FINANCIAL SERVICES

NON BANKING PRODUCTS

By Nadya Narsidani
MUTUAL FUNDS:

Mutual Funds is a fund, managed by an investment

company with the financial objective of generating high
Rate of Returns.

These asset management or investment management companies collect money

from investors in order to invest the money in different investing options such as
stocks, bonds and other financial securities in a diversified manner. A detailed
study of the market conditions and the prices of the investments is done before
selecting the investments to be made. Thus, managers are able to invest in the right
direction before investing.

The profit received by these companies is mainly by allocating people's money in

different stocks and bonds according to their speculation about the market trend.
Other than some specific mutual funds which carry certain maturity term, investors
are generally able to sell the shares of their mutual funds at will. Returns, however,
vary according to market value of the stocks and bonds in which that particular
mutual fund made investment. Mutual funds are considered as one of the best
available investments as compared to others they are very cost efficient and also
easy to invest in, thus 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. The biggest advantage however lies in the fact that there is risk
minimizing and diversification and return maximization. The very idea of mutual
funds came from the urge to deliver a form of Diversified Investment Solution.
Over the years the idea developed and people received more and more choices of
Diversified Investment Portfolio through the mutual funds.
UTI introduced the concept of mutual funds in India in the year 1963.. Though the
growth was slow, but it accelerated from the year 1987 when non-UTI players
entered the industry. In the past decade, Indian mutual fund industry had seen
dramatic improvements, both quality wise as well as quantity wise. Before, the
monopoly of the market had seen an ending phase, the Assets under Management
(AUM) was Rs. 67bn. The private sector entry to the fund family rose the AUM to
Rs. 470 bn in March 1993 and till April 2004; it reached the height of 1,540 bn.
Basic features of Mutual Funds

1) Affordability: Mutual funds allow you to start with small investments. You can
purchase or sell fund shares directly from a fund or through a broker, financial
planner, bank or insurance agent, by mail, over the telephone, and increasingly by
personal computer. You can also arrange for automatic reinvestment or periodic
distribution of the dividends and capital gains paid by the fund. Funds may offer a
wide variety of other services, including monthly or quarterly account statements,
tax information, and 24-hour phone and computer access to fund and account
information.

2) Convenience: Mutual funds offer tailor-made solutions like systematic

investment plans and systematic withdrawal plans to investors

3) Cost effectiveness: A small investor will find that a mutual fund route is a cost
effective method. AMC fee is normally 2.5%
4) Professional management: The major advantage of investing in a mutual fund is
that you get a professional money manager for a small fee. Even under the best of
market conditions, it takes an astute, experienced investor to choose investments
correctly, and a further commitment of time to continually monitor those
investments. With mutual funds, experienced professionals manage a portfolio of
securities for you full-time, and decide which securities to buy and sell based on
extensive research. A fund is usually managed by an individual or a team choosing
investments that best match the fund's objectives. As economic conditions change,
the managers often adjust the mix of the fund's investments to ensure it continues
to meet the fund's objectives. Mutual funds usually hold dozens or even hundreds
of securities like stocks and bonds. The primary way you pay for this service is
through a fee that is based on the total value of your account. Because the fund
industry consists of hundreds of competing firms and thousands of funds, the
actual level of fees can vary. But for most investors, mutual funds provide
professional management and diversification at a fraction of the cost of making
such investments independently.
5) Diversification: A mutual fund can effectively diversify its portfolio because of
the large corpus Successful investors know that diversifying their investments can
help reduce the adverse impact of a single investment. Mutual funds introduce
diversification to your investment portfolio automatically by holding a wide variety
of securities. Moreover, since you pool your assets with those of other investors, a
mutual fund allows one to obtain a more diversified portfolio than you would
probably be able to comfortably manage on your own - and at a fraction of the cost.
In short, funds allow you the opportunity to invest in many markets and sectors.
That's the key benefit of diversification. Within the broad categories of stock, bond,
and money market funds, one can choose among a variety of investment approaches

6) Liquidity: You can liquidate your investments anytime you want. Liquidity is the
ability to readily access your money in an investment. Mutual fund shares are liquid
investments that can be sold on any business day. Mutual funds are required by law
to buy, or redeem shares each business day. The price per share at which you can
redeem shares is known as the fund's net asset value (NAV). NAV is the current
market value of all the fund's assets, minus liabilities, divided by the total number of
outstanding shares. NAV for the day is posted on AMFI website by 8.00 pm on that
day. This applies to both close-end and open-end schemes.

