the mutual fund is better investment plan (1)

7/28/2019 The Mutual Fund is Better Investment Plan (1)

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Nirma University

Institute of LawSemester VIII B.A. LL.B. (Hons.) course

A doctrinal Research project carried out on the topic of

MUTUAL FUNDS: A SYSTEMATIC

APPROACH

In the course of

Investment and Security Law

As a part of continuous evaluation scheme

Submitted to: Submitted by:

Dr. Nitesh Saraswat Surabhi Bairathi

(Asst. Prof.) (08BAL003)


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DECLARATION

I do hereby declare that this Project work entitled Mutual Funds: A Systematic

Approach has been prepared by me as a part of the fulfillment of the requirement

of B.A. LL.B. (Hons). I hereby also declare that I have duely acknowledged all the

sources and authorities in my Project work wherever it was required.

Name of Researcher:

__________________________

Surabhi Bairathi

(08BAL003)


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Certificate

This is to certify that the project entitled: Mutual Funds: A

Systematic Approach under has been carried out by Ms. Surabhi

Bairathiunder my supervision and guidance. The project is her own

work completed after careful research and analysis of the research

material available in previous works. The project is of the standard

expected of a candidate for project submission in the course of

Investment and Security Law of VIII semester of B. A.L.L B. (Hons.)

Programme and commend that it be sent for evaluation.

Date: 28th February 2012

__________________________________________

Name & Signature of Course Coordinator


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Acknowledgement

A successful accomplishment of research project signifies great contribution of the Course

Coordinator. In the present research project Dr. Nitesh Saraswat has contributed significantly in

the accomplishment of this research project. Without his support and guidance this research

project would have been an unrealistic dream. Dr. Nitesh Saraswat has guided the researcher

throughout the preparation of project. Besides he also gave valuable inputs for the research

project. At this moment the researcher would like to heartily acknowledge contribution of Dr.

Nitesh Saraswat in the preparation of research project.

The researcher would acknowledge the contribution of library staff for extending such support to

the researcher. Last but not the least researcher would like to thank the Institute of Law for

providing with such an opportunity in the form of project whereby our knowledge can be

enhanced. Besides the researcher wish to express gratitude to those who may have contributed to

this work even though anonymously. The researcher extends her sincere thanks to all.


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1.1 OBJECTIVESIn view of the foregoing discussion, the main purpose of the present work is to get an insight

about mutual funds and to also to study and analyze the awareness level amongst different group

of investors as to mutual funds and also to study the various provisions regulating the issue of

Mutual Funds.

1.2 SCOPE

The scope of this research project would be restricted to only India as the research has been done

by the researcher keeping India as focus. The important issues would be highlighted at length in

the paper and the researcher would try to come up with solutions pertaining to these issues. An

attempt would also be made to understand the relevant laws on this topic.

1.3 RESEARCH METHODOLOGY

The present research study is mainly a doctrinal and analytical. Keeping this in view, the researcher

utilized the conventional method of using libraries consisting of primary sources like books, articles,

websites etc.

The study being critical in nature, the researcher has adopted doctrinal methods for the purpose of

research because it is not possible to study the subject by experimental method.

From the collected material and information, researcher proposes to analyze the topic of the

study and tries to reach the core aspects of the study.


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1.4 HYPOTHESIS

In order to conduct a research work, some important hypotheses are to be formulated. The focal

points and assumptions are normally available through the formulation of hypothesis. The majorhypotheses developed on the basis of study of available literature and evaluation of primary as

well as secondary data and work done earlier including related studies are:

1. That mutual funds, as an investment option is just like any other investment plans

available.

2. That there are well defined legislations governing the issue of Insider Trading in India


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TABLE OF CONTENTS

Sr. No. Content Pg. No.

