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Mutual Funds

Introduction Definitions

Mutual Fund - A mutual fund brings together money from many people and 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, too 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.)

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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 highlyleveraged 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.
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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?

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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 provides 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. 2. Economies of Scale:

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The easiest way to understand economies of scale is by thinking about volume discounts; in many stores, the more of one product you buy, the cheaper that product becomes. For example, when you buy a dozen donuts, the price per donut is usually cheaper than buying a single one. This also occurs in the purchase and sale of securities. If you buy only one security at a time, the transaction fees will be relatively large. Mutual funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges. Imagine if you had to buy the 10-20 stocks needed for diversification. The commission charges alone would eat up a good chunk of your savings. Add to this the fact that you would have to pay more transaction fees every time you wanted to modify your portfolio - as you can see the costs begin to add up. With mutual funds, you can make transactions on a much larger scale for less money. 3. Divisibility: Many investors don't have the exact sums of money to buy round lots of securities. One to two hundred dollars is usually not enough to buy a round lot of a stock, especially after deducting commissions. Investors can purchase mutual funds in smaller denominations, ranging from $100 to $1,000 minimums. 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. So, rather than having to wait until you have enough money to buy higher-cost investments, you can get in right away with mutual funds. This provides an additional advantage liquidity. 4. Liquidity: Another advantage of mutual funds is the ability to get in and out with relative ease. In general, 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. However, it is important to watch out for any fees associated with selling, including back-end load fees. Also, unlike stocks and exchange-traded funds (ETFs), which trade any time during market hours, mutual funds transact only once per day after the fund's net asset value (NAV) is calculated. 5. Professional Management: When you buy a mutual fund, you are also choosing a professional money manager. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to thoroughly research every investment before you decide to buy or sell, you have a mutual fund's money manager to handle it for you.

Disadvantages of mutual funds
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1. Fluctuating Returns: Mutual funds are like many other investments without a guaranteed return: there is always the possibility that the value of your mutual fund will depreciate. Unlike fixedincome products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be stellar. Another important thing to know is that mutual funds are not guaranteed by the U.S. government, so in the case of dissolution, you won't get anything back. This is especially important for investors in money market funds. Unlike a bank deposit, a mutual fund will not be insured by the Federal Deposit Insurance Corporation (FDIC). 2. Cash, Cash and More Cash: As you know already, mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolios as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous. 3. Costs: Mutual funds provide investors with professional management, but it comes at a cost. Funds will typically have a range of different fees that reduce the overall payout. In mutual funds, the fees are classified into two categories: shareholder fees and annual operating fees. The shareholder fees, in the forms of loads and redemption fees, are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money, these fees only magnify losses. 4. Misleading Advertisements: The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labelled as growth funds, while others are classified as small cap or income funds. 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. How the remaining assets are invested is up to the fund manager.

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However, the different categories that qualify for the required 80% of the assets may be vague and wide-ranging. A fund can therefore manipulate prospective investors by using names that are attractive and misleading. Instead of labelling itself a small cap, a fund may be sold as a "growth fund". Or, the "Congo High-Tech Fund" could be sold with the title "International High-Tech Fund".

5. Evaluating Funds: Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how do you know if one fund is better than another? Furthermore, advertisements, rankings and ratings issued by fund companies only describe past performance. Always note that mutual fund descriptions/advertisements always include the tagline "past results are not indicative of future returns". Be sure not to pick funds only because they have performed well in the past - yesterday's big winners may be today's big losers.

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TYPES OF MUTUAL FUNDS
Most funds have a particular strategy they focus on when investing. For instance, some invest only in Blue Chip companies that are more established and are relatively low risk. On the other hand, some focus on high-risk start up companies that have the potential for double and triple digit growth. Finding a mutual fund that fits your investment criteria and style is important.

Types of mutual funds are: • Value stocks : Stocks from firms with relative low Price to Earning (P/E) Ratio, usually pay good dividends. The investor is looking for income rather than capital gains. Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. They invest in companies that the market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry. Investing in value fund involves identifying fundamentally sound stocks that are trading at a discount to their fair value. The fund manager buys these stocks and holds them until the stock bounce backs to its fair value. The fund managers identify undervalued stocks in the market on the basis of fundamental analysis techniques. In this process stocks with low price to earnings ratios are tagged. These stocks are then closely reviewed to see which ones have the greatest growth potential and are paying high dividends. Suitability of Value Funds: Value style of investing works particularly well during a bear phase in the stock markets. During this time, the fund manager has more opportunities to invest in stocks trading at a discount to their fair value. By buying low and selling high, value funds take on lower risk than growth funds, which tend to buy high and sell higher. Thus value funds are particularly suitable for investors with a moderate risk profile. As value funds react slowly to market movements, they can be a good instrument of investment for those investors who are due to retire shortly. • Growth stock : Stocks from firms with higher low Price to Earning (P/E) Ratio, usually pay small dividends. The investor is looking for capital gains rather than income. Based on company size, large, mid, and small cap Stocks from firms with various asset levels such as over $2 Billion for large; in between $2 and $1 Billion for mid and below $1 Billion for small. • Income stock : The investor is looking for income which usually comes from dividends or interest. These stocks are from firms which pay relative high dividends. This fund may include bonds

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which pay high dividends. This fund is much like the value stock fund, but accepts a little more risk and is not limited to stocks. • 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) :

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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. This 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.

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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.
Establishes MF as a Trust

Sponsor Company Managed by a Board of Trustees Appointed by BOT
Appointed by Trustees

Holds unit holders’ fund Registers MF with in MF

SEBI

Mutual Fund

Ensures compliance to SEBI Enters into agreement Floats MF funds with AMC Manages funds as per SEBI guidelines and AMC agreement

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, acting alone or in combination with another corporate body, establishes the mutual fund and gets it registered with SEBI. The sponsor is required to contribute at least 40% of the minimum net worth (Rs
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10 crore) of the AMC. He must have a sound track record and a reputation for fairness and integrity in all his business transactions.

As per the 1996 regulations, ‘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, duly registered under the provisions of the Indian Registration Act, 1908, executed by the sponsor in favour of trustees named in such an instrument. The mutual fund is managed by the board of trustees or Trustee Company, and the sponsor executes the trust deeds in favour of the trustees. The mutual fund raises money through the sale of units under one or more schemes for investment in securities, in accordance with SEBI guidelines. 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. It is also their responsibility to control the capital property of the mutual fund schemes. The trustees have the right to obtain relevant information from the AMC, as well as a quarterly report on its activities. They can also dismiss the AMC under certain conditions, as per SEBI regulations. At least half the trustees have the right to obtain relevant information from the AMC or its employees cannot act as trustees. 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. The trustees are required to submit half-yearly reports to SEBI on the activities of the mutual fund. They appoint a custodian, whose activities they supervise. A trustee can be removed only with the prior approval of SEBI The trustees appoint the AMC, which must act as per the SEBI guidelines, the trust deeds, and the management agreement it has made with the trustees.

