mutual funds - copy

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Mutual fund

A Mutual Fund is a trust that pools thesavings of a Number of investors who

share a common financial goal. Anybodywith an investible surplus of as little asa Few hundred rupees can invest inMutual Funds. These Investors buy units

of a particular Mutual Fund Scheme thathas a defined investment objective andstrategy.


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HISTORY OF MUTUAL FUND

First phase- 1964-87

Unit trust of India (UTI) was establishedon 1963 by an act of parliament. The first

scheme launched by UTI was unit scheme1964. at the end of 1988 UTI had Rs.6,700 crores of asset under management

Second phase -1987-1993 (entry of

public sector fund)

SBI mutual fund was the first mutual fundestablished in June 1987


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Third phase -1993-2003 (entry ofprivate sector funds) Kothari pioneer

(now merged with Franklin Templeton)

was the first private sector mutual fundregistered in July 1993.

Fourth phase- since February 2003

market by very rapid growth in mfindustry. Increase in market share of

private players.


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Regulations

Governed by SEBI (Mutual Fund) Regulation1996

-All MFs registered with it, constituted as trusts (under Indian Trusts Act, 1882)

Bank operated MFs supervised by RBI too

AMC registered as Companies registered underCompanies Act, 1956

SEBI- Very detailed guidelines for disclosures inoffer document, offer period, investment

guidelines etc.-NAV to be declared everyday for open-ended,every week for closed ended

-Disclose on website, AMFI, newspapers

-Half-yearly results, annual reports


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SPONSOR

Promoter of the company.

Contribution of minimum 40% of net

worth of AMC.

Posseses sound financial record over five

years period.

Establish the fund.

Gets it register with the SEBI.

Forms a trust & appoints board of trustee.


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trustee A trustee is a person who the property of mutual

fund in trust for the benefit of unit holders. A company is appointed as trustee to manage the

mutual fund with approval of SEBI.

The trustee role is not to manage the money. Theirjob is only to see, whether the money is being

managed as per stated objectives. It is duty of trustee is to provide information to

unit holders as well as to SEBI about mutual fundschemes.

Trustees are to appoint AMC to float the schemes. It is trustees duty to observe & ensures that AMC

is managing schemes in accordance with the trustdeed.


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Asset Management Company

(AMC) The AMC is a company formed and

registered under the Companies Act, 1956, to

manage the affairs of the Mutual Fund and

operate the schemes of such Mutual Funds. They are the ones who manage investors'

money. An AMC takes investment decisions,

compensates investors through dividends,

maintains proper accounting and information

for pricing of units, calculates the NAV etc.


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CUSTODIAN

A custodians role is safe keeping ofsecurities and also keeping a tab on

the corporate actions like bonus,

dividends declared by the companiesin which the fund has invested.

The custodian is appointed by the

board of trustee.


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Registrar & Transfer Agent (RTA)

The RTA maintains investor records. Theiroffices in various centers serve as Investor

Service Centers (ISCs), which perform a

useful role in handling the documentation ofinvestors. Investors invest in various plans of

the Mutual Fund. The record of investors and

their unit-holding may be maintained by the

AMC itself, or it can appoint a RTA. Theseagencies are also registered with SEBI


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Funds

UNITS- is equivalent to the term shares which is used in the context ofCompanies. A Mutual Fund Unit represents a part ownership of the funds of theMutual Fund investments. The value of a mutual fund Unit is represented as a

NAV. When an investor invests in a Mutual Funds scheme, he is alloted unitsreflecting the value of the his investments.

NAV represents the value of one unit of a mutual fund. NAV is computed on adaily basis by dividing the total value of investments held by a mutual fund by totalnumber of units of the mutual funds. Returns in a mutual fund scheme is reflected

by increase in the NAV price over a period of time.

LOADS- Loads are the terminology used in the mutual fund industry for chargeslevied either at the time of purchasing a mutual fund or at the time of selling.

ENTRY LOAD- is a charge levied at the time of purchase of a mutual fund. Since2010, these charges have been abolished. Hence no charges are now deducted by afund house at the time of purchase.

EXIT LOADis a charge levied at the time of selling a mutual fund. Generally

these charges are in the range of 0.5% to 3%. Equity funds generally levy 1% exitload on the total value of the investment being redeemed, if a person sells their unitswithin 1 year of purchase.

NFO- stands for New Fund Offer. A new mutual fund is offered to the public viaa New Fund Offer. It is similar to the term IPO used for shares.

FOLIO- reflects an account number with the mutual fund house. You can get your

mutual fund details from a fund house by quoting your folio number. The sameneeds to be quoted while redeeming the fund.


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TYPES OF MUTUAL FUNDS(A)By Structure Open-Ended Schemes

These do not have a fixed maturity. You deal withthe Mutual Fund for your investments andredemptions. The key feature is liquidity. You canconveniently buy and sell your units at Net Asset

Value (NAV) related prices, at any point of time. Close-Ended SchemesSchemes that have a stipulated maturity period

(ranging from 2 to 15 years) are called close-ended schemes. You can invest in the scheme atthe time of the initial issue and there after you canbuy or sell the units of the scheme on the stockexchanges where they are listed.


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Balanced Schemes

Aim to provide both growth and income by

periodically distributing apart of the income and

capital gains they earn. They invest in both shares

and fixed income securities in the proportion

indicated in their offer documents


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Money Market/Liquid Schemes

Aim to provide easy liquidity, preservation of

capital and moderate income. These schemes

generally invest in safer, short term instruments such

as treasury bills, certificates of deposit, commercialpaper and inter bank call money. Returns on these

schemes may fluctuate, depending upon the interest

rates prevailing in the market.


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Other schemes

Tax Saving Schemes (Equi ty L inked

Saving Scheme-ELSS)

These schemes offer tax incentives to the

investors under tax laws as prescribedfrom time to time and promote long term

investments inequities through Mutual

Funds.


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Sector funds

Sector funds however invest in only aspecific sector. For example, a banking

sector fund will invest in only shares of

banking companies. Gold sector fund willinvest in only shares of gold-related

companies.

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