1. Introduction 8-10

2. History of Mutual Fund 11-12

3. Mutual Fund: Its Pros and Cons 13-16

4. Types of Mutual Fund 17-20

5. Mutual Fund Structure 21-23

6. Conclusion and Suggestions 24

7. Bibliography 25-26


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CHAPTER 1

INTRODUCTION TO THE TOPIC

Role of financial system is to enthusiast economic development. With the increase in awareness,

education investors are becoming more prudent as now they look for innovative investment

instruments so that they are able to reduce investment risk, minimize transaction costs, and

maximize returns along with certain level of convenience as a result there has been numerous

financial instruments introduced such as bonds, company deposits, insurance, and mutual funds.

All of which could be matched with individuals investment needs. Talking about Mutual funds,

it scores over all other investment options in terms of safety, liquidity, returns etc. The objective

behind a mutual fund is to provide an efficient way to make money.

A fund establishment in the form of a trust to raise money through the sale of units to the public

or a sector of the public under one or more schemes for investing in the securities, including

money market operations.1

It is most commonly understood as an investment option, where

investors contribute small amounts of money. A mutual fund is just the connecting bridge or a

financial intermediary that allows a group of investors to pool their money together with a

predetermined investment objective.2

These contributions are pooled together to make it a large

sum. This sum is then invested in various securities depending on the objectives of the mutual

fund schemes. It will have a fund manager who is responsible for investing the gathered money

into specific securities (stocks or bonds).3 The income earned through these investments and the

capital appreciations (Profits/Losses) realized is shared by its unit holders in proportion the

number of units owned by them. These pooled funds provide thousands of investors with

1Regulation 2(q) of SEBI (Mutual Funds) Regulations 1996.

2Available at http://www.mutualfundsindia.com/mfbasic.asp visited on 20 February, 2102

3Ibid


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proportional ownership of diversified portfolio managed by professional investment managers at

a relatively low cost.4

When we say 'mutual fund' we are referring to the money contributed by the investors. When we

say 'portfolio' we are referring to the securities in which the investments have been made.5

A

mutual fund thus enables investors to participate in securities markets and invest in equity shares,

bonds and such instruments by pooling their money together. The term mutual as it is the joint

ownership of the fund, i.e. the fund belongs to all investors. The money thus collected is then

invested in capital market instruments such as shares, debentures and other securities. A mutual

fund will state its objective up front.6

This indicates how the money will be invested and how the

portfolio will be constructed. Generally Investors choose a fund, which matches their own

objectives.

Indian mutual funds industry is as old as four decades but its growth and awareness has reached

the present level only since last five years.7

It is most suitable investment for the common man

who invests his savings at regular intervals. It is an investment tool where the return on

investment is high compared with some other investments available in the market. It is a mature,

well developed & regulated investment vehicle. However, like any other investment, this too,

carries a certain degree of risk. An investor therefore has to take care of his\her risk taking

ability, tax issues, investment period etc. They are the mobilizers of savings particularly from

small & house hold sector for investment in stock & money market. Broadly mutual funds are

basically in 3 types of asset classes such as stocks, bonds & money market instruments.8

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets

of the fund in the same proportion as his contribution amount put up with the total amount of the

investment made. Mutual Fund investor is also known as a mutual fund shareholder or a unit

holder.

4Available at http://www.sec.gov/investor/tools/mfcc/mutual-fund-help.htm visited on 21 February.2012

5 Ms. Uma Shashikant and Ms. Sunita Abraham, Workbook for National Institute of Securities Market(NISM)-

Series-II-B: Registrars and Transfer Agents (Mutual Funds) Certificate Examination (Mumbai: National Institute of

Securities Market) 2009 P57.6Available at www.sec.state.ma.us/sct/sctprs/prsamf/amfidx.htm visited on 21 February 2012

7Available at http://www.infosys.com/finacle/solutions/thought-papers/Documents/understanding-financial-

product-life-cycle.pdfvisited on 22 February, 20128Dr. S Gurusamy, Financial markets and Services, (New Delhi: Tata Mc Grow Hill Private Education Limited)