7) Transparency: Mutual funds offer daily NAVs of schemes, which help you to
monitor your investments on a regular basis.

8) Variety in terms of services/options and plans

a. Growth option, Dividend option, Dividend reinvestment option

Growth Option: Dividend is not paid-out under a Growth Option and the investor
realizes only the capital appreciation on the investment (by an increase in NAV).

Dividend Payout Option: Dividends are paid-out to investors under the Dividend
Payout Option. However, the NAV of the mutual fund scheme falls to the extent of
the dividend payout.
Dividend Re-investment Option: Here the dividend accrued on mutual funds is
automatically reinvested in purchasing additional units in open-ended funds. In
most cases mutual funds offer the investor an option of collecting dividends or re-
investing the same.

b. SIP - Here the investor is given the option of preparing a pre-determined number
of postdated cheques in favour of the fund. The investor is allotted units on a
predetermined date specified in the offer document at the applicable NAV.

c. SWP - As opposed to the Systematic Investment Plan, the Systematic

Withdrawal Plan allows the investor the facility to withdraw a pre-determined
amount / units from his fund at a pre-determined interval. The investor's units will
be redeemed at the applicable NAV as on that day.

d. Switch Facility - Unit holders under a scheme can opt to switch units between
dividend plan, growth plan and any other plan and also any options(s) within a plan
under a scheme at applicable NAV based prices. Besides they may exchange their
units for units of the other schemes(s)

e. Gift Facility - Unit holders can write to the AMC/registrar requesting for the gift
form to gift units (by transferring units to the done), to the extent provided in the
regulations.

9) Product Variety
There are different types of mutual funds. They can be categorized on the basis of
several criteria. By structure they can be classified as

1. Open-ended Funds: 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 related prices. The key feature of open-end
schemes is liquidity.

2. Closed-ended Funds: 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.

3. Interval Funds: 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.
AMC

An Asset Management Company (AMC) is a firm that pools funds from various
individuals and institutional investors and invests in various securities. The
company invests the funds in stocks, real estate, bonds, master limited
partnerships, and various other capital assets. Along with high-net-worth
individual (HNWI) portfolios, an AMC also manages hedge funds and pension
plans. In attempts to better serve the smaller investors, AMCs also creates pooled
structures like index funds, mutual funds, or exchange-traded funds (ETFs) that
they can easily manage in a single centralized portfolio.
Since AMCs has a larger pool of resources than an investor could access by
themselves, AMCs provide investors more diversification and investing prospects.
The AMCs have fund managers who're professionals, and they manage the
investment; the research team is in charge to select the right securities. Fund
managers select the investment options that blend well with the fund's objectives.
For example, a debt fund will generally invest in bonds and government securities
to protect the investment and earn a steady return. On the other hand, an equity
fund will mainly focus on investing in shares of companies to maximise the
returns for the investors.
Since the AMCs assists in buying for so many clients, it enables them to practice
economies of scale, and through it, they get a price discount on their purchases.
With AMC's assistance, which takes care of paying out proportional returns and
pooling assets, investors can also avoid the minimum investment requirements that
are required while purchasing securities by themselves. Investors even get to
invest in larger assortment of securities with just a smaller amount of investment
funds. It's believed that the AMC managers get compensated through fees, usually,
it is a percentage of a client's assets under management. Moreover, the AMCs are
held to a fiduciary standard.
When investing in an Asset Management Company (AMC), one is basically
investing in a fund managed by the AMC. The firm is primarily responsible for
driving the mutual fund and making determinations that benefit the investors. Since
the returns of the funds are market-linked, thus, it depends on the fund's
performance, and a well-managed fund does have the potential to deliver relatively
higher returns. In return for this, the fund charges a small fee known as the fund
management fee, and this is the prime source of revenue generation for the AMC. It
is expected that a fund, in its category, will generate competitive returns to
maximize its subscribers and hence, the revenue.

