in 19 . and receive your proceeds by check in 3-4 days. if you have all of your assets in that one stock. you’re likely to feel a more considerable loss. Open funds have no time duration. There's no limit to the number of shares the fund can issue. but fund manager has less influence because the price of the underlining owned securities has greater influence. like the shares are traded. Diversifying your investment is key because your assets are not impacted by the fluctuation price of only one stock. It is open for subscription only during the time of launch. the number of shares always stays fixed.Open funds sell and redeem shares at any time directly to shareholders. But. which is deducted from the amount invested. whenever investors put money into the fund or take it out. but not on the stock market. Some open-ended funds charge an entry load (i. a sales charge). In order to provide an exit route to the investors. and can be purchased or redeemed at any time. Since this happens routinely every day. Nor is the value of each individual share affected by the number outstanding. or if you have an account with the investment firm. not the size of the fund itself. Close Ended mutual fund or generally termed as traded mutual fund is the one that can be brought and sold like a normal share. Advantages: Open funds are much more flexible and provide instant liquidity as funds sell shares daily. A majority of open mutual funds also allow transferring among various funds of the same “family” without charging any fees. because net asset value is determined solely by the change in prices of the stocks or bonds the fund owns. Closed-ended Funds/schemes: (Tenor based) • A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The more investors buy a fund. In it. An open fund issues and redeems shares on demand. The value of the shares fluctuates with the market. If a stock in the fund drops in value. This fund has a fixed number of shares. The price you pay per share will be based on the fund’s net asset value as determined by the mutual fund company. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. You will generally get a redemption request processed promptly. 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. Open funds range in risk depending on their investment strategies and objectives. but still provide flexibility and the benefit of diversified investments. allowing your assets to be allocated among many different types of holdings. total assets of the fund grow and shrink as money flows in and out daily. you purchase a number of shares through a representative. These funds also have commission which brokers get since the shares of these funds are traded over the counter. you can buy online. the more shares there will be.e. usually a percentage of the net asset value.. Close-ended funds has a stipulated maturity period like 5-7 years.
What exactly the fund 20 . the closed-end funds can be traded during the market day at any time. In case of market panic and mass-selling by investors. hence they tend to keep less cash in their portfolios and cam invest more capital in the market. Distinct Features of Closed-end Funds : • • • These funds are closed to new capital after they begin operating Closed-end funds trade on stock exchanges rather than being redeemed directly by the fund Unlike open-end funds. The discount is the difference between the market price of the closed-end fund and its total net asset value. open-end funds need to raise money for redemptions. and keep stocks he would rather sell. which may be public or limited. Close-ended funds give an option for the investor of selling back the units to the mutual fund through periodic repurchase at NAV related prices. in the UK the London Stock Exchange's main market is home to the mainstream funds although AIM supports many small funds especially the Venture Capital Trusts. Closed-end funds are usually traded at a premium or discount whereas open-end funds are traded at NAV. In such as scenario the quality of the portfolio may be affected . closed-end funds are usually sponsored by a funds management company which will control how the money is invested. They begin by soliciting money from investors in an initial offering.the close ended mutual funds at the time of the initial public issue and thereafter can be brought or sold units of the scheme on the exchanges where the units are listed. the discount usually decreases and becomes a premium instead. • • Availability Closed end funds are typically traded on the major global stock exchanges. Savvy investors search for closed-end funds with solid returns that are trading at large discounts and then bet that the gap between the discount and the underlying asset value will close. in Canada. To cope with the liquidity concerns. Therefore. they have the potential to generate greater returns as compared to open-end funds.Advantages: The prospect of buying closed funds at a discount makes them appealing to experienced investors.S. So one advantage to closed-end funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks. But the commissions will incur for this selling and buying. the manager of an open-ended fund may be forced to sell stocks he would rather keep. The fund managers pool the money and purchase securities. As the stocks in the fund increase in value. Like their better-known open-ended cousins. with the ability to buy at a discount. the Toronto Stock Exchange lists many closed-end funds. In the U. The investors are given shares corresponding to their initial investment. Open-end funds are generally traded at the closing price at the end of the market day. • Advantages of Closed-end Funds : • Closed-end funds don't have to worry about the redemption of shares. the New York Stock Exchange is dominant although the NASDAQ is in competition.
Total managed assets include both the assets attributable to the purchase of stock by common shareholders and those attributable to the purchase of stock by preferred shareholders. Distinguishing features Some characteristics that distinguish a closed-end fund from an ordinary open-end mutual fund are that: It is closed to new capital after it begins operating. preferred stock. Its shares can therefore be traded during the market day at any time. However. For the most part. Often the share price drops below the net asset value. the fund hopes to earn a higher return with this excess invested capital. Another distinguishing feature of a closed-end fund is the common use of leverage or gearing to enhance returns. An open-end fund can usually be traded only at the closing price at the end of the market day. two types of shareholders are created: preferred stock shareholders and common stock shareholders. closed-end fund companies report expenses ratios based on the fund's common assets only. Since closed-end funds are traded like stock. Preferred stock shareholders benefit from expenses based on the total managed assets of the fund. you cannot simply mail a check and buy closed fund shares at the calculated net asset value price. Some funds invest in stocks. A minimum investment of as much as $5000 may apply. and Its shares trade on stock exchanges rather than being redeemed directly by the fund. and unlike the more common open funds discussed below. and some in very specific things. The entry into long-term debt arrangements and reverse-repurchase agreements are two additional ways to raise additional capital for the fund. others in bonds. long-term debt. Funds may use a combination of leveraging tactics or each individually. rather than the total managed assets of the fund. a customer trading them will pay a brokerage commission similar to one paid when trading stock (as opposed to 21 . it is more common that the fund will use only one leveraging technique. The expenses charged to the common shareholder are based on the common assets of the fund. liquidity is very poor. The time to buy closed funds is immediately after they are issued. Buying and Selling: Unlike standard mutual funds. however. thus selling at a discount. CEFs can raise additional investment capital by issuing auction rate securities. A CEF usually has a premium or discount. When a fund leverages through the issuance of preferred stock. Information regarding prices and net asset values are listed on stock exchanges. there is typically a five-year commitment. Shares are purchased in the open market similar to stocks. The common shareholder's returns are reduced more significantly than those of the preferred shareholders due to the expenses being spread among a smaller asset base. In doing so. An open-end fund sells at its NAV . and/or reverse-repurchase agreements. However.manager can invest depends on the fund's charter. the contractual management fees charged to the closed-end funds may be based on the common asset base or the total managed asset base. A closed-end company can own unlisted securities.