2009 p.31 Available at http://books.google.co.in/books?ei=4f95T

mutual+fund#v=snippet&q=mutual%20fund&f=fals


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The Mutual funds normally come out with a number of schemes with different investment

objectives which are launched from time to time. In India, A Mutual fund is required to be

registered with Securities and Exchange Board of India (SEBI) which regulates securities

markets before it can collect funds from the public. These funds are set up under Indian Trusts

Act and then invested in line with the scheme guidelines, for the benefit of investors and are

regulated by SEBI. Although UTI is governed by its own Act.9

9UTI was the only fund operating for a long time since 1964. It is in the public sector, enjoying a monopoly position

and enjoys certain tax benefits like exemption from income tax of its entire income.


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CHAPTER 2

HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, on

the initiative of the Government of India and Reserve Bank. The history of mutual funds in India

can be broadly divided into four distinct phases: -

First Phase1964-87

THE origin of mutual funds industry in India can be traced in the enactment of the Unit Trust of

India (UTI) Act in 1963.10

An Act of Parliament established Unit Trust of India (UTI) on 1963. It

was set up by the Reserve Bank of India and so it functioned under the Regulatory and

administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI

and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative

control in place of RBI. The first scheme launched by UTI was Unit Scheme in 1964. At the end

of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and

Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).

SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can

bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual

Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established

its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.

10Madhu S. Panigrahi, Mutual Performance; Growth, Performance and Prospects,Economic and Political

Weekly, Vol. 31, No. 12 (Mar. 23, 1996) P 765


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At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund

industry. Also in 1993 the first Mutual Fund Regulations came into being, under which all

mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer

(now merged with Franklin Templeton) was the first private sector mutual fund registered in July

1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and

revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual

Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting

up funds in India and also the industry has witnessed several mergers and acquisitions. As at the

end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The

Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other

mutual funds.

Fourth Phasesince February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcatedinto two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets

under management of Rs.29,835 crores as at the end of January 2003. The Specified Undertaking

of Unit Trust of India, functioning under the rules framed by Government of India and does not

come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund

Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the

Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000

more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual

Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place

among different private sector funds, the mutual fund industry has entered its current phase of


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consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage

assets of Rs.1,53,108 crores under 421 schemes.11

CHAPTER 3

MUTUAL FUNDS: PROS AND CONS

For investments in mutual fund, one must keep in mind about the Pros and cons of investments

in mutual fund. Firstly the advantages would be dealt which would be followed by the

disadvantages of mutual funds.

ADVANTAGES OF MUTUAL FUNDS

Professional Management

The major advantage of investing in a mutual fund is that they are professionally managed by

well qualified professional. A mutual fund is considered to be relatively less expensive way to

make and monitor their investments.12

They manage all the investments for a small fee. A team

of professional fund managers manages them with in-depth research inputs from investment

point of view.One can leave the investment decisions to him and only have to monitor the

performance of the fund at regular intervals. As discussed above the investors in the mutual

funds is a common man who generally is not aware of the financial and securities market. So,

indeed professional management is a great help to them.

Diversification

11Available at http://www.amfiindia.com/showhtml.aspx?page=mfindustry visited on 21 February, 2012

12Supra note 2


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Mutual funds offer investors an opportunity to diversify across assets depending on their

investment needs.13

By purchasing units in a mutual fund instead of buying individual stocks or

bonds, the investors risk is spread out and minimized up to certain extent. The idea behind

diversification is to invest in a large number of assets so that a loss in any particular investment

is minimized by gains in others. These pooled funds provide thousands of investors with

proportional ownership of diversified portfolio managed by professional investment managers

at a relatively low cost14

. A mutual fund can effectively diversify its portfolio because of the

large corpus.