The capital market regulator, Securities and Exchange of India (SEBI), regulates an
Asset Management Company (AMC). To protect the interests of the investors,
AMCs are even passively regulated by the Association of Mutual Fund of India
(AMFI).
How Does An Asset Management Company (AMC) Manage The Funds?

Under the leadership of the fund manager, it will invest the funds that are in line
with the objectives The market reputation of the AMC plays a vital role while
choosing a fund for investment. Investors will naturally trust those funds
managed by reputed AMCs. To further strengthen its investor's base and deliver
quality returns, AMCs follows a comprehensive process that is listed below:

Asset Allocation: For maintaining the investor's trust, an AMC is responsible for
judiciously investing the investor's funds in various types of investment
instruments. Speaking about Mutual Funds, they have a certain investment
objective that enables the fund manager to decide on the assets in which the
investments can be made. As an example, debt-oriented funds mostly have a
substantial proportion of their assets under management in bonds and other
fixed-income securities. Moreover, the balanced funds mostly get invested in a
mix of stocks and fixed income securities. Thus, the allocation of assets amongst
equity and debt depends on the market conditions and prospective interest rates.
Research and Analysis: The most crucial decision an AMC has to take is
creating an investment portfolio. Building the fund’s portfolio involves lots of
research and analysing the performance of the asset classes. First, the experts
have to study the market, micro and macro-economic aspects before giving the
reports to the fund manager. Upon receiving the reports, the fund manager will
eventually make investment decisions based on the fund's objectives. Through
this process, a company builds a portfolio that predominantly depends on the
experience and expertise of the fund manager.

Performance Review: AMCs are required to furnish the unit holders with
information that has a direct impact on their mutual fund holdings. They must
even send regular updates on sales and repurchases, portfolio details, NAV, and
so on to the investors. In simple terms, AMCs must answer to the investors of
the mutual funds and take care of their interests. They also have to attend to
customer grievances regarding their mutual fund schemes. Mutual funds,
Exchange Traded Funds (ETFs), Index Funds, etc are all examples of the
various types of funds managed by AMC.
The Basic Securities and Exchange Board of India (SEBI) And Association of
Mutual Fund of India (AMFI) Guidelines

Following are some of the guidelines and practices for mutual fund companies that SEBI,
AMFI, and RBI mandate:
For any mutual fund, an AMC shall not serve as the trustee
The company will not invest in its schemes unless full disclosure of its intention to invest
has been revealed in the offer documents
They have to submit quarterly reports about their activities and compliance with these
regulations to trustees
An AMC's key personnel should have a clean record- It should not have had convicted
economic offence like fraud or insider trading
The AMC's Chairman will not be a trustee of any mutual fund
The AMC must have a net worth of less than Rs 10 Crores
SEBI has drafted some guidelines for the reports which has to be submitted by the AMCs
to the trustees. On a bi-monthly basis, AMCs have to submit the compliance certificate to
the trustees.
Benefits to Asset Management Companies
There are various benefits to pooling capital together, including:
1. Economies of scale
Economies of scale are the cost advantages that a company can gain from increasing the
scale of operations. With larger operations, the per-unit costs of operating are lower.
For example, asset management companies can purchase securities in larger quantities
and can negotiate more favorable trading commission prices. Also, they can invest a lot
of capital in a single office, which reduces overhead costs.
2. Access to broad asset classes
Access to broad asset classes means that asset management companies can invest in
asset classes that an individual investor will not be able to. For example, an AMC can
invest in multi-billion-dollar infrastructure projects, such as a power plant or a bridge.
The investments are so large that an individual investor will not usually be able to access
them.
3. Specialized expertise
Specialized expertise refers to asset management companies hiring finance professionals
with extensive experience in managing investments that most individual investors lack.
For example, an AMC can hire various professionals who specialize in certain asset
classes, such as real estate, fixed income, sector-specific equities, etc.
Downsides to Asset Management Companies
Asset management companies come with a few downsides as well, such as:
1. Management fees
Most asset managers charge flat fees that are collected no matter what their performance
was. As a result, over time, the fees can become very expensive for investors. Because
of the costs for the resources and expertise required to run an AMC, the fees are high to
compensate for such costs and to provide asset managers with a profit as well.
2. Inflexible
Asset managers can become too large to a point where they are cumbersome and
unresponsive to the dynamic market. Managing too large of an amount of capital creates
operational problems at times.
3. Risk of underperforming
Typically, the performance of AMCs are evaluated in comparison to a benchmark. A
benchmark is a standard to compare performance against, usually in the form of a
broad market index. There is the risk that asset managers underperform the markets, and
if including the management fees mentioned earlier, it can become very costly for
investors.
HOW TO INVEST IN A MUTUAL FUND

