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Financial knowledge series
part 2 of 26

ARE MUTUAL although they come without

any explicit guarantee of
capital protection,
mutual funds can give the
investor peace of mind

very investor wants to protect his capital and aims for 10 per cent of its corpus in unrated debt instruments issued by a
a reasonable return on his investments. The question, single issuer, and the total investment in such instruments can-
then, is: do mutual funds (MFs) meet these criteria? not exceed 25 per cent of the scheme’s net asset value (NAV).
Being subject to market risks, MFs do not guarantee These stipulations go quite some way in making the investments
capital preservation. However, there are plenty of safeguards more secure. Besides, Sebi has introduced a slew of changes
built into the system to protect the interests of investors and over the last two years, which includes making the Scheme
their money. Let’s take a look at some such features. Information Document available to the investor. Also, scheme-
related documents now provide detailed information on fund
THE SAFEGUARDS policies, risks, trustees and operations. Some other changes that
Structural Safeguards. The capital market regulator, Sebi wants to introduce aim to bring in standardisation and
Securities and Exchange Board of India (Sebi), which regulates transparency in disclosures by MFs. Apart from these in-built
MFs, is a critical entity in protecting investor interest, be it by structural and regulatory features for safety of investments,
drafting regulations or monitoring their implementation. It has there are three other aspects reinforcing this effect.
laid down guidelines for all constituents of an MF, like sponsors,
trusts, asset management companies (AMCs) and custodians. BENEFITS OF DIVERSIFICATION
Regulations pertaining to sponsors MFs provide the benefits of diversifica-
and trustees are crucial to protecting tion that help any investment to mini-
investor interest. For instance, to be the
sponsor of an MF—the sponsor of an
Mutual funds mise the impact of volatility and earn-
ings risk as opposed to investing in indi-
MF is what a promoter is to a compa- provide the vidual securities. One can diversify
ny—one needs to have at least five years
of experience in the financial services
benefit of across asset classes—equity or debt—
and across companies and sectors.
business, three of which should have diversification
been profitable. This ensures a minimum wide product range
track record for the sponsor, whose that helps mini- You can invest in MFs according to
expertise should give investors comfort.
The board of trustees, which is set up
mise the impact your risk appetite. If you are risk-averse,
you may go in for debt funds or a combi-
by the sponsor, also aims to protect of volatility nation of debt and equity, such as
investor interest. At least two-thirds of monthly income plans and balanced
the directors on the board are required funds. Those willing to take risk for the
to be independent. This helps in maintaining an independent sake of greater returns may go for mid-cap or sectoral funds.
stance, albeit slightly tilted in favour of investors. Trustees also
monitor fund performance and compliance with Sebi regula- risk management
tions. The trust holds the investors’ money in fiduciary capacity. Apart from the benefits of diversification and a wide product
The Sebi MF regulations, 1996, give the trustees immense range, MFs have another safety feature. Each AMC has its own
power. In case of continuous underperformance and unethical internal risk management teams comprising risk analysts, who
practices, trustees can even dismiss the AMC. monitor risks and keep them in check.
Regulatory safeguards. Sebi’s investment guidelines add To sum it up, an investor who is well-informed about product
another layer of protection. For instance, an equity MF scheme features can look forward to investing in MFs with confidence.
cannot account for more than 10 per cent of a company’s paid-
up capital. Similarly, a debt scheme cannot invest more than Next issue: Essential mutual fund Terms

1 1 a u g u s t 2 0 1 0 OUTLOO K M O NE Y [ 43 ]