Convenient Administration

Mutual funds offer tailor-made solutions like systematic investment plans and systematic

withdrawal plans to investors, which is very convenient to investors.15 Investors also do not

have to worry about investment decision, they do not have to deal with brokerage or

depository, etc. for buying or selling of securities. Specialized schemes like retirement plans,

childrens plans, industry specific schemes, etc. are also been offered by the mutual funds to

suit the personal preference of investors.16

These schemes also help small investors with asset

allocation of their corpus. It also saves a lot of paper work.

Costs Effectiveness

A small investor will find that the mutual fund route is a cost-effective method (the AMC17 fee

is normally 2.5%) and it also saves a lot of transaction cost as mutual funds also get concession

from brokerages.18

Also, the investor gets the service of a financial professional for a very

small fee. If he were to seek a financial advisor's help directly, he will end up paying

13Available at http://www.moneycontrol.com/planning_desk/understandingmf.php?step1=3 visited on 20 February,

201214Ibid15 Available at http://www.charteredaccountantdelhi.com/investment-consultancy.htmlvisited on 21 February, 201216Ibid17 Asset Management Company is a company which manages all the assets in the form of investments made by the

medium of business of Mutual Funds.18Ibid


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significantly more for investment advice. Also, he will need to have a sizeable corpus to offer

for investment management to be eligible for an investment advisers services.19

Liquidity

Mutual fund also allows investors to liquidate their holdings as and when they want. Generally

they can liquidate the investments within 3 to 5 working days as it dispatches redemption

cheques speedily.20

Transparency

Mutual funds offer daily NAVs21

of schemes, which help you to monitor your investments on a

regular basis. They also send quarterly newsletters, giving details of the portfolio, performance

of schemes against various benchmarks, etc. They are also well regulated and SEBI monitors

their actions closely.22

Tax benefits

Mutual funds has certain tax advantages also. Like the investor do not have to pay any taxes on

dividends issued by mutual funds. They also have the advantage of capital gains taxation.23

Moreover, the Tax-saving schemes and pension schemes give them the added advantage of

benefits.

Affordability

Mutual funds allow the investors even to invest in small sums. For instance, if you want to buy

a portfolio of blue chips of modest size, you should at least have a few lakhs of rupees.24

A

mutual fund gives you the same portfolio for meager investment of Rs.1,000-5,000. This is

possible in Mutual funds as it collects money from many people and therefore gains a large

corpus.

19 Supra note 4.20Ibid21

A fund's net asset value or NAV equals the current market value of a fund's holdings minus the fund's liabilities

(sometimes referred to as "net assets").22 Supra note 823 Ibid24 Ibid


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DISADVANTAGES OF MUTUAL FUNDS:

Professional Management- the advantage of having professional managers lies only

theoretically.25

Practically if looked at many investors debate over whether or not the so-called

professionals are any better than the investors themselves. Their management is by no means

reliable, and, even if the fund loses money, the manager still manages to take his/her cut.

CostsThe biggest source of income of the AMC is generally from the entry & exit load

which they charge from an investors, at the time of purchase. The mutual fund industries are

thus charging extra cost under layers of jargon.26

Dilution - As funds have small holdings in so many different companies, high returns from a

few investments often don't make much difference on the overall return.27

Dilution is also the

result of a successful fund getting too big. When money pours into funds that have had strong

success, the manager often has trouble finding a good investment for all the new money.

25 Available at http://www.sec.gov/investor/pubs/inwsmf.htm visited on 22 February, 201226

Available at onlineresearchonline.com visited on 20 February, 2012.27 Available at http://www.mutualfundsindia.com/mfbasic.asp visited on 23 February, 2012


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Taxes - When making decisions about the investment money, fund managers don't consider

investors personal tax situation.28

For example, when a fund manager sells a security, a

capital-gain tax is triggered, which affects the profitability of the individual from such sale. It

might have been more advantageous for the individual to defer the capital gains liability.

CHAPTER 4

TYPES OF MUTUAL FUND SCHEMES

BY STRUCTURE

OpenEnded Schemes.