Because a closed-end fund is on the market. This feature could lead to potential arbitrage profits if the market price of the ETF were to diverge substantially from its NAV. Some advantages of closed-end funds over their open-ended cousins are financial. and for which orders must be placed in advance. the market price of an ETF trades in a narrow range very close to its net asset value. and this price often diverges substantially from the NAV of the fund assets. at the calculated NAV. it must obey certain rules. and keep stocks he'd rather sell. In contrast. Thus 22 . The market prices of closed-end funds are often ten to twenty percent higher or lower than their NAVs. CEFs don't have to deal with the expense of creating and redeeming shares. the closed-end fund may snap up a bargain. Also. Thus it may become overweight in the shares of lower-quality or underperforming companies for which there is little demand. In other words. But buying a closed-end fund trading at a premium might mean buying $900 worth of assets for $1000. They also qualify for advanced types of orders such as limit orders and stop orders. Some funds require that orders be placed hours or days in advance. due to liquidity concerns (selling too much of any one stock causes the price to drop disproportionately). investors may sell en masse. but there are important differences between these two kinds of security. they tend to keep less cash in their portfolio. while open-ended funds might sell too early. The main exception is loan-participation funds. before the NAV is known. But an investor pulling out of a closed-end fund must sell it on the market to another buyer. so the manager need not sell any of the underlying stock.commissions on open-ended mutual funds where the commission will vary based on the share class chosen and the method of purchasing the fund). and they need not worry about market fluctuations to maintain their "performance record". The price of a closed-end fund is completely determined by the valuation of the market. but it is more likely to make a recovery when the intrinsically sound stocks rebound. and by simple buy or sell orders. if there is a market panic. So if a stock drops irrationally. Comparison with open-ended funds With open-ended funds. The CEF's price will likely drop more than the market does (severely punishing those who sell during the panic). So investing $1000 into the fund means buying shares that lay claim to $1000 worth of underlying assets (apart from sales charges). the manager of an open-ended fund may be forced to sell stocks he'd rather keep. Since the market downturn of late 2008 a number of fixed income ETF's have traded at premiums of roughly two or three percent to their NAV's. closedend funds typically do not have sales-based share classes where the commission and annual fees vary between them. Closed-end funds trade on exchanges and in that respect they are like exchange-traded funds (ETFs). Exchange-traded Closed-end fund shares trade continually at whatever price the market will support. such as filing reports with the listing authority and holding annual stockholder meetings. the value is precisely equal to the NAV. Faced with a wave of sell orders and needing to raise money for redemptions. because the structure of ETFs allows major market participants to redeem shares of an ETF for a "basket" of the fund's underlying assets. This is in contrast to some open-end funds which are only available for buying and selling at the close of business each day. while the market price of an ETF is typically within one percent of its NAV.
have outperformed most other kind of investments held over the long term. It has been proven that returns from stocks. Inc. They are open for sale or redemption during pre-determined intervals at NAV related prices. Growth funds tend to look for the fastest-growing companies in the market. In India. Objective of Growth Funds : 23 . Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation. such as protest against poor management. rather than companies that pay out dividends. growth funds became popular after the tremendous growth of the Indian companies during the post economic reforms period. which are experiencing significant earnings or revenue growth. blue chip companies. Such schemes normally invest a majority of their corpus in equities. The rapid growth of Indian industry attracted investors’ money to sectors of high growth and as a result growth funds came into being. Examples Among the biggest. they are focussed on increasing in capital gains.stockholders can more easily find out about their fund and engage in shareholder activism. Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. By Investment Objective : • Growth Funds/schemes: (Asset class based) The aim of growth funds is to provide capital appreciation over the medium to long. But. These type funds are those which invest in the stocks of well-established. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time. They focus on those companies. Dividends and steady income are not only goal of these types of funds. Newer CEFs include: • • • • • Alpine Total Dynamic Dividend Fund Morgan Stanley China A-Share Fund John Hancock PATRIOT Fund Teucrium Natural Gas Fund Interval Funds/schemes: Interval funds combine the features of open-ended and close-ended schemes. long-running CEFs are: • • • • • • Adams Express Company Foreign & Colonial Investment Trust plc Witan Investment Trust plc Tri-Continental Corporation Gabelli Equity Trust General American Investors Company.term.
or fall equally when the market falls. The objective of these funds is to provide a balanced mixture of safety. • Bond /Income Funds/schemes: The aim of income funds is to provide regular and steady income to investors. Income Funds are ideal for capital stability and regular income. These type of mutual funds are most volatile also. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities. Capital gains are the increase in the value of investment. In general. Only aggressive investors. These terms denote funds that invest primarily in government and corporate debt. corporate debentures and Government securities. This type of mutual fund invest in many different kind of shares which includes risk industry stocks. Because there are many different types of bonds. the audience for these funds consists of conservative investors and retirees. Growth funds offer tremendous opportunities for growth. • Aggressive Growth Funds /schemes(Asset class based) : These are stock funds that primarily have one objective of maximum capital gains. • Balanced Funds/schemes: The aim of balanced funds is to provide both growth and regular income. small company stocks and uses certain investment techniques like short selling of stocks. the primary objective of these funds is to provide a steady cash flow to investors. or those with enough time to make up for short-term market losses. which means that if rates go up the value of the fund goes down. In a rising stock market. Such schemes generally invest in fixed income securities such as bonds. rising more than other funds in bull markets and falling more in bear markets. bond funds can vary dramatically depending on where they invest. but bond funds aren't without risk. should buy these funds • Growth and Income funds/schemes (Asset class based) : These type of mutual funds are focussed on increased capital gains and steady income." "bond. For example. Income funds are named appropriately: their purpose is to provide current income on a steady basis." and "income" are synonymous. The weighting might also be restricted to a specified maximum or minimum for each asset class.The objective of growth funds is to achieve capital appreciation by in stocks of those companies. growth funds are more volatile than other types of funds. nearly all bond funds are subject to interest rate risk. the terms "fixed-income. which are registering significant earnings or revenue growth. futures & options. These are ideal for investors looking for a combination of income and moderate growth. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. The strategy of balanced funds is to invest in a combination of fixed income and equities. Bond funds are likely to pay higher returns than certificates of deposit and money market investments. income and capital appreciation. the NAV of these schemes may not normally keep pace. As such. Furthermore. Less volatile than Aggressive Growth funds. when the financial market is bullish. When referring to mutual funds. While fund holdings may appreciate in value. 24 .
They invest in the largest. It is a type of mutual fund that buys a combination of common stock. You won't get great returns. Objectives are similar to those of a balanced fund. including Treasury bills. preferred stocks and common stocks. 25 . Advantages of Balanced Fund: Generally. If you invest a thousand rupees. Balanced mutual funds aim to conserve investors’ initial investment. but these kinds of funds typically do not have to hold a specified percentage of any asset class. This helps the investor in maintaining the appropriate asset mix. mostly Treasury bills. balanced funds maintain a 60:40 equity debt ratio. to pay an income and to aid in the long-term growth of both the principle and the income. and short-term bonds. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods. income or growth. Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. bonds. you will get that money back.A similar type of fund is known as an asset allocation fund. balanced funds will usually increase less than an all-stock fund during a bull market. The money market consists of short-term debt instruments. The investor may wish to balance his risk between various sectors such as asset size. These are generally the safest and most secure of mutual fund investments. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle. Therefore. Balanced funds continuously rebalance their portfolios to ensure that the broad asset allocation is not disturbed. and have made the entire investment process more accessible to people. When investing in a money-market fund. but you won't have to worry about losing your principal. • Money Market Funds/schemes:(Asset Class Based) The aim of money market funds is to provide easy liquidity. It is simply a matter of when you get it back. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD). to provide both income and capital appreciation while avoiding excessive risk. Money-markets have allowed investors to reap high yields on their deposits. along with the rules regarding check-writing. But on the flip side. the profits earned from the stock markets are encashed and invested in low risk instruments. Money-market funds are risk-free. preservation of capital and moderate income. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. commercial paper and inter-bank call money. certificates of deposit. you should pay attention to the interest rate that is being offered. Therefore the fund is a balance between various attributes desired. most stable securities. The chances of your capital being eroded are very minimal. These schemes generally invest in safer short-term instruments such as treasury bills. Balanced fund is also known as hybrid fund. by investing in both stocks (for growth) and bonds (for income). This means that 60% of their total investment is in equity and the balance 40% in debt and cash equivalents. preferred stock. This is a safe place to park your money. Balanced mutual funds have a portfolio mix of bonds. without getting into the hassles of rebalancing the portfolio on their own. Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives. Balance funds combine the power of equities (shares) and the stability of debt market instruments (fixed return investments like bonds) and provide both income and capital appreciation while avoiding excessive risk.
