Equity Fund Management

– Processes and Practices

Introduction
•Types of Mutual Funds – SEBI Categorization Circular
•Organization Structure
•CIO
•Fund Manager
•CMO
•COO

• Fiduciary role of fund manager

What is a Mutual Fund
A mutual fund is a pool of money managed by a professional Fund Manager.
It is a trust that collects money from a number of investors who share a common investment objective
and invests the same in equities, bonds, money market instruments and/or other securities.
And the income / gains generated from this collective investment is distributed proportionately amongst the
investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or
NAV.

Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.

Mutual funds are ideal for investors who either lack large sums for investment, or for those who neither have
the inclination nor the time to research the market, yet want to grow their wealth. The money collected in
mutual funds is invested by professional fund managers in line with the scheme’s stated objective. In return,
the fund house charges a small fee which is deducted from the investment. The fees charged by mutual funds
are regulated and are subject to certain limits specified by the Securities and Exchange Board of India
(SEBI).
Types of Mutual Fund
No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
It's important to understand that each mutual fund has different risks and rewards. In general, the higher
the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds
have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.
Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments
and investment strategies. At the fundamental level, mutual funds can be classified on three parameters:

• On the basis of structure.

• On the basis of investment objective.

• On the basis of special schemes.

PLEASE REFER TO THE CATEGORIZATION CIRCULAR SHARED SEPARATELY

Types of Mutual Funds
ON THE BASIS OF STRUCTURE

➢Open ended Schemes

• Open ended Schemes are schemes which offers unit for sale without specifying any duration
for redemption.
• They sell and repurchase schemes on a continuous basis. These Funds do not have a fixed
maturity period.
• The main feature of such kind of scheme is liquidity

➢ Close ended Schemes

• A close-ended Mutual fund has a stipulated maturity period e.g. 5-7 years. The fund is open
for subscription only during a specified period at the time of launch of the scheme.
• These are the schemes in which redemption period is specified.
• Once the units are sold by mutual funds, then any transaction takes place in secondary
market only i.e stock exchange.
• Price is determined by forces of market.
 ON THE BASIS OF INVESTMENT OBJECTIVE
➢ GROWTH FUND
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such
schemes normally invest a major part of their corpus in equities. Such funds have comparatively high
risks.

➢ INCOME FUNDS
Funds that invest in medium to long-term debt instruments issued by private companies, banks,
financial institutions, governments and other entities belonging to various sectors (like infrastructure
companies etc.) are known as Debt / Income Funds.

➢ BALANCED FUND
These funds provide both growth and regular income as these schemes invest in debt and equity.
The NAV of these schemes is less volatile as compared pure equity funds.

➢ MONEY MARKET FUNDS

Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt
instruments. These securities are highly liquid and provide safety of investment, thus making money
market / liquid funds the safest investment option when compared with other mutual fund types.
These schemes invest exclusively in safer short- term instruments such as treasury bills, commercial
paper and government securities, etc.
 ON THE BASIS OF SPECIAL SCHEMES

➢ INDEX SCHEMES
In this schemes, the funds collected by mutual funds are invested in shares forming the Stock
Exchange Index.
Example- Nifty Index Scheme of UTI Mutual Fund and Sensex Index Scheme of Tata Mutual
Fund.

➢ SECTORAL SCHEMES
Sectoral funds are those mutual funds which invest in a particular sector of the market, e.g.
banking, information technology etc. Sector funds are riskier than equity diversified funds since
they invest in shares belonging to a particular sector which gives them fewer diversification
opportunities

➢ THEMATIC SCHEMES
Thematic funds are those mutual fund schemes which invests in companies of few sectors
which represents a theme like Infrastructure, Consumption, Domestic Economic Recovery,
Rural revival.
OTHER SCHEMES

Gilt Security Schemes

Funds of Funds

Domestic Funds

Tax Saving Schemes.

Role & Objective of AMFI
➢ AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.

➢ To recommend and promote best business practices and code of conduct to be followed by members and others engaged in the
activities of mutual fund and asset management including agencies connected or involved in the field of capital markets and
financial services.

➢ Association of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on
matters relating to the Mutual Fund Industry.

➢ It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all
intermediaries and other engaged in the mutual fund industry.