CloseEnded Schemes.

Interval Schemes.

1. OPENENDED SCHEMES

An open-end fund is one which is available for sale and repurchase all throughout the year.

These do not have a fixed maturity. That is they are open for investors to enter and exit at any

time. While investors come and go, the scheme remains open indefinitely. Such schemes are

called open-ended schemes. When an investor enters an existing open-ended scheme, the scheme

is said to sellnew units to the investor.29 Hence, the unit capital of the schemes keeps changing

28 Ibid29

Securities Market (Advanced) Module, National Stock Exchange of India Limited p 151


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each day. Open-ended fund is not obliged to keep selling/issuing new units at all times, and may

stop issuing further subscription to new investors.30

2. CLOSED

ENDED SCHEMES

Closed ended Scheme means any scheme of a mutual fund in which the period of maturity of the

scheme is specified.31

Unlike open-ended scheme, close-ended schemes have a fixed maturity.

The fund is open for subscription only during a specified period. These schemes are launched

with an initial public offer (IPO) with a stated maturity period, and thereafter, investors can buy

or sell units on the stock exchanges where they are listed.32

Unlike open-ended schemes, the unit

capital in closed-ended schemes usually remains unchanged. After an initial closed period, the

scheme may offer direct repurchase facility to the investors.

3. INTERVAL SCHEMES

These schemes combine the features of open-ended and closed-ended schemes. They may be

traded on the stock exchange or may be open for sale or redemption during pre-determined

intervals at NAV based prices.33

BY INVESTMENT OBJECTIVE

Growth Schemes.

Income Schemes.

Balanced Schemes.

1. GROWTH SCHEMES

30Available at http://www.moneyschool.indianmoney.com/money-gyan visited on 22 February, 2012

31Regulation 2(f) ofSEBI (Mutual Funds) Regulations 1996

32Ibid

33Ibid


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These schemes, also commonly called Equity Schemes, these fundsseek to invest a majority of

their funds in equities.34

Such schemes have the potential to deliver superior returns over the long

term. However, because they invest in equities, these schemes are exposed to fluctuations in

value especially in the short term.

2. INCOME SCHEMES

These schemes, also commonly called Debt Schemes, they invest in debt securities such as

debentures and government securities.35

The prices of these schemes is considered to be more

stable as compared to equity schemes and most of the returns to the investors are generated

through dividends or steady capital appreciation. These schemes are ideal for the investors who

are not in a position to take higher equity risks, such as retired individuals.

3. BALANCED SCHEMES

These schemes are commonly known as Hybrid schemes. These schemes invest in both equities

as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the

objective of income and moderate capital appreciation and are ideal for investors with a

conservative, long-term orientation.36

OTHER SCHEMES

Tax Saving Schemes.

Special Schemes.

Index Schemes.

Sector Specific Schemes

1. TAX SAVING SCHEMES

34Available at www.investmentkit.com/mutualfunds/typesofmutualfunds.shtmlvisited on 22 February,2012

35Ibid

36Ibid


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Investors are being encouraged to invest in equity markets through Equity Linked Savings

Scheme (ELSS) by offering them a tax rebate as the Government offers tax incentives for

investment in specified avenues.37

Units purchased cannot be assigned / transferred/ pledged /

redeemed / switched out until completion of 3 years from the date of allotment of the

respective Units.

Subject to such conditions and limitations, as prescribed under Section 88 of the Income-tax Act,

1961.38

2. INDEX SCHEMES

The primary purpose of an Index is to serve as a measure of the performance of the market as a

whole, or a specific sector of the market.39

An Index also serves as a relevant benchmark to

evaluate the performance of mutual funds. Some investors are interested in investing in the

market in general rather than investing in any specific fund. Such investors are happy to receive

the returns posted by the markets. As it is not practical to invest in each and every stock in the

market in proportion to its size, these investors are comfortable investing in a fund that they

believe is a good representative of the entire market. Index Funds are launched and managed for

such investors.