Treasury bills make up the bulk of the money market instruments. Types of Money Market Mutual Funds Money market funds are of two types: 1. Securities in the money market are relatively risk-free. A money market fund is a mutual fund that invests solely in money market instruments. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free. Generally. They can be further subdivided into (1) Front-end load funds and (2) Back-end load funds. institutional investors and businesses etc. 26 . The investment portfolio of money market funds comprises of treasury bills. short term debts. Money market funds are generally the safest and most secure of mutual fund investments. Load funds are those funds that charge commission at the time of purchase or redemption.Load mutual funds and No-Load mutual funds. each time you buy or sell units in the fund.The interest rates on money-market funds are changing nearly day to day. Money market instruments are forms of debt that mature in less than one year and are very liquid. 2. Typically entry and exit loads range from 1% to 2%. The goal of a money-market fund is to preserve principal while yielding a modest return. Money market funds allow retail investors the opportunity of investing in money market instrument and benefit from the price advantage. Load Funds/schemes: • • A Load Fund is one that charges a commission for entry or exit. money market instruments require huge amount of investments and it is beyond the capacity of an ordinary retail investor to invest such large sums. Retail Money Market Mutual Funds/schemes: Retail money market funds are used for parking money temporarily. Huge sum of money is parked in institutional money funds. When investing in a money-market fund. Institutional Money Market Mutual Funds/schemes: These funds are held by governments. The assets in a money market fund are invested in safe and stable instruments of investment issued by governments. a commission will be payable. • No-Load Funds/schemes: Mutual funds can be classified into two types . these funds have had high yields. In times of inflation. That is. Special Features of Money Market Mutual Funds: • Money market mutual funds are one of the safest instruments of investment for the retail low income investor. tax free bonds etc. It could be worth paying the load. banks and corporations etc. if the fund has a good performance history. attention should be paid to the interest rate that is being offered.
or equity. These companies are characterized by low P/E and price-to-book ratios and high dividend yields.Front-end load are fees or expenses recovered by mutual funds against compensation paid to brokers. and the aim of stock ownership is to see the value of the companies increase over time. These expenses are generally called as sales loads. when a load fund is held over a long time period. Front-end load funds charge commission at the time of purchase. Also which have already outperformed all other types of investments in long term. consistently underperform no-load funds when the load is taken into consideration in performance calculations. and can be classified in three basic sizes: small. Stocks that have proven historically to bethe best investment. Stocks are often categorized by their market capitalization (or caps). which refers to companies that have had (and are expected to continue to have) strong growth in earnings. is not diminished because if the money paid for the load had been invested. The opposite of value is growth. however. loads understate the real commission charged because they reduce the total amount being invested. Such a mutual fund would reside in the bottom right quadrant (small and growth). A compromise between value and growth is blend. These funds produce a greater level of current income by investing in equity securities of companies with solid reputation and have a good record of paying dividends. Equity mutual funds are also known as stock mutual funds. Similar to front end loads there are back end loads. • Equity Funds/schemes :(Asset class based) Funds that invest in stocks represent the largest category of mutual funds. The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term value refers to a style of investing that looks for high quality companies that are out of favour with the market. it’s like having shares of a certain company. no-load funds are those funds that can be purchased without commission. These funds allow an investor to own a portion of the company that they have invested in. the investment objective of this class of funds is long-term capital growth with some income. which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle. Generally. sales and cash flow. The opposite of this would be a fund that invests in start-up technology companies with excellent growth prospects. but the risk is high. Equity mutual funds invest pooled amounts of money in the stocks of public companies. The advantage of a no load fund is that the entire corpus is put to work. A great way to understand the universe of equity funds is to use a style box. That is. Secondly. if paid up front. no commission is payable on purchase or sale of units in the fund. funds with loads. There are. an example of which is below. and large. it would have been compounding over the whole time period. their distribution and marketing costs. SELECTION OF MUTUAL FUNDS:- 27 . as in a no-load fund. Firstly. in companies. on average. Finally. medium. many different types of equity funds because there are many different types of equities. For example. No load funds have several advantages over load funds. Back-end load funds charge commission at the time of redemption. Stocks represent part ownership. A No-Load Fund is one that does not charge a commission for entry or exit. the effect of the load. a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value).
say IT based fund. investors should evaluate its historical performance. It's tough to classify these funds as either riskier or safer than domestic investments. they can.How to Select an Equity Fund? Compare a fund with its peers: One of the basic fundamental of benchmarking is to evaluate funds with in the same category. If investments are chosen carefully. fund managers need to keep close watch on foreign currencies and world markets as profitable investments in a rising market can lose money if the foreign currency rises against the dollar. Global funds invest anywhere around the world. But. By evaluating a fund against its own historical performance. Nifty or any other index. it is likely that another economy somewhere is outperforming the economy of your home country. The funds that have outperformed their benchmark indices during stock market volatility must be given a close look. Things to Consider Before Investing in International Mutual Funds: 28 . on the flip side. In recent years international mutual funds have gained popularity. including your home country. • Global/International Funds/schemes : An international fund (or foreign fund) invests only outside your home country. It can be BSE 100. then you should compare its performance with another similar IT based fund. Although the world's economies are becoming more inter-related. Compare against the fund's own performance: Apart from comparing a fund with its peers and benchmark index. Compare how the fund has fared against the benchmark index over a period of 3-5 years. international mutual fund may be profitable when some markets are rising and others are declining. The benchmark index serves as a guidepost for both the fund manager and the investor. which has sparked off growth in various regions of the world. Investing in international markets provides greater portfolio diversification and let you capitalize on some of the world's best opportunities. actually reduce risk by increasing diversification. you can get an idea about consistent performers. They do tend to be more volatile and have unique country and/or political risks. BSE 200. Comparing it with banking sector fund for example will not give the correct picture. Compare returns against those of the benchmark index: Every fund mentions a benchmark index in the Offer Document. as part of a well-balanced portfolio. Comparing a fund over stock market cycle (boom and bust) will give investors a good idea about how the fund has fared. However. if you are evaluating the performance of a thematic fund. International mutual funds are those funds that invest in non-domestic securities markets throughout the world. This can be attributed to removal of trade barriers and expansion of economies. For example.
• Index Funds/schemes :(Position Philosophy Based) The last but certainly not the least important are index funds.International Investing Formula: According to a survey. which occurs if the region goes into a bad recession. alcoholic beverages. So. it is essential to have diversification in different markets across the world. For example you invested INR 9000 in an international mutual fund. technology. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. Diversification: Not all the markets of the world move in one pack. This means in effect you invested $200. the best policy for investment is to have a 70% domestic investment and a 30% international diversified funds investment. Most socially responsible funds don't invest in industries such as tobacco. health. An investor in an index fund figures that most managers can't beat the market. you have to accept the high risk of loss. so a downswing in a country's market can be well taken care off by gains in the others. only Brazil). Currency Exchange Risk: You should also factor in foreign exchange currency fluctuations in your investment returns. This may mean focusing on a region (say Latin America) or an individual country (for example. There is a greater possibility of big gains. An index fund merely replicates the market return and benefits investors in the form of low fees. The idea is to get a competitive performance while still maintaining a healthy conscience.00. Regional funds make it easier to focus on a specific area of the world. but you have to accept that your sector may tank. Sector funds are extremely volatile. etc. Sector funds are targeted at specific sectors of the economy such as financial. 50. This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). which is otherwise difficult and expensive. An advantage of these funds is that they make it easier to buy stock in foreign countries. After a year your investment appreciated to Rs 10. At that time let say one dollar was worth Rs 45. 29 . Just like for sector funds. The survey reveals that this investment strategy is better than having a 100% domestic investment portfolio or a 100% international exposure in terms of risk exposure and return on the capital. Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. So due to fluctuation in dollar-rupee rate.000 but at the same time dollar appreciated to Rs. your investment is still worth $200 • Specialty Funds/schemes : This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. weapons or nuclear power.