➢ AMFI undertakes all India awareness programme for investors in order to promote proper understanding of the concept and
working of mutual funds.

➢ Association of mutual fund of India also disseminate information on Mutual Fund Industry and undertakes studies and research
either directly or in association with other bodies.

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Difference Between ETF and Mutual fund
Advantages of Investing in MFs

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Advantages of investing in MFs
Professional Management
Mutual funds employ experienced and skilled professionals who make investment research and analyze the performance and
prospects of various instruments before selecting a particular investment. Thus, by investing in mutual funds, one can avail the
services of professional fund managers, which would otherwise be costly for an individual investor.

Diversification
Diversification involves holding a wide variety of investments in a portfolio so as to mitigate risks. Mutual funds usually spread
investments across various industries and asset classes, constrained only by the stated investment objective. Thus, by investing in
mutual funds, one can avail the benefits of diversification and asset allocation without investing a large amount of money that would
be required to create an individual portfolio.

Liquidity
In an open-ended scheme, unit holders can redeem their units from the fund house anytime. Even with close-ended schemes, one can
sell the units on a stock exchange at the prevailing market price. Besides, some close-ended and interval schemes allow direct
repurchase of units at NAV related prices from time to time. Thus investors do not have to worry about finding buyers for their
investments.

Flexibility
Mutual funds offer a variety of plans, such as regular investment, regular withdrawal and dividend reinvestment plans. Depending
upon one’s preferences and convenience, one can invest or withdraw funds, accordingly.
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Advantages of investing in MFs
Cost Effective
Since Mutual funds have a number of investors, the fund’s transaction costs, commissions and other fees get reduced to a
considerable extent. Thus, owing to the benefits of larger scale, mutual funds are comparatively less expensive than direct
investment in the capital markets.
Well Regulated
Mutual funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI), which strives to protect
the interests of investors. Mutual funds are required to provide investors with regular information about their investments, in
addition to other disclosures like specific investments made by the scheme and the proportion of investment in each asset classes.
Convenient Administration
The facility of making investments through service centers as well as through internet ensures convenience.
Return Potential
By allocating right asset mix, mutual funds offer a chance of higher potential of returns. The high concentration of risky assets
would lead to higher return and vice-versa.
Transparency
Information available through fact sheets, offer documents, annual reports and promotional materials help investors gather
knowledge about their investments.
Choice of Schemes
The investors can chose from various kinds of scheme available to them. The risk-seeker investors can go for more aggressive
schemes while risk-averse investors can go for income schemes funds and so on.

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Risks Associated with Mutual Funds
• Professional Management- Some funds don’t perform in the market, as their management is not dynamic
enough to explore the available opportunity in the market.

• Costs – The biggest source of AMC income is generally from the entry & exit load which they charge from
investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of
jargon.

• Dilution - Because funds have small holdings across different companies, high returns from a few
investments often don't make much difference on the overall return.

• Taxes - when making decisions about your money, fund managers don't consider your personal tax situation.
For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how
profitable the individual is from the sale.
 With such a clearly defined structure present in a mutual fund, your money and investment details are filtered through a number of different
processes to determine the best investment for you. With a good structure in place, the mutual fund you select will have a consistent performance
too.

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Structure
Sponsor:

• The sponsor is the one who ends up choosing the trustees and sets up an AMC where investors can submit their
money in.
• Being a sponsor is a huge responsibility which is why SEBI has a set of guidelines to determine if they are
eligible enough.
• These include being in the financial services for at least five years, three of which should have positive returns.
• Along with this, the sponsor should have a positive net worth which will also contribute to the AMC.
• According to SEBI, the sponsor should have professional competence, financial soundness and reputation for
fairness and integrity.
• The sponsor contributes 40% of the networth of the AMC.

A Sponsor is any person or corporate body that establishes the Fund and registers it with SEBI. It forms a Trust and
appoints a Board of Trustees. It also appoints Custodian and Asset Management Company either directly or through
Trust, in accordance with SEBI regulations.