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The AMC should be registered with SEBI. Its net worth should be in the form of cash and all assets should be held in its name. In case it wants to carry out other fund management business, it should satisfy the capital adequacy requirement for each such business independently. The AMC cannot give or guarantee loans, and is prohibited from acquiring any assets (out of the scheme property) which would involve the assumption of unlimited liability. It is required to disclose the scheme particulars and the base calculation of the NAV. It must submit quarterly reports to the mutual fund. The director of the AMC should be a person of repute and high standing, with at least five years experience in the relevant field. The appointment of the AMC can be

terminated by a decision of 75% of unit-holders or a majority of trustees. 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. The custodian must have a sound track record and adequate relevant experience. At the time of appointment, he should not be

associated with the AMC, or act as a sponsor or trustee to any mutual fund. 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, or a section of the public, under one or more schemes for investment in securities, including money market instruments. Mutual funds are also allowed to diversify their activities in the following areas.     Portfolio management services Management of offshore funds Providing advice to offshore funds Management of pension or provident funds

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  

Management of venture capital funds Management of money market funds Management of real estate funds

The regulations deal with various issues relating to launching, advertising and listing of mutual funds schemes. 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, and should contain adequate disclosures to enable investors to make informed decisions. Advertisements in respect of schemes should be in conformity with the prescribed advertisement code of SEBI. 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. However, listing is not mandatory if the scheme     provides for periodic repurchase facilities to all unit-holders, or provides for monthly income or caters to special classes of persons, or discloses details of repurchase in the offer document, 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. 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. No scheme other than unit linked schemes can be opened for subscription for more than 45 days. In the offer document, the AMC must specify the minimum subscription and the extent of over-subscription which it intends to retain. In the case of oversubscription, all those applying for up to 5000 units must be given full allotment subject to oversubscription. The AMC must refund the

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application money if the minimum subscription is not received, and also, the excess oversubscription within six weeks of the closure of subscription. Guaranteed returns can be provided for in a scheme only if they are fully guaranteed by the AMC or sponsor. In such cases, 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.

The regulations provide procedure for the manner in which close-ended scheme is to be wound up. It should be would up on the redemption date, unless it is rolled over. It can be would up if 75% of the unit-holders pass a resolution in favour of winding it up, or if the trustees so require for ay reason, or if SEBI so directs in the interest of the investors.

The regulations of 1996 and the subsequent amendments attempted to enhance transparency and accountability, and improve the mechanism of investor protection. They contained several provisions:  They demanded the provision of stringent disclosure norms in the offer document to facilitate informed decision-making by the investors.  Standardisation of accounting policies, computation of NAV and valuation of assets.  Prudential supervision replaced the quantitative investment restrictions and the AMC was given complete freedom to structure schemes.  Stringent restrictions were imposed on the launching of guaranteed return schemes.  A code of ethics was introduced for AMCs

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Transfer agents were entrusted for higher responsibilities to ensure better management of funds.

Considering the various irregularities and sharp deterioration in the performance of many mutual funds, it was decided to fix certain responsibilities for the trustees to ensure that they remained vigilant and played a more active role. The SEBI appointed a committee under the chairmanship of P.K. Kaul to examine the issue of responsibilities of trustees. The committee’s report was accepted by SEBI and the following measures were decided upon, among others.

The manner in which the trustees are to fulfil their responsibilities has been spelt out.

 

They are required to meet at least once in three months. Trustees can appoint independent auditors.

Several other measures, like revision of the codes of conduct, were taken to promote integrity, diligence, and fairness among the trustees as well as the AMCs. All this, together with the standardization of several provisions relating to operations, has increased the level of transparency and strengthened the mechanism of investor protection.

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Diagrammatic Representation of Fund Structure and it’s Constituents

F u n d S p o n sor

T ru stees

A sset M an ag em en t C o m p a n y (A M C )

D ep o sito ry

A gen t

C u sto d ia n

5. Asset Holding Pattern and Resource Mobilization Mutual Funds in India: Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time. One of the options is to invest the money in stock market. 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. A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification.

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Diversification means spreading out money across many different types of investments. When one investment is down another might be up. Diversification of investment holdings reduces the risk tremendously.

CLASSIFICATION OF MUTUAL FUNDS:Mutual fund schemes also classified on the basis of its structure and its investment objective. By Structure: • Open-ended Funds/Schemes: (Tenor based) An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Open-ended Mutual Funds are those funds in which the company can issue always more outstanding shares. It can help to add on the net assets of the company. These types of funds do not have a fixed maturity period. Investors can buy and sell units of these funds at Net Asset Value (NAV) related prices which are published on a daily basis. Open-end schemes are more liquid in nature. Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value. Most of the open-end funds are actively managed and the fund manager picks the stocks as per the objective of the fund. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations. Some of the benefits of open-end funds include diversification, professional money management, liquidity and convenience. But open-end funds have one negative as compared to closed-end funds. Since open-end funds are constantly under redemption pressure, they always have to keep a certain amount of money in cash, which they otherwise would have invested. This lowers the potential returns. Fees There may be a percentage charge levied on the purchase of shares or units. Some of these fees are called an initial charge (UK) or 'front-end load' (US). Some fees are charged by a fund on the sale of these units, called a 'close-end load,' that may be waived after several years of owning the fund. Some of the fees cover the cost or distributing the fund by paying commission to the adviser or broker that arranged the purchase. These

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fees are commonly referred to as 12b-1 fees in U.S. Not all fund have initial charges; if there are no such charges levied, the fund is "no-load" (US). These charges may represent profit for the fund manager or go back into the fund.

Active management Most open-end funds are actively managed, meaning that a portfolio manager picks the securities to buy, although index funds are now growing in popularity. Index funds are open-end funds that attempt to replicate an index, such as the S&P 500, and therefore do not allow the manager to actively choose securities to buy. Buying and Selling: Open funds sell and redeem shares at any time directly to shareholders. To make an investment, you purchase a number of shares through a representative, or if you have an account with the investment firm, you can buy online, or send a check. The price you pay per share will be based on the fund’s net asset value as determined by the mutual fund company. Open funds have no time duration, and can be purchased or redeemed at any time, but not on the stock market. An open fund issues and redeems shares on demand, whenever investors put money into the fund or take it out. Since this happens routinely every day, total assets of the fund grow and shrink as money flows in and out daily. The more investors buy a fund, the more shares there will be. There's no limit to the number of shares the fund can issue. Nor is the value of each individual share affected by the number outstanding, because net asset value is determined solely by the change in prices of the stocks or bonds the fund owns, not the size of the fund itself. Some open-ended funds charge an entry load (i.e., a sales charge), usually a percentage of the net asset value, which is deducted from the amount invested.

Advantages:
Open funds are much more flexible and provide instant liquidity as funds sell shares daily. You will generally get a redemption request processed promptly, and receive your proceeds by check in 3-4 days. A majority of open mutual funds also allow transferring among various funds of the same “family” without charging any fees. 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. Diversifying your investment is key because your assets are not impacted by the fluctuation price of only one stock. If a stock in the fund drops in value, it may not impact your total investment as another holding in the fund may be up. But, if you have all of your assets in that one stock, and it takes a dive, you’re likely to feel a more considerable loss. Closed-ended Funds/schemes: (Tenor based)

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A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. This fund has a fixed number of shares. The value of the shares fluctuates with the market, but fund manager has less influence because the price of the underlining owned securities has greater influence. Close Ended mutual fund or generally termed as traded mutual fund is the one that can be brought and sold like a normal share. In it, the number of shares always stays fixed. These funds also have commission which brokers get since the shares of these funds are traded over the counter, like the shares are traded. Close-ended funds have a stipulated maturity period like 5-7 years. It is open for subscription only during the time of launch. Investors can invest in 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. 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. But the commissions will incur for this selling and buying. 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 closed-end funds can be traded during the market day at any time. Open-end funds are generally traded at the closing price at the end of the market day. Closed-end funds are usually traded at a premium or discount whereas open-end funds are traded at NAV.

