MUTUAL FUNDS

• A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with the objectives stated in the offer letter.

• The ownership of the fund is thus joint or mutual. The fund belongs to the investors.

• A single investor’s ownership of the fund is in the same proportion as the amount of contribution made by him or her bears to the total amount of the fund.

ADVANTAGES OF MUTUAL FUNDS

• Portfolio diversification• Professional management• Reduction of risk (as compared to direct

investing)• Reduction in transaction costs• Liquidity• Convenience and flexibility• Research based investments• MFs get their income free of income tax

HISTORY OF MUTUAL FUNDS IN INDIA

• Phase I: 1964 – 1987 Unit Trust of India• Phase II: 1987-1993 Entry of PSU MFs• Phase III: 1993-1996 Emergence of private MFs• Phase IV: 1996 SEBI regulations on MFs

MUTUAL FUND CLASSIFICATION

• Open end/close end: lssue of units to new investors on an ongoing basis or issue during the specific period when the issue of units is open; option to redeem the units to the investors at anytime and the fund itself buys back the units or the investors have to wait for a specific maturity date/period when the fund redeems the units

• Load/ no load funds: funds can also be grouped on the basis of whether they collect any charges from the customers at the time of entry or exit or both, thus reducing the investible amount or the redemption proceeds.

• Recovery of initial expenses incurred for marketing a new mutual fund scheme

a) At the time of investor’s entry into the fund by deducting specific amount from his initial contribution (entry load)

b) By charging the fund / scheme with a fixed amount every year, during the stated number of years (deferred load)

c) At the time of exit of the investor from the scheme by deducting a specified amount from the redemption proceeds payable to the investor (exit load)

d) If the load is to be charged on the basis of the number of years the investor has stayed with the fund that is called contingent deferred sales charge

TYPE OF MUTUAL FUNDS• Known by nature of investments – Equity Fund, Money

Market Fund, Bond Fund• Known by investment objectives –

- Growth Funds – Capital appreciation- Income Funds – Thrust on regular income & less on capital appreciation- Sector Funds – Pharma means investing in only pharma shares

• Known by risk profile –- Equity Funds – Greater risk or loss of capital- Debt funds – looks for income-seeks to protect capital- Money Market Funds – Shorter term than debt fund

STRUCTURE OF MUTUAL FUNDS IN INDIA

FUND SPONSOR

ASSET MANAGEMENT CO.TRUST

BOARD OF DIRECTORSBOARD OF TRUSTEES-holds the assets of the MF.

• Sponsor - must have a sound financial track record over five years before registration; Must contribute at least 40% of net worth of AMC; Minimum net worth of AMC at all times should be Rs. 10 crores

• Sponsors settles a public trust under Indian Trusts Act 1882 - contributes initial amount – trust does not have legal power – it should act through the trustees - trustees hold the assets of the mutual fund on behalf of the unit holders in fiduciary capacity – unit holders are the beneficial owners.

• Trustees - settler sets up a trust deed by which trustees are appointed, their rights & obligations defined towards unit holders and AMC.

• Board of trustees or individual trustee does not manage the portfolio of the fund. They set the AMC for that purpose – AMC reports to the Board of Trustees - trustee has to be a person of high repute and integrity.

• Trustees (each) appointment has to be got approved by SEBI - same way his resignation is also to be approved by SEBI.

RIGHTS OF TRUSTEES• Appoints the AMC Board with prior approval of SEBI• Approve each scheme floated by the AMC• Right of information from AMC concerning the

performance of any scheme at regular or irregular intervals

• Ensuring compliance with Trust Deed & MF regulations• Take remedial action where ever necessary• They have the rights to dismiss AMC in specific

circumstances with the prior approval of SEBI• Ensure that AMC’s net worth does not come down

below the required net worth

OBLIGATIONS OF TRUSTEES• Must enter into an investment management

agreement with AMC in accordance with SEBI Guidelines ensure compliance of Trust Deed

• Ensure that AMC has appointed key officials like Fund Managers Compliance Officer, Auditor, Registrar

• Ensure due diligence in empanelment of brokers• Ensure that AMC is not compromising interest of unit-

holders of one scheme against unit holders of some other schemes

• Trust must submit to SEBI on half yearly basis a report about the fund’s activities

ASSET MANAGEMENT COMPANY

• It acts as the investment manager of the trust – minimum net worth Rs.10 crores. Directors should have adequate professional experience in financial services and should be individuals of high moral standing and repute. AMC cannot act as a trustee of any other MF.