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Structure
Trustee
• Trustee is created through a document called the Trust Deed that is executed by the Fund Sponsor and registered with SEBI.
• The Trust-the mutual fund may be managed by a Board of Trustees- a body of individuals or a Trust Company- a corporate body.
• Trustees are the protector of unit holders’ interests.
• A minimum of 75% of the trustees must be independent of the sponsor to ensure fair dealings.

Rights of Trustees

• Approve each of the schemes floated by the AMC.

• The right to request any necessary information from the AMC.
• May take corrective action if they believe that the conduct of the fund's business is not in accordance with SEBI Regulations.
• Have the right to dismiss the AMC,
• Ensure that, any shortfall in net worth of the AMC is made up.

Obligations of the Trustees

• Enter into an investment management agreement with the AMC.

• Ensure that the fund's transactions are in accordance with the Trust Deed.
• Furnish to SEBI on a half-yearly basis, a report on the fund's activities
• Ensure that no change in the fundamental attributes of any scheme or the trust or any other change which would affect the interest of unit holders
is happens without informing the unit holders.
• Review the investor complaints received and the redressal of the same by the AMC.
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Structure
Asset Management Company (AMC)
• Acts as an investment manager of the Trust under the Board Supervision and direction of the Trustees.
• Has to be approved and registered with SEBI.
• Will float and manage the different investment schemes in the name of Trust and in accordance with SEBI regulations.
• Acts in interest of the unit-holders and reports to the trustees.
• At least 50% of directors on the board are independent of the sponsor or the trustees.

Obligation of Asset Management Company:

• Float investment schemes only after receiving prior approval from the Trustees and SEBI.
• Send quarterly reports to Trustees.
• Make the required disclosures to the investors in areas such as calculation of NAV and repurchase price.
• Must maintain a net worth of at least Rs. 10 crores at all times.
• Will not purchase or sell securities through any broker, which is average of 5% or more of the aggregate purchases and
sale of securities made by the mutual fund in all its schemes.
• AMC cannot act as a trustee of any other mutual fund.
• Do not undertake any other activity conflicting with managing the fund.

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Structure
Custodians
• A custodian’s role is keeping custody of the securities that are bought by the fund manager and also keeping a tab on the
corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested.
• The Custodian is appointed by the Board of Trustees. The custodian also participates in a clearing and settlement system
through approved depository companies on behalf of mutual funds, in case of dematerialized securities.
• Only the physical securities are held by the Custodian. The deliveries and receipt of units of a mutual fund are done by the
custodian or a depository participant at the instruction of the AMC and under the overall direction and responsibility of the
Trustees. Regulations provide that the Sponsor and the Custodian must be separate entities.

Registrar & Transfer Agents

• The Register and Transfer Agent is in charge of updating the records of the investors, processing the applications, purchasing
transactions, redemption of transactions amongst other functions.
• The registrar and transfer agents are appointed by the AMC. AMC pay compensation to these agents for their services. They
carry out the following functions
• Receiving and processing the application forms of investors
• Issuing unit certificates
• Sending refund orders
• Giving approval for all transfers of units and maintaining records
• Repurchasing the units and redemption of units
• Issuing dividend or income warrants 20
Structure
Accountants

• The fund accountants present are responsible in keep a tab on the NAV or Net Asset Value of the different assets and liabilities
available.
• Fund accountants are appointed by the AMC. The are in charge of maintaining proper books of accounts relating to the
fund transactions and management. The perform the following functions
• Computing the net asset value per unit of the scheme on a daily basis
• Maintaining its books and records
• Monitoring compliance with the schemes, investment limitations as well as SEBI regulations
• Preparing and distributing reports of the schemes for the unit holders and SEBI and monitoring the performance of mutual
funds custodians and other service providers.

Auditors

• Since the accounts and the schemes of the AMC are kept separately, the auditor is present to audit and keep a track on the
various accounts of the AMC.
• An auditor is appointed by the AMC and must undertake independent inspection and verification of its accounting
activities.

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Distribution Channels
Mutual Funds are primary vehicles for large collective investments, working on the principle of pooling funds. A substantial portion
of the investments happen at the retail level. Agents and distributors are a vital link between the mutual funds and investors.

➢ Agents
▪ Is a broker between the fund and the investor and acts on behalf of the principal.
▪ He is not exclusive to the fund and also sells other financial services. This in a way helps him to act as a financial advisor.