Advantages of Closed-end Funds: • Closed-end funds don't have to worry about the redemption of shares, hence they tend to keep less cash in their portfolios and cam invest more capital in the market. Therefore, they have the potential to generate greater returns as compared to open-end funds. In case of market panic and mass-selling by investors, open-end funds need to raise money for redemptions. To cope with the liquidity concerns, the manager of an open-ended fund may be forced to sell stocks he would rather keep, and keep stocks he would rather sell. In such as scenario the quality of the portfolio may be affected .Advantages: The prospect of buying closed funds at a discount makes them appealing to experienced investors. The discount is the difference between the market price of the closed-end fund and its total net asset value. As the stocks in the fund increase in value, the discount usually decreases and becomes a premium instead. 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
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and the underlying asset value will close. 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, with the ability to buy at a discount.

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Availability
Closed end funds are typically traded on the major global stock exchanges. In the U.S. the New York Stock Exchange is dominant although the NASDAQ is in competition; 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; in Canada, the Toronto Stock Exchange lists many closed-end funds. Like their better-known open-ended cousins, 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, which may be public or limited. The investors are given shares corresponding to their initial investment. The fund managers pool the money and purchase securities. What exactly the fund manager can invest depends on the fund's charter. Some funds invest in stocks, others in bonds, and some in very specific things. Buying and Selling: Unlike standard mutual funds, you cannot simply mail a check and buy closed fund shares at the calculated net asset value price. Shares are purchased in the open market similar to stocks. Information regarding prices and net asset values are listed on stock exchanges; however, liquidity is very poor. The time to buy closed funds is immediately after they are issued. Often the share price drops below the net asset value, thus selling at a discount. A minimum investment of as much as $5000 may apply, and unlike the more common open funds discussed below, there is typically a five-year commitment. Distinguishing features Some characteristics that distinguish a closed-end fund from an ordinary openend mutual fund are that: It is closed to new capital after it begins operating, and Its shares trade on stock exchanges rather than being redeemed directly by the fund. Its shares can therefore be traded during the market day at any time. An openend fund can usually be traded only at the closing price at the end of the market day. A CEF usually has a premium or discount. An open-end fund sells at its NAV. A closed-end company can own unlisted securities. Another distinguishing feature of a closed-end fund is the common use of leverage or gearing to enhance returns. CEFs can raise additional investment capital by issuing auction rate securities, preferred stock, long-term debt, and/or reverserepurchase agreements. In doing so, the fund hopes to earn a higher return with this excess invested capital.

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When a fund leverages through the issuance of preferred stock, two types of shareholders are created: preferred stock shareholders and common stock shareholders. Preferred stock shareholders benefit from expenses based on the total managed assets of the fund. 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. The expenses charged to the common shareholder are based on the common assets of the fund, rather than the total managed assets of the fund. 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. For the most part, closed-end fund companies report expenses ratios based on the fund's common assets only. However, the contractual management fees charged to the closed-end funds may be based on the common asset base or the total managed asset base. The entry into long-term debt arrangements and reverse-repurchase agreements are two additional ways to raise additional capital for the fund. Funds may use a combination of leveraging tactics or each individually. However, it is more common that the fund will use only one leveraging technique. Since closed-end funds are traded like stock, a customer trading them will pay a brokerage commission similar to one paid when trading stock (as opposed to commissions on open-ended mutual funds where the commission will vary based on the share class chosen and the method of purchasing the fund). In other words, closed-end funds typically do not have sales-based share classes where the commission and annual fees vary between them. The main exception is loanparticipation funds. Exchange-traded Closed-end fund shares trade continually at whatever price the market will support. They also qualify for advanced types of orders such as limit orders and stop orders. This is in contrast to some open-end funds which are only available for buying and selling at the close of business each day, at the calculated NAV, and for which orders must be placed in advance, before the NAV is known, and by simple buy or sell orders. Some funds require that orders be placed hours or days in advance. Closed-end funds trade on exchanges and in that respect they are like exchangetraded funds (ETFs), but there are important differences between these two kinds of security. The price of a closed-end fund is completely determined by the valuation of the market, and this price often diverges substantially from the NAV of the fund assets. In contrast, the market price of an ETF trades in a narrow range very close to its net asset value, because the structure of ETFs allows major market participants to redeem shares of an ETF for a "basket" of the fund's underlying assets.[1] This feature could lead to potential arbitrage profits if the market price of the ETF were to diverge substantially from its NAV. The market prices of closed-end funds are often ten to twenty percent higher or lower than their NAVs, while the market price of an ETF is typically within one percent of

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its NAV. 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. Comparison with open-ended funds With open-ended funds, the value is precisely equal to the NAV. So investing $1000 into the fund means buying shares that lay claim to $1000 worth of underlying assets (apart from sales charges). But buying a closed-end fund trading at a premium might mean buying $900 worth of assets for $1000. Some advantages of closed-end funds over their open-ended cousins are financial. CEFs don't have to deal with the expense of creating and redeeming shares, they tend to keep less cash in their portfolio, and they need not worry about market fluctuations to maintain their "performance record". So if a stock drops irrationally, the closed-end fund may snap up a bargain, while open-ended funds might sell too early. Also, if there is a market panic, investors may sell en masse. Faced with a wave of sell orders and needing to raise money for redemptions, the manager of an openended fund may be forced to sell stocks he'd rather keep, and keep stocks he'd rather sell, due to liquidity concerns (selling too much of any one stock causes the price to drop disproportionately). Thus it may become overweight in the shares of lower-quality or underperforming companies for which there is little demand. 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. The CEF's price will likely drop more than the market does (severely punishing those who sell during the panic), but it is more likely to make a recovery when the intrinsically sound stocks rebound. Because a closed-end fund is on the market, it must obey certain rules, such as filing reports with the listing authority and holding annual stockholder meetings. Thus stockholders can more easily find out about their fund and engage in shareholder activism, such as protest against poor management. Examples Among the biggest, 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, Inc.

Newer CEFs include: • • • • Alpine Total Dynamic Dividend Fund Morgan Stanley China A-Share Fund John Hancock PATRIOT Fund Teucrium Natural Gas Fund
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Interval Funds/schemes:

Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices. By Investment Objective: • Growth Funds/schemes: (Asset class based) The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time. These type funds are those which invest in the stocks of well-established, blue chip companies. Dividends and steady income are not only goal of these types of funds. But, they are focussed on increasing in capital gains. Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing companies in the market. 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. In India, growth funds became popular after the tremendous growth of the Indian companies during the post economic reforms period. The rapid growth of Indian industry attracted investors’ money to sectors of high growth and as a result growth funds came into being. Objective of Growth Funds: The objective of growth funds is to achieve capital appreciation by in stocks of those companies, which are registering significant earnings or revenue growth. Growth funds offer tremendous opportunities for growth, when the financial market is bullish. In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets. Only aggressive investors, or those with enough time to make up for short-term market losses, should buy these funds • Growth and Income funds/schemes (Asset class based) :

These types of mutual funds are focussed on increased capital gains and steady income. Less volatile than Aggressive Growth funds. • Aggressive Growth Funds /schemes(Asset class based) :

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These are stock funds that primarily have one objective of maximum capital gains. Capital gains are the increase in the value of investment. This type of mutual fund invest in many different kind of shares which includes risk industry stocks, small company stocks and uses certain investment techniques like short selling of stocks, futures & options. These type of mutual funds are most volatile also. • Bond /Income Funds/schemes: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors. As such, the audience for these funds consists of conservative investors and retirees. Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down. • Balanced Funds/schemes:

The aim of balanced funds is to provide both growth and regular income. 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. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class. A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle. The investor may wish to balance his risk between various sectors such as asset size, income or growth. Therefore the fund is a balance between various attributes desired. Balanced mutual funds have a portfolio mix of bonds, preferred stocks and common stocks. Balanced mutual funds aim to conserve investors’ initial investment, to pay an income and to aid in the long-term growth of both the principle and the income. Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk.