One can invest in mutual funds by submitting a duly completed application

form along with a cheque or bank draft at the branch office or designated
Investor Service Centres (ISC) of mutual Funds or Registrar & Transfer
Agents of the respective mutual funds.

One may also choose to invest online through the websites of the respective
mutual funds.

Further, one may invest with the help of / through a financial intermediary i.e.,
a Mutual Fund Distributor registered with AMFI OR choose to invest directly
i.e., without involving or routing the investment through any distributor.
A Mutual Fund Distributor may be an individual or a non-individual entity,
such as bank, brokering house or on-line distribution channel provider.
Note :
As per SEBI Mutual Fund Regulations, all MFDs must fulfil the following two
requirements before engaging in sale and/or distribution of mutual fund
products, namely

Obtain the relevant certification of National Institute of Securities

Management (NISM); AND

Register with Association of Mutual Funds in India (AMFI ) and obtain AMFI
Registration Number (ARN).

Likewise, before being employed in sale and/or distribution of mutual fund

products, employees of MFDs are also required to obtain the relevant NISM
certification and register with AMFI and obtain Employee Unique
Identification Number(EUIN).
 Systematic Investment Plan (SIP) is an investment
plan (methodology) offered by Mutual Funds wherein
one could invest a fixed amount in a mutual fund
scheme periodically, at fixed intervals – say once a
month, instead of making a lump-sum investment.
The SIP instalment amount could be as little as 500 per month. SIP is similar to a
recurring deposit where you deposit a small /fixed amount every month.

SIP is a very convenient method of investing in mutual funds through standing

instructions to debit your bank account every month, without the hassle of having to
write out a cheque each time.

SIP has been gaining popularity among Indian MF investors, as it helps in Rupee Cost
Averaging and also in investing in a disciplined manner without worrying about market
volatility and timing the market. Systematic Investment Plans offered by mutual funds
are easily the best way to enter the world of investments over the long term.
Common sense suggests that “Buying low and selling high” is perhaps the best way
to get good returns on your investments. But this is easier said than done, even for
the most experienced investors. There are many factors at play when it comes to any
market - debt or equity, and all of them are inextricably linked.

SIP is a simpler approach to long term investing is disciplining and committing to a

fixed sum for a fixed period and sticking to this schedule regardless of the
conditions of the market.

RUPEE COST AVERAGING

Rupee cost averaging, as this practice is called, in a way ensures that you
automatically buy more units when the NAV is low and fewer when the NAV is
high…e.g., an SIP of 1000 gets you 50 units when the NAV is Rs. 20, but gets you
100 units when the NAV is Rs.10. The average cost for buying those 150 units
would be Rs. 2000/150 units i.e. 13.33.
However, please remember that the Rupee cost averaging does not assure profit, nor
does it protect one against investment losses in declining markets. It merely ensures
disciplined & regular investment in stock markets, which helps overcome the
natural impulse to stop investing in a falling or a depressed market or investing a
lot, when markets are buoyant and euphoric.

THE POWER OF COMPOUNDING

There is a great advantage with long-term investments,
namely, compounding which is considered one of the greatest mathematical
discovery.

To put it in simple words, compounding is when the interest (or income) you earn is
reinvested in the original corpus and accumulated corpus continues to earn (&
grow). Every time this happens, your investment keeps growing, paving the way for
a systematic accumulation of money, multiplying over time.
STARTING EARLY PAYS WELL
To get the best out of your investments, it is very important to invest for the long-
term, which means that you should start investing early, in order to maximize the
end returns.