Mutual funds

A mutual fund is an investment vehicle that pools funds from investors and
invests in equities, bonds, government securities, gold, and other assets.
Companies that qualify to set up mutual funds, create Asset Management
Companies (AMCs) or Fund Houses, which pool in the money from
investors, market mutual funds, manage investments, and enable investor
transactions.

Constituents of Mutual funds

1. Fund Sponsor:
A ‘sponsor’ is any person who, acting alone or in combination with another
body corporate, establishes a MF. The sponsor of a fund is similar to the
promoter of a company.

In accordance with SEBI Regulations, the sponsor forms a trust and

appoints a Board of Trustees, and also generally appoints an AMC as fund
manager. In addition, the sponsor also appoints a custodian to hold the
fund assets. The sponsor must contribute at least 40% of the net worth of
the AMC and possess a sound financial track record over five years prior to
registration.

2. Mutual Fund:
A MF in India is constituted in the form of a trust under the Indian Trusts
Act, 1882. The fund invites investors to contribute their money in the
common pool, by subscribing to ‘units’ issued by various schemes
established by the trust.

The assets of the trust are held by the trustee for the benefit of unit holders,
who are the beneficiaries of the trust. Under the Indian Trusts Act, the trust
or the fund has no independent legal capacity; it is the trustee(s) who have
the legal capacity.

3. Trustees:
The MF or trust can either be managed by the Board of Trustees, which is a
body of individuals, or by a Trust Company, which is a corporate body.
Most of the funds in India are managed by Board of Trustees.

The trustees being the primary guardians of the unit holder’s funds and
assets, a trustee has to be a person of high repute and integrity. The
trustees, however, do not directly manage the portfolio of securities. The
portfolio is managed by the AMC as per the defined objectives, in
accordance with Trust Deed and SEBI (Mutual Funds) Regulations.

4. Asset Management Company:

The AMC, which is appointed by the sponsor or the trustees and approved
by SEBI, acts like the investment manager of the trust. The AMC functions
under the supervision of its own Board of Directors, and also under the
direction of the trustees and SEBI.
AMC, in the name of the trust, floats and manages the different investment
‘schemes’ as per the SEBI Regulations and as per the Investment
Management Agreement signed with the Trustees.

Calculation of net asset value and pricing of

mutual funds
Mutual fund net asset value (NAV) represents a fund's per share market
value. It is the price at which investors buy (bid price) fund shares from a
fund company and sell them (redemption price) to a fund company.

A fund's NAV is calculated by dividing the total value of all the cash and
securities in a fund's portfolio, less any liabilities, by the number of shares
outstanding.

A NAV computation is undertaken once at the end of each trading day

based on the closing market prices of the portfolio's securities. The formula
for a mutual fund's NAV calculation is straightforward:

NAV = (Assets - Liabilities) / Total number of outstanding

shares
Mutual Funds and NAV
Mutual funds collect money from a large number of investors, then use
that money to invest in securities, such as stocks, bonds, and money
market instruments. Each investor gets a specified number of shares in
proportion to their invested amount. The pricing of each share is based on
NAV.

Unlike a stock whose price changes are posted throughout the day, mutual
fund pricing is based on the end-of-the-day methodology based on the
activity of the securities in the fund.

At the end of the trading day, managers of a mutual fund compute the
closing price of all the securities within its portfolio, adds the value of any
additional assets, accounts for liabilities, and calculate NAV based on the
number of outstanding shares.

Recent trends of mutual funds investments

in industry
Rise of Smaller Distributors and IFAs
The growing importance of smaller distributors and Independent Financial
Advisors (IFAs) is one notable development. These agents are gaining an
increasing amount of commissions and AUM, and are frequently identified
by their AUM (Assets Under Management) of less than Rs5 billion. As
smaller businesses acquire traction alongside established national
distributors, this change may indicate a democratisation of the distribution
sector. Investors seeking specialised investment advice like them because
of their capacity to offer personalised services and local knowledge.

Banking Channels and Consolidation

In the past, banking channels were crucial for the distribution of mutual
funds, but this dynamic has changed in recent years. While private banks
and international banks saw reductions, public sector banks, headed by
SBI, saw growth in their commission/AUM share. Notably, HDFC Bank is
an exception, continuing to keep a solid position in the distribution
industry. The largest banks are strengthening their position and con trolling
a higher portion of the total commissions generated, which may indicate a
change in the sector’s sway.

Diversification of AUMs Across AMCs

Large independent distributors are changing their strategy by spreading
their AUM among several AMCs, such as NJ and Prudent. This tactical
choice may improve their capacity to satisfy a wider range of investor
preferences and maybe lower the dangers connected with an excessive
dependence on a single AMC. This tendency towards diversification is
consistent with the shifting investing environment, as investors look for a
range of solutions to meet their financial objectives.

Distribution Commissions Under Scrutiny

The industry-level commissions shared with distributors have decreased as
a part of TER (Total Expense Ratio), indicating that distribution
commissions have stayed under control. This modification demonstrates a
move towards a more investor-centric strategy that prioritises customer
retention over maximising commissions. A mature market that prefers
long-term sustainable development to short-term aggressive strategies is
shown by the focus on preserving profitability on both the front and back
books.

Rise of Direct (Commission-Free) AUMs

The rise of direct investing, when investors invest directly with AMCs
instead of middlemen, is a noteworthy upheaval. Direct AUMs now
account for over 25% of total AUMs, up from 16% in March 2019. This
increase reveals a rising desire among investors for more control and
cheaper prices. Additionally, it creates favourable conditions for the
development of digital distribution methods, which might change the face
of the sector in the years to come.
Digital Transformation and Disruption
The distribution of mutual funds is one of several businesses being
transformed by digital disruption. Traditional distribution strategies are
under threat from new competitors that are concentrating on digital
platforms, passive funds, and originations powered by technology. These
digital-first methods appeal to a younger generation of investors who are at
ease with technology-driven solutions since they are convenient,
approachable, and affordable.