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Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. But on the flip side, balanced funds will usually increase less than an all-stock fund during a bull market.

Advantages of Balanced Fund:
Generally, balanced funds maintain a 60:40 equity debt ratio. This means that 60% of their total investment is in equity and the balance 40% in debt and cash equivalents. 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. Balanced funds continuously rebalance their portfolios to ensure that the broad asset allocation is not disturbed. Therefore, the profits earned from the stock markets are encashed and invested in low risk instruments. This helps the investor in maintaining the appropriate asset mix, without getting into the hassles of rebalancing the portfolio on their own.

Money Market Funds/schemes:(Asset Class Based)

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods. The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. 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). These are generally the safest and most secure of mutual fund investments. They invest in the largest, most stable securities, including Treasury bills. The chances of your capital being eroded are very minimal. Money-market funds are risk-free. If you invest a thousand rupees, you will get that money back. It is simply a matter of when you get it back. When investing in a money-market fund, you should pay attention to the interest rate that is being offered, along with the rules regarding check-writing. Money-markets have allowed investors to reap high yields on their deposits, and have made the entire investment process more accessible to people. The interest rates on money-market funds are changing nearly day to day. In times of inflation, these funds have had high yields. A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free. Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is

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not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.

Types of Money Market Mutual Funds
Money market funds are of two types: 1. Institutional Money Market Mutual Funds/schemes: These funds are held by governments, institutional investors and businesses etc. Huge sum of money is parked in institutional money funds. 2. Retail Money Market Mutual Funds/schemes: Retail money market funds are used for parking money temporarily. The investment portfolio of money market funds comprises of treasury bills, short term debts, tax free bonds etc.

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. The assets in a money market fund are invested in safe and stable instruments of investment issued by governments, banks and corporations etc. Generally, money market instruments require huge amount of investments and it is beyond the capacity of an ordinary retail investor to invest such large sums. 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. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. • No-Load Funds/schemes:

Mutual funds can be classified into two types - Load mutual funds and No-Load mutual funds. Load funds are those funds that charge commission at the time of purchase or redemption. They can be further subdivided into (1) Front-end load funds and (2) Backend load funds. Front-end loads are fees or expenses recovered by mutual funds against compensation paid to brokers, their distribution and marketing costs. These expenses are generally called as sales loads. Front-end load funds charge commission at the time of purchase. Similar to front end loads there are back end loads. Back-end load funds charge commission at the time of redemption. No-load funds are those funds that can be purchased without commission. No load funds have several advantages over load funds. Firstly, funds with loads, on average, consistently underperform no-load funds when the load is taken into consideration in
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performance calculations. Secondly, loads understate the real commission charged because they reduce the total amount being invested. Finally, when a load fund is held over a long time period, the effect of the load, if paid up front, is not diminished because if the money paid for the load had been invested, as in a no-load fund, it would have been compounding over the whole time period. A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

Equity Funds/schemes :(Asset class based)

Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which is below. 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. These companies are characterized by low P/E and price-to-book ratios and high dividend yields. The opposite of value is growth, which refers to companies that have had (and are expected to continue to have) strong growth in earnings, sales and cash flow. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle. For example, 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). The opposite of this would be a fund that invests in start-up technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth). These funds allow an investor to own a portion of the company that they have invested in, it’s like having shares of a certain company. Stocks that have proven historically to bethe best investment. Also which have already outperformed all other types of investments in long term, but the risk is high. 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. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time. Stocks are often categorized by their market capitalization (or caps), and can be classified in three basic sizes: small, medium, and large.

SELECTION OF MUTUAL FUNDS: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. For example, if you are evaluating the performance of a thematic fund, say IT

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based fund, then you should compare its performance with another similar IT based fund. Comparing it with banking sector fund for example will not give the correct picture. Comparing a fund over stock market cycle (boom and bust) will give investors a good idea about how the fund has fared. Compare returns against those of the benchmark index: Every fund mentions a benchmark index in the Offer Document. It can be BSE 100, BSE 200, Nifty or any other index. The benchmark index serves as a guidepost for both the fund manager and the investor. Compare how the fund has fared against the benchmark index over a period of 3-5 years. The funds that have outperformed their benchmark indices during stock market volatility must be given a close look. Compare against the fund's own performance: Apart from comparing a fund with its peers and benchmark index, investors should evaluate its historical performance. By evaluating a fund against its own historical performance, you can get an idea about consistent performers. • Global/International Funds/schemes : An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country. It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile and have unique country and/or political risks. But, on the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are becoming more interrelated, it is likely that another economy somewhere is outperforming the economy of your home country. International mutual funds are those funds that invest in non-domestic securities markets throughout the world. Investing in international markets provides greater portfolio diversification and let you capitalize on some of the world's best opportunities. If investments are chosen carefully, international mutual fund may be profitable when some markets are rising and others are declining. However, 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. In recent years international mutual funds have gained popularity. This can be attributed to removal of trade barriers and expansion of economies, which has sparked off growth in various regions of the world.

Things to Consider Before Investing in International Mutual Funds:

International Investing Formula:
According to a survey, the best policy for investment is to have a 70% domestic investment and a 30% international diversified funds investment. 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.

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Diversification: Not all the markets of the world move in one pack, so a downswing in a country's market can be well taken care off by gains in the others. So, it is essential to have diversification in different markets across the world. Currency Exchange Risk: You should also factor in foreign exchange currency fluctuations in your investment returns. For example you invested INR 9000 in an international mutual fund. At that time let say one dollar was worth Rs 45.00. This means in effect you invested $200. After a year your investment appreciated to Rs 10,000 but at the same time dollar appreciated to Rs. 50. So due to fluctuation in dollar-rupee rate, 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. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank. Regional funds make it easier to focus on a specific area of the world. This may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession. Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive performance while still maintaining a healthy conscience. • Index Funds/schemes :(Position Philosophy Based) The last but certainly not the least important are index funds. 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). An investor in an index fund figures that most managers can't beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees. The securities in this fund are the same as in an Index fund such as the Dow Jones Average or Standard and Poor's. The number and ratios or securities are maintained by the fund manager to mimic the Index fund it is following. They invest in the portfolio of an index such as BSE Sensitive index (SENSEX) , S&P NSE 50 index (Nifty), etc. The investment is done in the securities in the same weightage comprising of an index. You can see that the NAVs of such schemes would rise or fall in

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accordance with the rise or fall in the index. It may not be exactly by the same percentage due to “tracking errors”. 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. An Index fund follows a passive investing strategy called indexing. It involves tracking an index say for example, the Sensex or the Nifty and builds a portfolio with the same stocks in the same proportions as the index. The fund makes no effort to beat the index and in fact it merely tries to earn the same return. Origin of Index Funds Index funds first came into being in the US in the 1970s. 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. Though a few actively managed mutual funds may beat the market for a while, it is very rare for active funds to beat the market in the long run.

Advantages of Index Funds
• • • As per efficient markets concept index funds provide optimum returns in the long run. An index fund doesn't have to pay for expensive analysts and frequent trading. Index funds track a broad index which is less volatile than specific stocks or sectors, thereby lessening the risk for investors.