➢ Distribution Companies
▪ Is a company which sells mutual funds on behalf of the fund.
▪ It has several employees or sub-broker under it.
▪ It manages distribution for several funds and receives commission for its services.

➢ Banks and NBFCs

▪ Several banks, particularly private and foreign banks are involved in a fund distribution by providing similar services
like that of distribution companies.
▪ They work on commission basis.

➢ Direct Marketing
▪ Mutual funds sell their own products through their sales officers and employees of the AMC.
▪ This channel is normally used to mobilize funds from high net worth individuals and institutional investors.
Role of Fund Manager
What is the role of a fund manager?
A fund manager is responsible for implementing a fund's investing strategy and managing its portfolio. A
fund can be managed by one person, by two people as co-managers, or even by a team of three or more
people. For actively managed mutual funds, the fund manager is basically in charge of stocks, bonds or
other assets the fund will buy with the money given by investors. Essentially, the fund manager will
function as a stock-picker. He is responsible to attain returns consistent with the level of risk for the
particular scheme. The fund manager monitors market, economic trends and track securities in order to
make informed investment decisions. By functioning as the stock picker, the fund manager is responsible
for making sure that the portfolio is ahead of its benchmark and peers.
Duties of a Fund Manager
➢ Meeting the reporting requirements
Mutual fund managers have to design funds keeping in mind the reporting standards as per the regulatory guidelines. The building of a fund takes into
account the objectives of the investors, the strategies, risks, expenses and various policies. Fund managers are responsible for ensuring that the investors
are aware and abide by these details and rules. It is also the responsibility of the fund manager to make sure that all the documents are furnished on time
and following the laws and regulations.

➢ Complying with Regulatory Authorities

The operations of the funds must happen in line with the rules set out by the governing bodies such as the Securities and Exchange Board of India, and
other relevant authorities. These regulations cover all aspects, starting from signing clients to handling the redemptions. Fund managers are answerable to
legislators and investors in case of non-compliance.

➢ The Protection of Wealth

The fund managers have to protect the wealth of investors. It is given that funds are subject to some risks to generate returns, but they must not be
subjected to reckless risk-assumption. The decision of the fund manager with regards to the buying or selling of assets will be based on the extensive
research and due diligence. To protect the wealth of the investors, the manager will, if need be, employ investigations into the company in question, use
risk management techniques to evaluate the investments, and so on. To address risk, fund managers have to ensure that there is adequate diversification in
asset portfolios.
Duties of a Fund Manager
➢ Monitor the growth and performance of the fund
The fund managers will take a call as to where to invest, and these decisions are governed by regulations, expectations and
objectives of the investors. The fund managers are judged based on how well their funds perform and how they deliver growth that
is above the interest rates and inflation rate. This justifies the risk they take for investing.

➢ Oversight and Hiring

With the responsibility of managing funds being extensive, fund managers have to get assistance from various professionals and
even firms in order to deliver. Specific duties like issuing annual reports, getting capital, negotiating with brokers, and so on, are
outsourced. This way, the fund managers can transfer some of the regulation related responsibilities to a third party. But ultimately it
is still the fund manager alone who is responsible for how the funds fare.
How to evaluate a Fund Manager?

Fund managers are critical for the selection and performance of your funds, and so you
must consider certain things when evaluating a fund manager. Most experienced investors
pay attention to the manager and their fund management team. One can differentiate
between a good fund manager and an average one by looking at such factors as:

a. Has the fund manager succeeded in outperforming the benchmark in perpetuity?

b. Does the manager keep track of the other institutional investors’ (DII or FII) buying and
selling of stocks?
c. Are they experienced?
d. Are they able to identify scripts way ahead of their peers?
How do fund managers decide where to invest?

Apart from the comprehensive knowledge on the subject and far-reaching insights,
fund managers gather invaluable insights from their research team. Some other
considerations include:

a. They check for the shifts in the stock market to analyse the volume of the shifts
b. An analysis of the competition in the industry plays an equally vital role to gauge the
macroeconomic outlook
c. A thorough review of the annual results of the companies that the fund manager
intends to invest in
d. Finally, all the information mentioned above is weighed along with the experience of
the top managers and directors before making investing decisions