The investment is done in the securities in the same weightage comprising of an index. • Regional Mutual Fund /schemes: Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area. You can see that the NAVs of such schemes would rise or fall in accordance with the rise or fall in the index. the fund's local region. It may not be exactly by the same percentage due to “tracking errors”. Indian markets haven't been thoroughly researched and there is enormous scope to beat the market by sound research.the more the number of stocks comprising an index the better is the diversification and price discovery. Origin of Index Funds Index funds first came into being in the US in the 1970s. usually. Bond funds fall into the category of fixedincome funds. Indian indices like the Sensex (30) and the Nifty (50) cover a relatively small number of stocks and ignore many opportunities in the mid-cap sector. etc. The fund makes no effort to beat the index and in fact it merely tries to earn the same return. The objective is to take advantage of regional 30 . A regional mutual fund generally looks to own a diversified portfolio of companies based in and operating out of its specified geographical area. These types of mutual funds are geared towards the investor who is approaching old age and doesn’t have many earning years left. Index funds track a broad index which is less volatile than specific stocks or sectors. In the US the research established the efficient markets concept which says that stocks are mostly priced accurately and that it is not possible to beat the market in a systematic way. An Index fund follows a passive investing strategy called indexing. Many investors hope to draw a steady income from these types of mutual funds. Though a few actively managed mutual funds may beat the market for a while. but as always. They invest in the portfolio of an index such as BSE Sensitive index (SENSEX) . it is very rare for active funds to beat the market in the long run. Index Funds in the context of India In the Indian market scenario index funds may not be the best option. It involves tracking an index say for example. The number and ratios or securities are maintained by the fund manager to mimic the Index fund it is following. unlike the capital markets in developed countries. S&P NSE 50 index (Nifty). An index fund doesn't have to pay for expensive analysts and frequent trading. thereby lessening the risk for investors. do not yield as high returns as the latter do. The basic principle of indexing is . Also. • Fixed-Income Funds (Asset class based): Fixed-income mutual funds are safer than equity funds. Advantages of Index Funds • • • As per efficient markets concept index funds provide optimum returns in the long run. the Sensex or the Nifty and builds a portfolio with the same stocks in the same proportions as the index.The securities in this fund are the same as in an Index fund such as the Dow Jones Average or Standard and Poor's. An index fund is a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market.
Regional funds differ from the international mutual funds in the sense that international mutual funds have a diversified portfolio with investment spanning all across the world.growth potential before the national investment community does. since a fund of funds buys many different funds which themselves invest in many different stocks. Also. • Fund of Funds : A fund of funds (FoF) is an investment fund that holds a portfolio of other investment funds rather than investing directly in shares. Regional funds select securities that pass geographical criteria. Fund of funds can be classified into: Mutual fund FoF and Hedge fund FoF. where as regional funds invest in companies in one specific region or nation. Sectoral mutual 31 . which have strong growth potential. energy. They may be some regional funds whose objective is to invest in a specific segment of the region's economy. energy etc. Regional funds carry more risk as compared to international mutual funds because their investments are less diversified geographically. Hedge fund FoF: A Hedge fund FoF invests in a portfolio of different hedge funds to provide broad exposure to the hedge fund industry and to diversify the risks associated with a single investment fund. Also known as thematic funds. This type of investment is also known as multi-manager investment. these funds are beneficial as most investors don't have enough capital to adequately diversify themselves across many investments in the region. real estate. depending on whether the chosen sector is in or out of favour. a fund of funds holds shares of many different mutual funds. Mutual fund FoF: A Mutual fund FoF invests in other mutual funds. Just as a mutual fund invests in a number of different securities. these funds concentrate on one industry such as infrastructure. the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area. But on the flipside. Pros & Cons of Fund of funds : Fund of funds are designed to achieve greater diversification than traditional mutual funds. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. • Sector Mutual Funds/schemes : Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. banking. such as banking. The idea is to allow investors to place bets on specific industries or sectors. it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings. For the investor. bonds or other securities. FMCG. technology. Such concentrated portfolios can produce tremendous gains or losses. For the average investor. power heath care. pharmaceuticals etc. expense fees on fund of funds are typically higher than those on regular funds because they include part of the expense fees charged by the underlying funds.
the large cap funds offer lower returns than mid cap or small cap funds. Large cap funds invest in those companies that have more potential of earning growth and higher profit. they limit diversification and the fund manager’s ability to capitalise on other sectors. One of the major advantages of large cap funds is that they are less volatile than mid cap and small cap funds and the near term prospects of large cap funds can be more accurately predicted. Since these funds focus on just one sector of the economy. Those companies that 32 . But when compared in totality. mutual fund houses avoid launching sectoral funds as they are seasonal in nature and do well only in cycles. each mutual fund has its own classification for small and medium sized companies. • Other Schemes : • • • Tax Saving Schemes : Special Schemes : Large cap funds/schemes: Large cap funds are those mutual funds. Different mutual funds have different criteria for classifying companies as large cap. Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap stocks). On the flip side. Generally. Generally. These funds come under low risk low return category. which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. companies with a market capitalization of up to Rs 500 crore are classified as small.funds come in the high risk high reward category and are not suitable for investors having low risk appetite. Top Large cap Funds in India: • • • • • • • • HDFC Top 200 UTI Large Cap Fund Franklin India Blue Chip Kotak 30 DSPML Top 100 Equity Principal Large Cap Fund Reliance Growth Fund Mid Cap Funds/schemes : Mid cap funds are those mutual funds. because such companies are usually widely researched and information is widely available. Unless a particular sector is doing very well and its long term growth prospects look bright. if the specific sectors aren’t doing well. which invest in small / medium sized companies. companies with a market capitalisation in excess of Rs 1000 crore are known large cap companies. Generally. it advisable not to trade in sector funds. In volatile times it is advisable to invest in large cap funds. large cap funds outperform all other funds. As there is no standard definition classifying companies as small or medium.
Big investors like mutual funds and Foreign Institutional Investors are increasingly investing in mid caps nowadays because the price of large caps has increased substantially. One of the challenges that fund managers of mid cap funds face is to identifying such companies. caution should be exercised while investing in mid cap mutual funds. 33 . Small / mid sized companies tend to be under researched thus they present an opportunity to invest in a company that is yet to be identified by the market.000 crore are classified as medium sized. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations.have a market capitalization between Rs 500 crore and Rs 1. Mid cap companies are looked upon as wealth creators and have the potential to join the league of large cap companies. But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So. Top Mid Cap Funds in India : • • • • • Sundaram BNP Paribas Select Midcap Franklin India Prima Fund HDFC Capital Builder Kotak Indian Mid Cap Fund HSBC Midcap Equity Fund. Mid cap funds are a good option in case the investor wants to add some diversity to his portfolio. flexible and can adapt to the changes faster. Such companies are nimble.
loyalty and the price of art 35 . There are many different houses to invest in a fund like T. based on characteristics or investment purposes. Investment funds and investors' money to a fund of money used to buy different types of actions.Mutual funds are an excellent way to invest in the stock market. Rowe.
the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. However. 36 . Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. necessary details in this respect are given in the offer documents of the schemes. Now a days. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Non-Resident Indians (NRI) can also invest in mutual funds. the post offices and banks also distribute the units of mutual funds.• How To Invest in Mutual Funds Scheme? Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Normally. On the other hand they must consider the track record of the mutual fund and should take objective decisions. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.
and the activities of investment management firms in particular. Monitoring and auditing the operations of investment management firms. Providing insurance . and Setting up minimum standards for investment management firms. and rating of management firms . To increase the benefit to investors from economies of scale and To improve the confidence of investors in the market by introducing minimum standard of quality. The principles of regulating are based on the following premises: To correct identified market imperfections and failures in order to improve the market and enhance competition . Regulatory measures. are designed to attain the twin objectives of correcting market failures and protecting investors from potential loss. In order to formulate a workable and acceptable regulatory structure. Disclosure.INVESTOR PROTECTION AND MUTUAL FUNDS REGULATION Need for regulation The prevalence of risk associated with investment activity necessitates regulation of the financial market in general. the following points must be noted. A suitable regulatory structure would be one which is broadened by legislature action and supported by industry practitioners. 38 . A close inter linkage must be established between the industry and the regulatory body. Regulatory measures can be broadly classified into five categories: Imposing capital requirements for investment management firms . whatever their form and structure.