Index Funds in the context of India In the Indian market scenario index funds may not be the best option. The basic principle of indexing is - the more the number of stocks comprising an index the better is the diversification and price discovery. 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. Also, unlike the capital markets in developed countries, Indian markets haven't been thoroughly researched and there is enormous scope to beat the market by sound research. • Fixed-Income Funds (Asset class based): Fixed-income mutual funds are safer than equity funds, but as always, do not yield as high returns as the latter do. These types of mutual funds are geared towards the investor who is approaching old age and doesn’t have many earning years left. Many investors hope to draw a steady income from these types of mutual funds. Bond funds fall into the category of fixed-income funds. • Regional Mutual Fund /schemes:

Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund's local region. A regional mutual fund generally looks to own a diversified portfolio of companies based in and operating out of its specified geographical area. The objective is to take advantage of regional growth potential before the national investment community does. They may be some regional funds whose objective is to invest in a specific segment of the region's economy, such as banking, energy etc.

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For the investor, the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area. For the average investor, these funds are beneficial as most investors don't have enough capital to adequately diversify themselves across many investments in the region. Regional funds select securities that pass geographical criteria. 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, where as regional funds invest in companies in one specific region or nation. Regional funds carry more risk as compared to international mutual funds because their investments are less diversified geographically. • 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, bonds or other securities. This type of investment is also known as multi-manager investment. Fund of funds can be classified into: Mutual fund FoF and Hedge fund FoF. Mutual fund FoF: A Mutual fund FoF invests in other mutual funds. Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds. 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. Pros & Cons of Fund of funds : Fund of funds are designed to achieve greater diversification than traditional mutual funds. But on the flipside, 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. Also, since a fund of funds buys many different funds which themselves invest in many different stocks, 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. • Sector Mutual Funds/schemes :

Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. Also known as thematic funds, these funds concentrate on one industry such as infrastructure, banking, technology, energy, real estate, power heath care, FMCG, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favour.

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Sectoral mutual funds come in the high risk high reward category and are not suitable for investors having low risk appetite. Generally, mutual fund houses avoid launching sectoral funds as they are seasonal in nature and do well only in cycles. Since these funds focus on just one sector of the economy, they limit diversification and the fund manager’s ability to capitalise on other sectors, if the specific sectors aren’t doing well. Unless a particular sector is doing very well and its long term growth prospects look bright, it advisable not to trade in sector funds. • Other Schemes : • • • Tax Saving Schemes : Special Schemes :

Large cap funds/schemes:

Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Different mutual funds have different criteria for classifying companies as large cap. Generally, companies with a market capitalisation in excess of Rs 1000 crore are known large cap companies. Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap stocks), because such companies are usually widely researched and information is widely available. Large cap funds invest in those companies that have more potential of earning growth and higher profit. 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. On the flip side, the large cap funds offer lower returns than mid cap or small cap funds. But when compared in totality, large cap funds outperform all other funds. These funds come under low risk low return category. In volatile times it is advisable to invest in large cap funds.

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 :

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Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no standard definition classifying companies as small or medium, each mutual fund has its own classification for small and medium sized companies. Generally, companies with a market capitalization of up to Rs 500 crore are classified as small. Those companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized. 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. 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. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations. Mid cap companies are looked upon as wealth creators and have the potential to join the league of large cap companies. Such companies are nimble, flexible and can adapt to the changes faster. One of the challenges that fund managers of mid cap funds face is to identifying such companies. But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds. Mid cap funds are a good option in case the investor wants to add some diversity to his portfolio.

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.

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Mutual funds are an excellent way to invest in the stock market. Investment funds and investors' money to a fund of money used to buy different types of actions, based on characteristics or investment purposes. There are many different houses to invest in a fund like T. Rowe, loyalty and the price of art

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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. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Nowadays, the post offices and banks also distribute the units of mutual funds. However, 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. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors. Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions. Non-Resident Indians (NRI) can also invest in mutual funds. Normally, necessary details in this respect are given in the offer documents of the schemes.

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, and the activities of investment management firms in particular. Regulatory measures, whatever their form and structure, are designed to attain the twin objectives of correcting market failures and protecting investors from potential loss. 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 ;   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.

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Regulatory measures can be broadly classified into five categories:
     Imposing capital requirements for investment management firms ; Monitoring and auditing the operations of investment management firms; Disclosure, and rating of management firms ; Providing insurance ; and Setting up minimum standards for investment management firms.

A suitable regulatory structure would be one which is broadened by legislature action and supported by industry practitioners. In order to formulate a workable and acceptable regulatory structure, the following points must be noted.  A close inter linkage must be established between the industry and the regulatory body.  Though the basis of such a structure may be legislative, it should be flexible, adaptive and less bureaucratic.    The regulators should possess a high degree of perception and market experience The regulatory should have enough authority to enforce the regulatory measures. The regulators should not indiscriminately change their views as this may create instability in the market and loss of public confidence.  The structure of regulation should create enough space for investors, for whom the regulatory system has been developed. The regulators should treat the investors as facilitators in the smooth functioning of the system. Effective regulation should take into account both the cost of regulation and value addition. Two types of costs are usually associated with any regulatory measure; direct and indirect. The direct cost is the cost of administration and implementation while the indirect cost is the loss of welfare due to restriction on competition. It is essential that

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any regulation is formulated only after taking into account the total cost and implicit benefits. 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. Moreover, in an emerging and semi-efficient market like India, investors are exposed to greater volatility and risks. Therefore, in order to be effective, regulation should be able to protect the investors’ interests, and the direct benefits must be more than the indirect benefits and costs of regulation.

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. In India, under the present

framework, the regulation of all participants in the securities market (with the exception of issuers of capital) is the responsibility of SEBI. As prime regulator of capital market activities in India, SEBI’s basic objective is to protect the interests of investors. This objective has been stated in the preamble of the Securities and Exchange Board of India Act, 1991 thus ‘….to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and the matters connected therewith or incidental thereto. Accordingly, all

capital market activities, including those of mutual funds are covered under the objective so far as investor protection is concerned. The SEBI Regulations of 1993 were the first attempt to bring mutual funds under a regulatory framework and to give direction to their functioning. However, as noted

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earlier, new regulations were passed in 1996, and these have many similarities with the Investment Company Act, 1940, of the US as far as mutual funds regulation and investor protections are concerned. The regulatory and supervisory powers of SEBI also stand strengthened by the Securities Law (Amendment) Ordinance, 1995, which empowers SEBI to impose penalties for violation of its regulations. Under this amendment, SEBI is also allowed to file complaints in court without prior approval of the Central Government. SEBI has thus emerged as an autonomous and powerful regulator of mutual funds in India. The 1996 regulations lay down many measures to protect mutual funds investors. Some of measures are as under: SEBI has incorporated several provisions to screen mutual funds at entry level, similar to provision for a ‘fit and proper’ test in the UK. 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’. 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, professional competence, financial soundness, and a general reputation for fairness and integrity in all business transactions. SEBI has laid down conditions for the appointment of trustees and has specified their obligations, as well as detailed guidelines on the trust deed. The AMC is to be approved by SEBI. SEBI has also laid down the terms and conditions for the approval of the AMC. The directors of the AMC are to be persons having adequate professional

experience in finance and financial services-related fields. 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.