3. SECTOR SPECIFIC SCHEMES.

Sector Specific Schemes generally invests money in some specified sectors for example: Real

Estate Specialized real estate funds would invest in real estates directly, or may fund real estate

developers or lend to them directly or buy shares of housing finance companies or may even buy

their securitized assets.40

37 Available athttp://www.sebi.gov.in/faq/mf_faq.htmlvisited on 22 February, 201238

Specified units of mutual fund schemes qualify for rebate under Section 88 of the Income Tax Act, 1961,subscription to the Units of the Scheme by Individuals and Hindu Undivided Families, not exceeding Rupees ten

thousand would be eligible to a deduction, from income-tax, of an amount equal to 20% of the amount so

subscribed. In the case of subscription by an individual, whose income is derived from the exercise of his profession

as an author, playwright, artist, musician, actor or sportsman (including an athlete), the deduction admissible would

be at the rate of 25%.39

Supra note 2840

Ibid
http://www.sebi.gov.in/faq/mf_faq.htmlhttp://www.sebi.gov.in/faq/mf_faq.htmlhttp://www.sebi.gov.in/faq/mf_faq.htmlhttp://www.sebi.gov.in/faq/mf_faq.html


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CHAPTER 5

MUTUAL FUND STRUCTURE

Mutual funds in India since regulated by SEBI need to adopt the legal framework mandated by

the SEBI (Mutual Funds) Regulations, 1996. The person behind setting up of a mutual fund is

thesponsor

41

. For the purpose of grant of a certificate of registration, the applicant has to fulfillthe following, namely

42-

The sponsor should have a sound track record and general reputation of fairness and

integrity in all his business transactions.

Explanation : For the purposes of this clause sound track record shall mean the

sponsor should,

Has been carrying on business in financial services for at least 5 years.

Has positive net worth for each of those 5 years (Net worth = Share Capital + Reserves

Accumulated Losses).

41Regulation 2(x) of SEBI (Mutual Funds) Regulations, 1996- sponsor means any person who, acting alone or in

combination with another body corporate, establishes a mutual fund.42Regulation 7(a)of SEBI (Mutual Funds) Regulations, 1996which is the Eligibility Criteria


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the networth in the immediately preceding year is more than the capital contribution of

the sponsor in the asset management company; and

Should have earned profits, after providing for depreciation and interest, in at least 3 out

of those 5 years, including the latest year.

Under the regulations, Mutual Funds are to be constituted as trusts.43

Like for example XYZ

Mutual Fund is in reference to such a trust. A Trust is established by the sponsor through a trust

deed. The beneficiaries of the trust are the investors who invest in the various schemes. The trust

acts through trustees, who are appointed by the sponsor. Every trustee has to be a person of

ability, integrity and standing. A person who is guilty of moral turpitude cannot be appointed

trustee.44

Further, a person convicted of any economic offence or violation of any securities laws

cannot be appointed as trustee. Prior permission of SEBI is to be taken, before a person isappointed as trustee.

45

Instead of appointing individuals as trustees, a trustee company i.e. a company that performs the

role of trusteeship can also be appointed by the sponsor. The company will operate through

directors, who will also need to meet the requirements as prescribed for trustees.

The trustees (or directors of the trustee company) have a key role in protecting the interests

of investors. In order to ensure that this role is performed effectively, SEBI requires that there

should be at least 4 trustees. At least two-thirds of them should be independent i.e. they should

not be associate of the sponsor.

Day to day operations of the mutual funds are handled by an Asset Management Company

(AMC), appointed by the sponsor or the trustees. Role and responsibilities of the AMC are as

laid down in the investment management agreement executed with it.46

The AMC is required to have a net worth of at least Rs. 10 crores.47

The sponsor should have

atleast 40% stake in the share capital of the AMC. Every person who has more than 40% stake in

the AMC is deemed to be a sponsor,48

and should therefore fulfill the requirements of sponsor as

mentioned earlier.