Though the basis of such a structure may be legislative. in order to be effective. This is more so in a developing country and emerging market like India. where regulatory expenditure is an additional burden on the public exchequer and expenses are incurred at the cost of development expenditure. The regulators should not indiscriminately change their views as this may create instability in the market and loss of public confidence. 39 . Therefore. adaptive and less bureaucratic. Two types of costs are usually associated with any regulatory measure. The regulators should treat the investors as facilitators in the smooth functioning of the system. regulation should be able to protect the investors’ interests. The regulators should possess a high degree of perception and market experience The regulatory should have enough authority to enforce the regulatory measures. It is essential that any regulation is formulated only after taking into account the total cost and implicit benefits. The structure of regulation should create enough space for investors. it should be flexible. The direct cost is the cost of administration and implementation while the indirect cost is the loss of welfare due to restriction on competition. in an emerging and semi-efficient market like India. Moreover. for whom the regulatory system has been developed. and the direct benefits must be more than the indirect benefits and costs of regulation. Effective regulation should take into account both the cost of regulation and value addition. direct and indirect. investors are exposed to greater volatility and risks.
As prime regulator of capital market activities in India. the securities market and the matters connected therewith or incidental thereto. The SEBI Regulations of 1993 were the first attempt to bring mutual funds under a regulatory framework and to give direction to their functioning.to protect the interests of investors in securities and to promote the development of. and to regulate. 1991 thus ‘…. 1940. including those of mutual funds are covered under the objective so far as investor protection is concerned. under the present framework. The regulatory and supervisory powers of SEBI also stand strengthened by the Securities Law (Amendment) Ordinance. the regulation of all participants in the securities market (with the exception of issuers of capital) is the responsibility of SEBI. Accordingly. all capital market activities. However. and these have many similarities with the Investment Company Act. of the US as far as mutual funds regulation and investor protections are concerned. which empowers SEBI to impose penalties 40 . SEBI’s basic objective is to protect the interests of investors.Regulation and Investor Protection in India Securities market regulation in India is in the process of evolution and cannot be identified with the UK or the US type of regulation. new regulations were passed in 1996. This objective has been stated in the preamble of the Securities and Exchange Board of India Act. 1995. In India. as noted earlier.
as well as detailed guidelines on the trust deed. emerged as an autonomous and powerful regulator of mutual funds in India. Some of measures are as under: SEBI has incorporated several provisions to screen mutual funds at entry level. SEBI has laid down conditions for the appointment of trustees and has specified their obligations. The key personnel of the AMC should not have been working for any AMC or mutual fund or any intermediary whose registration has been suspended or cancelled at any time by the board. Under this amendment. SEBI has also laid down the terms and conditions for the approval of the AMC. general reputation and fairness in transaction’ 41 . The regulations further stipulate that the sponsor must have a sound track record and experience in the relevant field of financial services for a minimum period of five years. and a general reputation for fairness and integrity in all business transactions. Mutual funds must have a custodian who is to be approved by SEBI. similar to provision for a ‘fit and proper’ test in the UK. The directors of the AMC are to be persons having adequate professional experience in finance and financial services-related fields. professional competence.for violation of its regulations. Every mutual fund shall be registered with SEBI and the registration will be granted on the fulfilment of certain conditions laid down in the regulations for ‘efficient and orderly conduct of the affairs of a mutual fund’. financial soundness. The AMC is to be approved by SEBI. SEBI is also allowed to file SEBI has thus complaints in court without prior approval of the Central Government. and one of the preconditions for approval is a ‘sound track-record. The 1996 regulations lay down many measures to protect mutual funds investors.
No guarantee of returns can be given unless they are fully guaranteed by the sponsors or AMC. AMC and custodian. The investment objective and strategy. refunds. SEBI has also stipulated that the AMC should stipulate the minimum amount it seeks to raise under the scheme and the extent of oversubscription to be retained. records and documents of a mutual fund. There are clear regulatory provisions regarding the listing of close-ended schemes. the trustees. 42 . investors’ protection fund and credit rating. There is strong emphasis on ex-post investigation and disciplining of mutual funds through financial penalties. as well as the approximate percentage share of investment to be made in various instruments are also disclosed. and a statement indicating the manner of guarantee and the name of the person who will guarantee the returns is to be made in the offer document.No new scheme can be launched by any mutual fund unless the same is approved by the trustees and a copy of the document has been filed with the board. SEBI can impose a monetary penalty also for non-compliance. transfer and sending of unit certificates to investors. Thus. The implicit tone of regulation is correction through control. like SROs. In addition. it has been stipulated that the names of the trustees of mutual fund and the director of the AMC should be disclosed in the prospectus of the fund. the level of protection can be enhanced by including a few more elements. • SEBI has outlined the advertisement code to be followed by mutual funds in making any publicity regarding a scheme and its performance. The Indian regulatory mechanism is centered around statutory provisions of SEBI. SEBI can inspect the books of accounts. the regulatory mechanism and supervisory control are strong enough for protecting the interests of investors. There are enough provisions for disclosure. However.
the activities of financial institutions have wider spread and a failure of any one kind of institution may induce a collapse in the entire economy. By now.CORPORATE GOVERNANCE IN MUTUAL FUNDS Financial institutions play a vital role in promoting and sustaining the growth and development of the economy. not only in the interest of shareholders. who are the core of their business activities. Some of the features of the SEBI regulations that are intrinsically tied up with corporate governance: Composition and Responsibilities of Trustees and AMC : As per the SEBI guidelines. Therefore. have to increase wealth of the depositors/investors. but also in the greater interest of the national economy. there should be a minimum of four trustees in the Board of trustees. but at least 50% of them must be independent directors. 43 . There is no prescribed minimum limit for number of directors on the board of the AMC. corporate governance is more important for such institutions. the industry has taken root in our financial system and is actively involved in strengthening the capital market-led system of economic growth through the process of disintermediation. and at least two or three of them must be independent trustees. The Indian mutual funds industry has come a long way since the establishment of UTI in 1963. investors/depositors and other stakeholders. The stakeholders of financial institutions are larger in number than those of manufacturing companies. Financial institutions. Moreover. in addition to enhancing the shareholders’ value.
trust deed and investment objectives of the scheme. the trustees are required to review all information and documents received from the AMC. 1999. employees or their relatives for any securities transaction is in accordance with the offer document and the brokerage and commission paid to such affiliates. each trustee shall file the details of his transactions in respect of dealing in securities with the mutual fund on a quarterly basis. It has stipulated that all the information and documents relating to the compliance process shall be authenticated /adopted by the board of directors of the AMC. As per the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations. and whether it continues to meet the capital adequacy requirement of each of the activities. All AMCs ‘shall adopt a management information system for reporting to the Trustees’. • If the utilization of the services of the sponsor or any of the AMC’s associates. SEBI has also suggested that the AMC provide infrastructure and administrative support to the trustees. • Details of any changes in the interests of the directors on the AMC’s board of directors 44 . Similarly. whether these are conducted as per regulations. • • • The net worth of the AMC Any change in the directors on the AMC’s board of directors If the investments have been made in accordance with the regulations.SEBI has prescribed a wide range of responsibilities for the trustees in order to strengthen the compliance mechanism. Model Compliance Checklist The compliance certificate to be submitted by the AMC to the trustees on a half-yearly basis should contain specific comments on the following: • If the AMC is carrying on other activities.