OBLIGATIONS OF AMC• Investment of funds is in accordance with SEBI

regulations and trust deed – take responsibility for the acts of its employees and others whose services it has procured – answerable to trustees - submit quality reports to them on activities and compliance of SEBI regulations, proper disclosure to unit holders on using the services of sponsor or any associates- not to take up any activity which will be in conflict to his role in AMC – float schemes only after approval of trustees and SEBI – disclosure of NAV – repurchase price.

OFFER DOCUMENT

• When an AMC or a fund sponsor wishes to launch a new scheme of collective investment, they are required to formulate the details of the scheme and register it with SEBI before announcing the scheme and inviting the investors to subscribe to the fund. The document containing the details of the new scheme that the AMC prepares and circulates to the prospective investor is called the offer document.

• It is one of the most important sources of information for the prospective investor considering investment in the new scheme. This is the operating document and describes the product. It governs the rights of the investor as this is the primary vehicle for his investments decision. It is a legal document of reference.

CONTENTS OF AN OFFER DOCUMENT

• Details of sponsor and AMC• Description of the scheme and investment

objective• Terms of issue• Historical statistics• Investors’ rights and servicesKey memorandum, containing salient features of

the offer document must be with every application form.

CONTENTS OF THE FIRST PAGE• Type of the scheme• Name of AMC• Classes of units offered for sale• Price of units• Nature of guarantee in case of an assured return• Opening, closing and earliest date of closing• Statement that the investor should return• Key information memorandum for future

reference• SEBI disclaimer clause

RISK FACTORS TO BE DECLARED IN THE OFFER DOCUMENT

• Investments are subject to market risk• NAV can move up or down on the basis of

capital market movements• Past performance of AMC/sponsor/MF is not

indicative of future performance of the scheme

• Name of the scheme does not indicate its quality or prospects

SCHEME SPECIFIC RISK FACTORS• Arising from the scheme’s investment objective and

proposed asset allocation• Risk arising from non-diversification, if any (opportunity

cost)• Specific risk factors associated with investing in closed-end

schemes• For assured return schemes, if the assurance is until the

maturity of the scheme, it must be stated that this is on the basis of GTE given by the sponsor/trustee/AMC

• If the assurance is for a specific period, it must be stated that there is no GTE for sustaining the assured return for the remaining duration of the scheme

• If the AMC has no previous experience in managing a fund, a disclosure to that effect should be made

LEGAL AND REGULATORY COMPLIANCE

• The AMC should confirm that a due diligence certificate signed by the compliance officer is filled with SEBI conforming that – the draft offer document forwarded to SEBI is in accordance with SEBI regulations.

• All legal requirements connected to the launching of the scheme have been complied with

• Disclosures made in the offer document are true, fair and adequate to enable investors to take well informed decisions regarding the investment in the proposed scheme

• Intermediaries mentioned in the offer letter are registered with SEBI

FINANCIAL INFORMATION• Expenses: Offer document must contain information on

expenses estimated to be incurred by the scheme• Adverse variations between estimates for the schemes

on offer and actual for past schemes must be explainedOffer document must mention about,• Sales load, contingent deferred sales charge,

redemption load, switch over, exchange fee, all as % of NAV

• Details of initial issue expenses of the scheme and for other schemes launched during the last one fiscal year by the AMC

• Estimated annual recurring expenses as a % of average weekly net assets

CONDENSED FINANCIAL INFO OF SCHEMES

• For all schemes launched during the last 3 fiscal years, for each of the years, NAV at the beginning/end of the year, net income per unit, dividend, transfer to reserve, annualized return, net assets at the end of the period, ratio of recurring expenses to net assets.