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Mutual funds must have a custodian who is to be approved by SEBI, and one of the preconditions for approval is a ‘sound track-record, general reputation and fairness in transaction’ 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 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. There are clear regulatory provisions regarding the listing of close-ended schemes, refunds, transfer and sending of unit certificates to investors. 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 investment objective and strategy, as well as the

approximate percentage share of investment to be made in various instruments are also disclosed. No guarantee of returns can be given unless they are fully guaranteed by the sponsors or AMC, 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. • SEBI has outlined the advertisement code to be followed by mutual funds in making any publicity regarding a scheme and its performance. SEBI can inspect the books of accounts, records and documents of a mutual fund, the trustees, AMC and custodian. compliance. SEBI can impose a monetary penalty also for non-

The Indian regulatory mechanism is centered on statutory provisions of SEBI. There is strong emphasis on ex-post investigation and disciplining of mutual funds through financial penalties. The implicit tone of regulation is correction through control. There are enough provisions for disclosure. Thus, the regulatory mechanism and supervisory

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control are strong enough for protecting the interests of investors. However, the level of protection can be enhanced by including a few more elements, like SROs, investors’ protection fund and credit rating.

CORPORATE GOVERNANCE IN MUTUAL FUNDS
Financial institutions play a vital role in promoting and sustaining the growth and development of the economy. The stakeholders of financial institutions are larger in number than those of manufacturing companies. Financial institutions, in addition to enhancing the shareholders’ value, have to increase wealth of the depositors/investors, who are the core of their business activities. Moreover, 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. Therefore, corporate governance is more important for such institutions, not only in the interest of shareholders, investors/depositors and other stakeholders, but also in the greater interest of the national economy. The Indian mutual funds industry has come a long way since the establishment of UTI in 1963. By now, 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. 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, there should be a minimum of four trustees in the Board of trustees, and at least two or three of them must be independent trustees. There is no prescribed minimum limit for number of directors on the board of the AMC, but at least 50% of them must be independent directors.
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SEBI has prescribed a wide range of responsibilities for the trustees in order to strengthen the compliance mechanism. 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. Similarly, the trustees are required to review all All AMCs ‘shall adopt a

information and documents received from the AMC.

management information system for reporting to the Trustees’. SEBI has also suggested that the AMC provide infrastructure and administrative support to the trustees. As per the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1999, each trustee shall file the details of his transactions in respect of dealing in securities with the mutual fund on a quarterly basis.

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, whether these are conducted as per regulations, and whether it continues to meet the capital adequacy requirement of each of the activities. • • • 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, trust deed and investment objectives of the scheme. • If the utilization of the services of the sponsor or any of the AMC’s associates, employees or their relatives for any securities transaction is in accordance with the offer document and the brokerage and commission paid to such affiliates.

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Details of any changes in the interests of the directors on the AMC’s board of directors

The borrowings of the mutual fund, specifying the details of the date, nature of instrument, source, amount borrowed, purpose of borrowing, interest rate, security offered for the borrowing, percentage of borrowing to the net assets on the date of borrowing, date of repayment or proposed manner of liquidation of the debt; if the borrowing is from any associate of the sponsor of the AMC, the reasons for borrowing from such an entity and the competitiveness of the terms.

Investments/Redemption by the AMC, sponsor or any associate of the sponsor in any of schemes and inter scheme investments, giving details of the names of the schemes, date, price, value and charges levied.

Transactions in securities by the key personnel of the AMC, whether in their own name or on behalf of the AMC, giving details of the names of the personnel, name of the security, and purchase/sale details like the quantity, rate, value and name of the broker; whether the transaction is on personal account or conducted by immediate family or fiduciary.

• •

The valuation and pricing of units The maintenance of proper books of accounts, records and documents for each scheme.

The identification and appropriation of expenses to individual schemes and whether the expenses are in conformity with the limits laid down by SEBI.

The ability to honour guarantees commitments in the case of schemes guaranteeing returns.

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Deficiency/Warning letters, if any, received from SEBI and the corrective action taken.

Broad coverage report of Trustees to SEBI
The trustees shall submit bi-annual reports at the end of September and March. The reports should reach SEBI within two months of the end of the half-year, 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, concentration of business with affiliate brokers, compliance with investment restrictions, inter-scheme transfers and the net worth of the AMC.

The ability of the AMC/sponsor to honour guaranteed returns in the case of any scheme guaranteeing returns.

Whether the deployment of the funds of the schemes is in accordance with the investment objectives and not intended for any option trading, short-selling or carryforward transactions.

 

Whether the valuation and pricing of units is in accordance with the regulations. The publication of an annual report, as well as furnishing of bi-annual and annual accounts statements to the unit-holders and SEBI.

Listing of schemes on the stock exchange as per the terms of the offer document, effecting of transfer and despatch of units to unit-holders within 30 days, and timely despatch of repurchase/redemption proceeds and dividend warrants.

Any action taken on deficiency and warning letters by SEBI.

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Whether before the launch of a scheme, the AMC had systems in place for the back office, etc., if it had appointed all key personnel, auditors and compliance officers, prepared manuals, specified norms, and so on.

If the AMC has appointed a registrar and share transfer agents who are registered with SEBI, whether it has ensured that the rates charged are competitive, if the work is done in-house, and the reasons for charging higher rates whenever higher rates are charged.

If the AMC has been diligent in empanelling brokers for monitoring securities transactions, and whether it has avoided undue concentration with any broker.

An assurance that the AMC has not given undue and unfair advantage to any associate.

In case the company has invested more than 5% of the NAV of a scheme, 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.

Whether the AMC has dealt through any associate broker in excess of 5% of the quarterly business done by the mutual fund.

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, and whether all such investments have been reported to the trustees on a quarterly basis.

The utilization of the services of the sponsor or any of the AMC’s associates, employees, etc., and whether the relevant disclosures have been made in the annual accounts.

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Whether the AMC has submitted quarterly reports on its activities and compiled with the regulations.

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Whether the transactions of the mutual fund are in accordance with the trust deed. If the funds pertaining to a scheme have been invested in accordance with the regulations.

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Whether all activities of the AMC are in accordance with the regulations. Details of transactions in securities by key personnel, whether in their own name or on behalf of the AMC, every six months.

Whether the AMC has filed with the trustees the detailed bio-data of all directors of the AMC, along with their interest in other companies, within 15 days of their appointment; any change in the interests of the directors.

Whether the directors of the AMC have filed with the trustees a statement of their holding of securities at the end of financial year, 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.

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.

Certifying that they have satisfied themselves that there have been no instances of self-dealing or front-running by any of the trustees, directors and key personnel of the AMC.

Certifying that the AMC has been managing the schemes independently of any other activities and the unit-holders interest has been protected.

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.

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Confirmation that the mutual fund has not made any investment in any unlisted security of an associate or group company of the sponsor, any security issued by way of private placement by an associate or group company of the sponsor, or the listed securities of the group.

Due Diligence The trustees are required to exercise due diligence, which includes general due diligence and specific due diligence. General due diligence requires the trustee to be discerning in the appointment of directors on the board of the AMC; to review the desirability of the continuance of the AMC if substantial irregularities are observed; to ensure that trust properties are protected, held and administered by proper persons; to ensure that the service providers are registered with the regulatory authority concerned etc. Specific due diligence entails obtaining internal audit reports from the independent auditors appointed by them; obtaining compliance certificate from the AMC; holding meetings (of trustees) and initiating action on the auditors’ reports; ensuring compliance by the AMC; prescribing the code of ethics and ensuring that the trustees, AMC and its personnel adhere to it; and communicating in writing to the AMC about the deficiencies and checking up on the rectification of the deficiencies.

Audit and valuation committee The audit committee is the most important instrument for making corporate governance a success. SEBI has asked the mutual funds to form audit committees through their boards of trustees/directors of trustee companies. The trustees are required to constitute an audit committee of the trustees for reviewing the internal audit system, as well as the recommendations of the internal and statutory auditors’ reports. The committee should also ensure that action is taken on the rectifications suggested by these auditors. The

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committee shall be chaired by an independent trustee. As per SEBI guidelines, the AMC has to constitute an in-house valuation committee consisting of senior executives, including personnel from accounts, fund management and the compliance department, to review the system and practices relating to the valuation of securities on a regular basis. The trustees are required to review all the transactions of the mutual fund with the associates on a regular basis.