nature of instrument. sponsor or any associate of the sponsor in any of schemes and inter scheme investments. • Deficiency/Warning letters. 45 . giving details of the names of the schemes. value and charges levied. percentage of borrowing to the net assets on the date of borrowing. rate. • The ability to honour guarantee commitments in the case of schemes guaranteeing returns. date of repayment or proposed manner of liquidation of the debt. and purchase/sale details like the quantity.• The borrowings of the mutual fund. if any. amount borrowed. security offered for the borrowing. the reasons for borrowing from such an entity and the competitiveness of the terms. received from SEBI and the corrective action taken. interest rate. • Investments/Redemption by the AMC. giving details of the names of the personnel. source. • Transactions in securities by the key personnel of the AMC. specifying the details of the date. records and documents for each scheme. if the borrowing is from any associate of the sponsor of the AMC. whether in their own name or on behalf of the AMC. • • The valuation and pricing of units The maintenance of proper books of accounts. name of the security. whether the transaction is on personal account or conducted by immediate family or fiduciary. value and name of the broker. • The identification and appropriation of expenses to individual schemes and whether the expenses are in conformity with the limits laid down by SEBI. price. date. purpose of borrowing.
Whether before the launch of a scheme.Broad coverage report of Trustees to SEBI The trustees shall submit bi-annual reports at the end of September and March. Any action taken on deficiency and warning letters by SEBI. The ability of the AMC/sponsor to honour guaranteed returns in the case of any scheme guaranteeing returns. inter-scheme transfers and the net worth of the AMC. concentration of business with affiliate brokers. The reports should reach SEBI within two months of the end of the half-year. as well as furnishing of bi-annual and annual accounts statements to the unit-holders and SEBI. specified norms. and should give specific comments on the following: The performance of the schemes The activities of the AMC with specific reference to transactions with affiliates. Whether the valuation and pricing of units is in accordance with the regulations. Listing of schemes on the stock exchange as per the terms of the offer document. compliance with investment restrictions. if it had appointed all key personnel. short-selling or carry-forward transactions.. 46 . and so on. etc. prepared manuals. Whether the deployment of the funds of the schemes is in accordance with the investment objectives and not intended for any option trading. The publication of an annual report. auditors and compliance officers. and timely despatch of repurchase/redemption proceeds and dividend warrants. effecting of transfer and despatch of units to unit-holders within 30 days. the AMC had systems in place for the back office.
An assurance that the AMC has not given undue and unfair advantage to any associate. The utilization of the services of the sponsor or any of the AMC’s associates. and whether the relevant disclosures have been made in the annual accounts. and whether all such investments have been reported to the trustees on a quarterly basis. and whether it has avoided undue concentration with any broker. If the AMC has been diligent in empanelling brokers for monitoring securities transactions. 47 . Whether all activities of the AMC are in accordance with the regulations. and the reasons for charging higher rates whenever higher rates are charged. Whether the AMC has dealt through any associate broker in excess of 5% of the quarterly business done by the mutual fund. employees. every six months. Whether the AMC has submitted quarterly reports on its activities and compiled with the regulations. a justification has to be provided for an investment made by the scheme or by any other scheme of the same mutual fund in that company or its subsidiaries.. In case the AMC has dealt through any broker other than an associate broker in excess of 5% or more of the aggregate purchase and sale of securities made by the mutual fund in all its schemes. whether the AMC has recorded in writing the justification for this. Whether the transactions of the mutual fund are in accordance with the trust deed. whether in their own name or on behalf of the AMC. whether it has ensured that the rates charged are competitive. Details of transactions in securities by key personnel. if the work is done in-house. In case the company has invested more than 5% of the NAV of a scheme. If the funds pertaining to a scheme have been invested in accordance with the regulations. If the AMC has appointed a registrar and share transfer agents who are registered with SEBI. etc.
directors and key personnel of the AMC. Whether the necessary remedial steps have been taken by the trustees in case the conduct and business of the mutual fund is not in accordance with the regulations. Whether the directors of the AMC have filed with the trustees a statement of their holding of securities at the end of financial year. within 15 days of their appointment. any security issued by way of private placement by an associate or group company of the sponsor. Confirmation that the mutual fund has not made any investment in any unlisted security of an associate or group company of the sponsor. General due diligence requires the trustee to be discerning in the appointment of directors on the board of the AMC. Certifying that they have satisfied themselves that there have been no instances of selfdealing or front-running by any of the trustees. to ensure that trust 48 . any change in the interests of the directors. Due Diligence The trustees are required to exercise due diligence. Comments of the independent trustee on the report received from the AMC regarding the investments made by the mutual fund in the securities of the group companies of the sponsor. Whether the AMC has filed with the trustees the detailed bio-data of all directors of the AMC. to review the desirability of the continuance of the AMC if substantial irregularities are observed. along with the dates of acquisition. If there is any conflict of interest between the manner in which the AMC has deployed its net worth and the interest of the unit-holders. or the listed securities of the group. Certifying that the AMC has been managing the schemes independently of any other activities and the unit-holders interest has been protected. which includes general due diligence and specific due diligence. along with their interest in other companies.
Audit and valuation committee The audit committee is the most important instrument for making corporate governance a success. holding meetings (of trustees) and initiating action on the auditors’ reports. to ensure that the service providers are registered with the regulatory authority concerned etc. held and administered by proper persons. Specific due diligence entails obtaining internal audit reports from the independent auditors appointed by them. to review the system and practices relating to the valuation of securities on a regular basis. obtaining compliance certificate from the AMC. The committee should also ensure that action is taken on the rectifications suggested by these auditors. prescribing the code of ethics and ensuring that the trustees. The trustees are required to constitute an audit committee of the trustees for reviewing the internal audit system. 49 . SEBI has asked the mutual funds to form audit committees through their boards of trustees/directors of trustee companies. as well as the recommendations of the internal and statutory auditors’ reports. ensuring compliance by the AMC. and communicating in writing to the AMC about the deficiencies and checking up on the rectification of the deficiencies. the AMC has to constitute an in-house valuation committee consisting of senior executives. fund management and the compliance department. The committee shall be chaired by an independent trustee. As per SEBI guidelines. AMC and its personnel adhere to it. including personnel from accounts. The trustees are required to review all the transactions of the mutual fund with the associates on a regular basis.properties are protected.
SEBI has made it mandatory for mutual funds to disclose the entire portfolio of any scheme. Therefore.Portfolio disclosure Transparency is essential for corporate governance and portfolio disclosure is an important means of keeping the investors informed about the way their moneys are being used to create financial assets. facts and opinion leading to that decision’. 50 . Transparency in investment decisions SEBI has taken a far-reaching step towards ensuring due diligence and transparency in all investment decisions by advising all mutual funds ‘to maintain records in support of each investment decision which will indicate the date.
One of most critical challenges is how to face the market impact of undesirable activities of the financial services industry and the managers associated with financial institutions. the market psychology and socio-economic environment. the association is dedicated to: Promoting and protecting the interests of mutual funds and their unit-holders. Broadly. Various types of defense mechanisms have been devised to confront the challenges originating from deregulation. leading to a collapse of the system. which have played havoc in the market. and Serving the investors’ interest by defining and maintaining high ethical and professional standards in the mutual funds industry 51 . However. jeopardizing the transmission mechanism and market equilibrium. these mechanisms are re-regulation of the market and its activities (exercised through legislative institutions). voluntary organisations). Role of AMFI AMFI represents the AMCs in India. Economic history is rife with examples of such activities. academicians and researchers. Increasing public awareness of mutual funds . Both these systems have certain advantages and disadvantages. economic administrators. a particular system can be more useful when its implicit advantages apply to the given level of market maturity. They have terminated the process of intermediation (and disintermediation) in the financial system. and self-regulating (exercised through nonlegislative. and experience shows that neither one should be relied on totally. Established as a non-profit organisation on 22 August 1995.MUTUAL FUNDS AND SELF-REGULATORY ORGANISATIONS The deregulation of financial services has posed several challenges to the policy-makers.
52 . valuation of traded and non-traded equities and valuation of non-traded debt securities . as well as the principles and system for provisioning such NPAs. (ii) The committee on NPA – to identify and recommend norms for recognizing NPAs of mutual funds. Given the short span of time. manual on mutual funds directory and a standard offer document. The various activities undertaken by AMFI are as under: AMFI has brought out publications on investor awareness. and to suggest the standard and frequency of disclosures . appropriate accounting standards. AMFI has formed several committees and submitted their reports to SEBI in order to promote high professional standards. model compliance. However. The committee on inspection fees . operational limitations and emerging nature of mutual funds industry in India. (iii) (iv) The committee on compliance – to prepare a compliance manual. and to serve the public interest by encouraging adherence to high ethical standards by all elements of the businesses. it still does not function as an SRO to any significant extent. code of ethics. Among the committees are : (i) The valuation committee – for valuation of securities.The vision of AMFI echoes the mission which is ‘to advance the interest of investment companies and their shareholders. AMFI has made a very significant contribution to the promotion of sound practices among mutual funds and towards protecting the interest of its members. to promote public understanding of investment company business.to suggest the basis for the fees to be paid to the auditors appointed by SEBI. which is mutual fund industry requires today.
Benchmark Asset Management Company Private Limited 2.(v) The committee on advertising guidelines – to finalize comprehensive guidelines for advertisement . AMFI has finalized a testing programme for intermediaries and employees. A committee which has devised the process of certification for intermediaries selling mutual funds products. The programme includes a comprehensive workbook and question bank. The committee on investors’ education and training and. Birla Sun Life Asset Management Company Limited 3. AMFI has selected NSE to conduct the tests. HDFC Asset Management Company Limited 7. Following list provides information of mutual funds and Exchange Traded Funds(ETF) of NSE . IDFC Asset Management Company Private Limited 53 . Franklin Templeton Asset Management (India) Pvt. List of Mutual Funds and ETFs in NSE 1. (vi) The committee on derivatives – to formulate guidelines for trading in derivatives. Ltd 6. National Stock Exchange(NSE) is the prime stock exchange followed by Bombay stock exchange(BSE). (vii) (viii) (ix) The committee on the non-performing assets of mutual funds. Fortis Investment Management (India) Private Limited 5. Deutsche Asset Management (India) Private Limited 4.
Religare Asset Management Co. Reliance Capital Asset Management Limited 12. DSP BlackRock Investment Managers Private Limited 22. 16. JM Financial Asset Management Company Limited 19. Pvt. 10. Motilal Oswal Asset Management Company Limited 54 . Canara Robeco Asset Management Company Limited 23. L&T Investment Management Limited 21.8. Ltd. FIL Fund Management Private Limited 24. Pvt. Bharti AXA Investment Managers Private Limited 20. ICICI Prudential Asset Management Company Limited 18. Ltd 13. Sundaram BNP Paribas Asset Management Company Limited 17. Ltd. UTI Asset Management Co. Principal Pnb Asset Management Co. Quantum Asset Management Co. SBI Funds Management Private Limited 14. Taurus Asset Management Company Limited 15. Private Ltd 11. Kotak Mahindra Asset Management Company Limited 9.
25. Name of Mutual Fund 1 DSP BlackRock World Energy Mutual Fund 2 Birla Sun Life Commodity Equities Mutual Fund 3 Fidelity Global Real Assets Mutual Fund 4 Birla Sun Life Commodity Equities Mutual Fund 5 DWS Global Thematic Offshore Mutual Fund 6 Birla Sun Life International Equity Mutual Fund 7 DWS Global Agribusiness Offshore Mutual Fund 8 DSP BlackRock World Mining Mutual Fund 9 ING Optimix Global Commodities Mutual Fund 10 ING Global Real Estate Mutual Fund 55 . JP Morgan Asset Management India Private Limited List of "Top Ten Mutual Funds" in India Sr. No. Axis Asset Management Company Limited 26.
With competition getting intense in the domestic industry.CONCLUSION: THE ROAD AHEAD FOR MUTUAL FUND INDUSTRY IN INDIA A perceptible change is sweeping across the mutual fund landscape in India. As it is being increasingly felt. anticipating trends of emerging investor needs and positioning products for these gaps pose greater challenges for growth for the industry players. service to investor and performance would be major differentiators. With investors today having a range of products to choose from. Increased deregulation of the financial markets in the country coupled with the introduction of derivative products offers tremendous scope for the industry to design and sell innovative schemes to suit individual customer needs. Globally. Besides. product innovation is increasingly becoming one of the key determinants of success. it has been seen that the top ten players account for a greater pie of the market share. and above all the growing commoditization of mutual fund products are acting as major catalysts putting pressure on industry players to formulate strategies to stay the course. with the commoditization of products looking imminent. attracting and retaining customers has also emerged as a key area where the need to have a greater focus is strongly felt. Quest for size to survive is bound to stimulate consolidation activities in a big way if the early signs of a few mergers are to be believed. Factors such as changing investor’s needs and their appetite for risk. 56 . churning in the industry looks imminent. emergence of Internet as a powerful service platform. effective communication is required to reach a wider audience. Building and sustaining a powerful brand is also becoming an issue of paramount importance. Given the growing shifts in investors’ preference owing to today’s uncertain economic environment. In the changed scenario today.
The Indian mutual fund industry has stagnated at around Rs. it is to be understood that whenever the 57 . The following challenges are required to meet by the Mutual Funds Investor Education. particularly the diversified schemes. equity schemes. It is assisting in the process of efficient resource allocation. The future growth of Indian mutual fund industry will depend upon how the industry is able to push the products and pull the savings from the investors.Need of the Hour The Indian mutual fund industry consists of both equity and debt schemes. which can satisfy investor’s requirements. The mutual fund industry needs to introduce innovative products from time to time. performance and services. The debt schemes during the last two years have given very attractive rates of return.200000 crore assets for the last couple of years. mostly performed in line with the market. Regarding the relatively poor performances of the equity schemes. The growing importance of Indian mutual funds in the market may be noted in terms of increased mobilization of funds and the growing number of investors’ accounts with the mutual funds. The industry has to push itself to the investors on product. The market has seen standard products being introduced by most of the players.EMERGING CHALLANGES The Indian Mutual Funds industry has emerged as a significant financial intermediary. providing strong support to the capital market and helping investors (particularly small investors) realize the benefits of stock market investing. The key to investors returning to mutual funds will be the funds ability to out perform the benchmark index on a constant basis. These products have met investor’s requirement in a bull market but products should also create a long-term investment habit among the investor. However.