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. Therefore, SEBI has made it mandatory for mutual funds to disclose the entire portfolio of any scheme.

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, facts and opinion leading to that decision’.

MUTUAL FUNDS AND SELF-REGULATORY ORGANISATIONS The deregulation of financial services has posed several challenges to the policy-makers, economic administrators, academicians and researchers. 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. Economic history is rife with examples of such activities, which have played havoc in the market,

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jeopardizing the transmission mechanism and market equilibrium.

They have

terminated the process of intermediation (and disintermediation) in the financial system, leading to a collapse of the system. Various types of defense mechanisms have been devised to confront the challenges originating from deregulation. Broadly, these

mechanisms are re-regulation of the market and its activities (exercised through legislative institutions), and self-regulating (exercised through non-legislative, voluntary organisations). Both these systems have certain advantages and disadvantages, and experience shows that neither one should be relied on totally. However, a particular system can be more useful when its implicit advantages apply to the given level of market maturity, the market psychology and socio-economic environment.

Role of AMFI
AMFI represents the AMCs in India. Established as a non-profit organisation on 22 August 1995, the association is dedicated to:    Promoting and protecting the interests of mutual funds and their unit-holders; Increasing public awareness of mutual funds ; and Serving the investors’ interest by defining and maintaining high ethical and professional standards in the mutual funds industry The vision of AMFI echoes the mission which is ‘to advance the interest of investment companies and their shareholders, to promote public understanding of investment company business, and to serve the public interest by encouraging adherence to high ethical standards by all elements of the businesses. Given the short span of time, operational limitations and emerging nature of mutual funds industry in India, AMFI has made a very significant contribution to the promotion of sound practices among mutual funds and towards protecting the interest of its

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members. However, it still does not function as an SRO to any significant extent, which is mutual fund industry requires today. The various activities undertaken by AMFI are as under:

AMFI has brought out publications on investor awareness, code of ethics, model compliance, manual on mutual funds directory and a standard offer document.

AMFI has formed several committees and submitted their reports to SEBI in order to promote high professional standards. Among the committees are : (i) The valuation committee – for valuation of securities, appropriate accounting standards, valuation of traded and non-traded equities and valuation of non-traded debt securities ; (ii) The committee on NPA – to identify and recommend norms for recognizing NPAs of mutual funds, as well as the principles and system for provisioning such NPAs, and to suggest the standard and frequency of disclosures ; (iii) (iv) The committee on compliance – to prepare a compliance manual; The committee on inspection fees - to suggest the basis for the fees to be paid to the auditors appointed by SEBI. (v) The committee on advertising guidelines – to finalize comprehensive guidelines for advertisement ; (vi) The committee on derivatives – to formulate guidelines for trading in derivatives. (vii) (viii) The committee on the non-performing assets of mutual funds; The committee on investors’ education and training and;

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(ix)

A committee which has devised the process of certification for intermediaries selling mutual funds products.

AMFI has finalized a testing programme for intermediaries and employees. The programme includes a comprehensive workbook and question bank. AMFI has selected NSE to conduct the tests. National Stock Exchange (NSE) is the prime stock exchange followed by Bombay stock exchange (BSE). Following list provides information of mutual funds and Exchange Traded Funds (ETF) of NSE.

List of Mutual Funds and ETFs in NSE
1, Benchmark Asset Management Company Private Limited 2, Birla Sun Life Asset Management Company Limited 3, Deutsche Asset Management (India) Private Limited 4, Fortis Investment Management (India) Private Limited 5, Franklin Templeton Asset Management (India) Pvt. Ltd 6, HDFC Asset Management Company Limited 7, IDFC Asset Management Company Private Limited 8, Kotak Mahindra Asset Management Company Limited 9, Principal Pub Asset Management Co. Pvt. Ltd. 10, Quantum Asset Management Co. Private Ltd 11, Reliance Capital Asset Management Limited 12, Religare Asset Management Co. Pvt. Ltd 13, SBI Funds Management Private Limited 14, Taurus Asset Management Company Limited 15 UTI Asset Management Co. Ltd. 16, Sundaram BNP Paribas Asset Management Company Limited 17, ICICI Prudential Asset Management Company Limited

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18, JM Financial Asset Management Company Limited 19, Bharti AXA Investment Managers Private Limited 20, L&T Investment Management Limited 21, DSP BlackRock Investment Managers Private Limited 22, Canara Robeco Asset Management Company Limited 23, FIL Fund Management Private Limited 24, Motilal Oswal Asset Management Company Limited 25, Axis Asset Management Company Limited 26, JP Morgan Asset Management India Private Limited

List of "Top Ten Mutual Funds" in India Sr. No. 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

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CONCLUSION: THE ROAD AHEAD FOR MUTUAL FUND INDUSTRY IN INDIA A perceptible change is sweeping across the mutual fund landscape in India. Factors such as changing investor’s needs and their appetite for risk, emergence of Internet as a powerful service platform, 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. In the changed scenario today, product innovation is increasingly becoming one of the key determinants of success. Given the growing shifts in investors’ preference owing to today’s uncertain economic environment, anticipating trends of emerging investor needs and positioning products for these gaps pose greater challenges for growth for the industry players. Besides, attracting and retaining

customers has also emerged as a key area where the need to have a greater focus is strongly felt. Building and sustaining a powerful brand is also becoming an issue of paramount importance. With investors today having a range of products to choose from, effective communication is required to reach a wider audience. 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. As it is being increasingly felt, with the commoditization of products looking imminent, service to investor and performance would be major differentiators. 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. Globally, it has been seen that the top ten players account for a greater pie of the market share. With competition getting intense in the domestic industry, churning in the industry looks imminent.

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EMERGING CHALLANGES

The Indian Mutual Funds industry has emerged as a significant financial intermediary. It is assisting in the process of efficient resource allocation, providing strong support to the capital market and helping investors (particularly small investors) realize the benefits of stock market investing. 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 Indian mutual fund industry has stagnated at around Rs.200000 crore assets for the last couple of years. 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. The industry has to push itself to the investors on product, performance and services. The mutual fund industry needs to introduce innovative products from time to time, which can satisfy investor’s requirements. The market has seen standard products being introduced by most of the players. These products have met investor’s requirement in a bull market but products should also create a long-term investment habit among the investor. The key to investors returning to mutual funds will be the funds ability to out perform the benchmark index on a constant basis. The following challenges are required to meet by the Mutual Funds Investor Education- Need of the Hour The Indian mutual fund industry consists of both equity and debt schemes. The debt schemes during the last two years have given very attractive rates of return. However, equity schemes, particularly the diversified schemes, mostly performed in line with the market. Regarding the relatively poor performances of the equity schemes, it is to be understood that whenever the market has fallen by a substantial portion, the NAVs of