and there could be no dividends also. it is a reality. non-bank companies. an AMC. Thirdly. 58 .market has fallen by a substantial portion. and there is SEBI. Neither there is a guarantee of the principal nor is there any insurance. Delhi. As far as safety of investment is concerned. auditors. because to go to smaller towns or distant places is a costly affair for these funds unlike LIC and certain other government financial institutions. The investor must understand that mutual funds work differently from the other saving instruments like banks. It is some of the sector specific funds. as Mutual Fund investment are subject to market risks. On restoring the confidence of Indian investors in mutual funds. Unlike the banks or government securities. the amount of investible funds available and his financial circumstances including income level. Chennai etc. investors should do their homework properly. From that point of view. There is no guarantee of the return. first of all the industry will need to create awareness about benefits of investing in mutual funds. From the beginning the mutual fund industry has concentrated on the rich pockets and also metropolitan towns like Mumbai. which have given very poor performance. there is no assurance of anything. That is why creating awareness among the investing community becomes more important. It is a matter of time before they go to smaller towns and other pockets where there are savings and a well to do rural population. There is a trustee. mutual fund investment is not safe and it entails some amount of risk. the NAVs of these funds have also suffered. Regarding widening the reach of the Indian industry. it is wrong to say that mutual funds are the safest investment avenues. particularly the IT sector funds. post office. People should understand that this is no myth. the slow market penetration is a matter of cost. Investors need to know that the right level of risk tolerance actually depends upon his age. or chit fund companies. An investor should know that NAV could go down.
but that was as far back as the pre 1990s. agents and brokers who are distributing and selling the mutual funds.. the distributors. The primary innovation of the Indian industry came in the form of insurance linked tax saving products introduced by UTI and LIC Mutual Fund. Investors should study these reports and keep themselves informed about the performance of the various schemes of different funds. Product innovations otherwise seemed to have plateaued in the mutual fund industry although we have seen the occasional sector funds which caught 59 . Also various studies on mutual fund schemes including yields of different schemes are being published by a number of financial newspapers on a weekly basis. Mutual funds need to make investors know that financial planning involves managing risks of investing. Investors must know that the mutual fund investing is not without risks and that these risks can be managed by tailoring the investment portfolio to the investors risk appetite. it is second to none in the world. etc. There has been a lot of improvement in the regulatory framework. equity and balanced schemes. and family seize. but a higher risk portfolio does not guarantee higher returns. One main fundamental is that great returns come only from assuming higher risks. would need to become more disciplined and pass out AMFI test. The activity that is important today is that the intermediaries i. the product offerings have been largely vanilla as in debt. yet. As far as disclosure standards are concerned. However. The Indian market has metamorphosed into the predominant open ended era from the close ended one. the figure seems miniscule when compared with the schemes prevailing in the advanced countries.e.job security. it has ushered investors into a present risk based return environment from the security of the guaranteed return times.. Product Innovations and Differentiations The mutual fund industry in India has grown from a single US-64 to around 600 schemes launched by various Mutual Funds today.
. which are already a norm in the international markets.investor fancy because of the tech boom. The domestic property market is extremely disorganized and needs to be brought within the grasp of formal economic activity. high costs and associated risks make it an unlikely investment choice. but also offers a good hedge to inflation. utility funds. So the objective of domestic real estate investment funds will be to help investors invest in property conveniently. increased life expectancy resulting in an increasing number of senior citizens. cost effectively and securely with the help of professional management. investment in real estate can be either direct. societal shift towards nuclear families. regional funds. thus providing them opportunities for capital gains as well as regular income. natural resources funds. personal. But with the growth in domestic financial markets. decreasing levels of job security. Although not as disorganized as the real estate industry. capitalization based funds. pension funds. A lot of groundwork still needs to be done before real estate investment funds are introduced in our market. serial plans which seemed to be tailored for corporate investors and index funds. the pension industry in India also needs to wake up to the changing global economics. there is a variety of products that can be offered to our investors such as international funds. municipal funds.. A burgeoning middle class population. However. commodity funds. it is available in India only through direct ownership wherein the tedious legal procedures. complete lack of a national social security system and an increasing sense of responsibility towards retirement benefits has 60 . in developed markets. structured funds etc. Real estate comprises of three types of properties viz. or through holdings in equity of property companies or mortgage backed securities and is quite a lucrative investment choice as it not only provides returns similar to equities in the long term. Generally. investment and infrastructure properties. Mutual funds otherwise for various reasons seemed to have adopted a very cautious approach to product innovations. real assets funds.
they can check 61 . The agency problem. However. which arises out of the separation of management and control in modern organizations. As a result. Strengthening of Corporate Governance Institutionalization of financial and capital markets has underlined the importance of corporate governance among mutual funds. mutual funds can check shareholder activism to protect the interests of the organization on one hand. While there should be performance rating for the existing schemes. Mandatory rating would help the investor select a scheme in accordance with his risk tolerance level. and on the other. For example. Product differentiation presently is on the basis of investment objectives.prompted a review of the existing pension system. However. particularly as they have a considerable influence on the market. As investor knowledge increases they will show a demand for specialized products and services. can be significantly influenced by mutual funds by virtue of their being large investors. management rating should be introduced for new schemes. private pension fund products will soon likely find their way in the domestic market. Introduction of Compulsory Rating Investors would certainly benefit from mandatory rating of mutual funds. asset allocation performance and service. service and performance will skew investor preferences. the financial industry as a whole has to travel a few miles before we can get to that level. with the commoditization of products being inevitable.
Another important task is to set out the responsibilities and obligations of mutual funds in the sphere of the implementation of corporate governance in the organizations in which they have a stake as shareholders. Mutual funds should design their own corporate governance policy to control the activism of their fund managers. SEC frequently conducts in depth studies in the interests of both the investors and industry. While liberalization by itself does not guarantee growth. It is not known whether SEBI has conducted any analysis regarding vital issues. But should go further and design a mechanism to monitor corporate governance in mutual funds. service delivery and the investors’ perceptions regarding the funds and regulators. The Indian mutual funds industry can emerge as one of the strongest 62 . The recent reforms in India and globalization offer tremendous opportunity for the Indian mutual fund. not much is known about the official assessments made by SEBI while taking regulatory initiatives.management activism to protect interests of the shareholder. can definitely produce the desired results. However. providing a broad framework to be followed in corporate dealings by the fund managers and other entities involved in asset management. SEBI can consider similar steps to remove certain regulatory and operational weaknesses. corporate governance. achieved through changes in the managerial mindset. SEBI has taken some useful steps. risk management practices. like the cost-return relationship of mutual fund investing. In the US. To this end. funds management strategies. Developmental role by the regulator SEBI has introduced a broad spectrum of policies to promote healthy regulation in the mutual funds industry and to protect the investors’ interest. institutionalization of liberalization. as well as appropriate penal action for any violation of the same. SEBI could issue certain guidelines of ‘Intentions and Interaction of good practices’.
alone there are more than 10. As with any investment.000 mutual funds. fund holdings are measured in the trillions of dollars. Despite the launch of separate accounts. the mutual fund industry remains healthy and fund ownership continues to grow. the advantages gained from mutual funds are not free: many of them carry loads. annual expense fees and penalties for early withdrawal. the industry is still growing.S. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. exchange-traded funds and other competing products. the story of the mutual fund is far from over. and if one accounts for all share classes of similar funds.players in the global capital market by absorbing investment technology and modifying managerial practices in the regional context. 63 . there are risks involved in buying mutual funds. In the U. Despite the 2003 mutual fund scandals and the global financial crisis of 2008-2009. while thinking and acting with a global vision. Also. In fact.
com 64 .com www.com) Value research (www.valueresearchonline. Sadhak – Mutual funds in India Association of Mutual Funds of India (www.com) www.BIBLIOGRAPHY H.marketriser.amfiindia.indiamutualfunds.
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