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these funds have also suffered. It is some of the sector specific funds, particularly the IT sector funds, which have given very poor performance. As far as safety of investment is concerned, it is wrong to say that mutual funds are the safest investment avenues. There is no guarantee of the return, as Mutual Fund

investment is subject to market risks. Neither there is a guarantee of the principal nor is there any insurance. From that point of view, mutual fund investment is not safe and it entails some amount of risk. People should understand that this is no myth, it is a reality. Unlike the banks or government securities, there is no assurance of anything. That is why creating awareness among the investing community becomes more important. An investor should know that NAV could go down, and there could be no dividends also. Regarding widening the reach of the Indian industry, the slow market penetration is a matter of cost, because to go to smaller towns or distant places is a costly affair for these funds unlike LIC and certain other government financial institutions. From the

beginning the mutual fund industry has concentrated on the rich pockets and also metropolitan towns like Mumbai, Delhi, and Chennai etc. 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. On restoring the confidence of Indian investors in mutual funds, first of all the industry will need to create awareness about benefits of investing in mutual funds. The investor must understand that mutual funds work differently from the other saving instruments like banks, post office, non-bank companies, or chit fund companies. There is a trustee, an AMC, auditors, and there is

SEBI. Thirdly, investors should do their homework properly. Investors need to know that the right level of risk tolerance actually depends upon his age, the amount of investible funds available and his financial circumstances including

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income level, job security, and family seize, etc... 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. One main fundamental is that great returns come only from assuming higher risks, but a higher risk portfolio does not guarantee higher returns. 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. Investors should study these reports and keep themselves informed about the performance of the various schemes of different funds. As far as disclosure standards are concerned, it is second to none in the world. There has been a lot of improvement in the regulatory framework. The activity that is important today is that the intermediaries i.e., the distributors, agents and brokers who are distributing and selling the mutual funds, would need to become more disciplined and pass out AMFI test.

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. However, the figure seems miniscule when compared with the schemes prevailing in the advanced countries. The Indian market has metamorphosed into the predominant open ended era from the close ended one; it has ushered investors into a present risk based return environment from the security of the guaranteed return times, yet, the product offerings have been largely vanilla as in debt, equity and balanced schemes. The primary innovation of the Indian industry came in the form of insurance linked tax saving products introduced by UTI and LIC Mutual Fund, but that was as far back as the pre 1990s. Product innovations

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otherwise seemed to have plateaued in the mutual fund industry although we have seen the occasional sector funds which caught investor fancy because of the tech boom, serial plans which seemed to be tailored for corporate investors and index funds. Mutual funds otherwise for various reasons seemed to have adopted a very cautious approach to product innovations. But with the growth in domestic financial markets, there is a variety of products that can be offered to our investors such as international funds, regional funds, real assets funds, utility funds, municipal funds, capitalization based funds, commodity funds, natural resources funds, pension funds, structured funds etc., which are already a norm in the international markets. The domestic property market is extremely disorganized and needs to be brought within the grasp of formal economic activity. Real estate comprises of three types of properties viz., personal, investment and infrastructure properties. Generally, in developed

markets, investment in real estate can be either direct, 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, but also offers a good hedge to inflation. However, it is available in India only through direct

ownership wherein the tedious legal procedures, high costs and associated risks make it an unlikely investment choice. So the objective of domestic real estate investment funds will be to help investors invest in property conveniently, cost effectively and securely with the help of professional management, thus providing them opportunities for capital gains as well as regular income. A lot of groundwork still needs to be done before real estate investment funds are introduced in our market. Although not as disorganized as the real estate industry, the pension industry in India also needs to wake up to the changing global economics. A burgeoning middle class population, increased life expectancy resulting in an increasing number of senior

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citizens, societal shift towards nuclear families, decreasing levels of job security, complete lack of a national social security system and an increasing sense of responsibility towards retirement benefits has prompted a review of the existing pension system. As a result, private pension fund products will soon likely find their way in the domestic market.

Product differentiation presently is on the basis of investment objectives, asset allocation performance and service. However, with the commoditization of products being inevitable, service and performance will skew investor preferences. As investor knowledge increases they will show a demand for specialized products and services. However, the financial industry as a whole has to travel a few miles before we can get to that level.

Introduction of Compulsory Rating
Investors would certainly benefit from mandatory rating of mutual funds. While there should be performance rating for the existing schemes, management rating should be introduced for new schemes. Mandatory rating would help the investor select a scheme in accordance with his risk tolerance level.

Strengthening of Corporate Governance

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Institutionalization of financial and capital markets has underlined the importance of corporate governance among mutual funds, particularly as they have a considerable influence on the market. The agency problem, which arises out of the separation of management and control in modern organizations, can be significantly influenced by mutual funds by virtue of their being large investors. For example, mutual funds can check shareholder activism to protect the interests of the organization on one hand, and on the other, they can check management activism to protect interests of the shareholder. Mutual funds should design their own corporate governance policy to control the activism of their fund managers. SEBI has taken some useful steps. But should go further and design a mechanism to monitor corporate governance in mutual funds, as well as appropriate penal action for any violation of the same. 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. To this end, SEBI could issue certain guidelines of

‘Intentions and Interaction of good practices’, providing a broad framework to be followed in corporate dealings by the fund managers and other entities involved in asset management.

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. However, not much is known about the official assessments made by SEBI while taking regulatory initiatives. It is not known whether SEBI has conducted any analysis regarding vital issues, like the cost-return relationship of mutual fund investing, risk management practices, funds

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management strategies, corporate governance, service delivery and the investors’ perceptions regarding the funds and regulators. In the US, SEC frequently conducts in depth studies in the interests of both the investors and industry. SEBI can consider similar steps to remove certain regulatory and operational weaknesses. The recent reforms in India and globalization offer tremendous opportunity for the Indian mutual fund. While liberalization by itself does not guarantee growth,

institutionalization of liberalization, achieved through changes in the managerial mindset, can definitely produce the desired results. The Indian mutual funds industry can emerge as one of the strongest players in the global capital market by absorbing investment technology and modifying managerial practices in the regional context, while thinking and acting with a global vision.

Despite the 2003 mutual fund scandals and the global financial crisis of 2008-2009, the story of the mutual fund is far from over. In fact, the industry is still growing. In the U.S. alone there are more than 10,000 mutual funds, and if one accounts for all share classes of similar funds, fund holdings are measured in the trillions of dollars. Despite the launch of separate accounts, exchange-traded funds and other competing products, the mutual fund industry remains healthy and fund ownership continues to grow.

As with any investment, there are risks involved in buying mutual funds. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. Also, the advantages gained from mutual funds are not free: many of them carry loads, annual expense fees and penalties for early withdrawal.

BIBLIOGRAPHY

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H. Sadhak – Mutual funds in India Association of Mutual Funds of India (www.amfiindia.com) Value research (www.valueresearchonline.com) www.indiamutualfunds.com www.marketriser.com

Questionnaire

1. Name of the customer Mr. / Mrs. / Ms. 2. Address/ Contact 3. What is the age group you face in? i. ii. iii. iv. v. 20-30 30-40 40-50 50-60 Above 60

4. What is your occupation? i. ii. iii. iv. v. Service Business Professional Dependent Retired

5. What is the per month income of your family? i. < 10,000

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ii. iii. iv.

10-30,000 30-50,000 > 50,000

6. Which type of investment you prefer? i. ii. iii. iv. v. vi. 7. i. ii. iii. Current saving Fixed deposits Shares Bonds/debentures Mutual fund Gold/real estates What is your objective for investing? Income generation Tax saving Others

7. What is your priority while investing your money? i. ii. iii. iv. Safety Higher returns Liquidity Tax benefits

8. Are you aware of mutual fund? i. ii. Yes No

9. Have you ever invested in mutual fund? i. Yes

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ii. 10. i. ii. iii. iv. v.

No From where you get information about mutual fund? Print media Electronic media Friends/relatives Broker/investment Banks

11. What has been the reason of your not investing into the mutual fund? i. ii. iii. iv. Lack of confidence Imperfect knowledge Find Govt. Securities/bonds better Other reasons

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