43Regulation 7(b)of SEBI (Mutual Funds) Regulations, 1996- in the case of an existing mutual fund, such fund is in

the form of a trust and the trust deed has been approved by the Board44

Regulation 2(d) of SEBI (Mutual Funds) Regulations, 199645

Regulation 17 of SEBI (Mutual Funds) Regulations, 1996- Approval of the Board for appointment of trustee. 46

Supra Note 29 p 15447 Regulation 21(f) of SEBI (Mutual Funds) Regulations,1996


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SEBI regulations also require that the directors of the AMC are persons having adequate

professional experience in finance and financial services related field. Directors as well as key

personnel of the AMC should not have been found guilty of moral turpitude or convicted of any

economic offence or violation of any securities laws.49

Further, key personnel of the AMC

should not have worked for any asset management company or mutual fund or any intermediary

during the period when its registration was suspended or cancelled at any time by the Board.50

Prior approval of the trustees is required, before a person is appointed as director on the board of

the AMC.51

Further, at least half the directors in the AMC need to be independent i.e. not

associate of the sponsor.52

In the mutual fund legal structure, AMC is the one which employs fund managers and other

employees to perform its role as investment manager. The AMC needs to work under the overall

supervision and guidance of the trustees, who have the responsibility of protecting investors

interests.

As another check in the system, the regulations require that the mutual fund appoint a

custodian53

, who will have custody of the various investments made by the fund. Thus, the

investment management responsibility is although handled by the AMC, but the custodian keeps

the custody of those investments made by the investor. The custodian is supposed to operate in

line with the custodial agreement, which they execute with the trustees.

Offices of the AMC handle the servicing of investors in its various mutual fund schemes.

The AMC can also choose to appoint a Registrar and Transfer Agent (RTA).54

The RTA, is

responsible for maintaining investor records. The AMC can also appoint different RTAs for

different schemes.

48 Regulation 7(c) of SEBI (Mutual Funds) Regulations,1996 49 Regulation 21(b) of SEBI (Mutual Funds) Regulations,1996 50 Regulation 21(c) of SEBI (Mutual Funds) Regulations,1996 51 Regulation 22(c) of SEBI (Mutual Funds) Regulations,1996 52 Regulation 21(d) of SEBI (Mutual Funds) Regulations,1996 53

Regulation 26(1) of SEBI (Mutual Funds) Regulations,1996- The mutual fund shall appoint a Custodian to carry

out the custodial services for the schemes of the fund and sent intimation of the same to the Board within fifteen

days of the appointment of the Custodian:54

Regulation 25(15) of SEBI (Mutual Funds) Regulations,1996- The asset management company shall appoint

registrars and share transfer agents who are registered with the Board.


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CHAPTER 6

CONCLUSION

Mutual Fund is where money is collected from the many investors out of their savings and is

invested in diversified securities. Mutual Funds aim to reduce risk and to maximize their income

and capital appreciation for distribution to its members on a pro rata basis.55

So here, the first

hypothesis of the researcher, that mutual funds, as an investment option is just like any other

investment plans available stands wrong.

It is a trust registered with the Securities and Exchange Board of India (SEBI). To protect the

interest of the investors, SEBI has formulated policies and regulates the mutual funds. It notified

regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. SEBI

approved Asset Management Company (AMC) which manages the funds by making investments

in various types of securities.56

A Custodian can also be appointed, registered with SEBI who

shall hold the securities of various schemes of the fund in its custody.

Here, the second hypothesis of the researcher proves to be correct.

55 V.A. Avadhani,Investment and Securities Market in India, (Mumbai: Himalaya Publishing House) 2011 P 467.56 Supra Note 2


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The entire mutual fund industry operates in a very organized way. The investors, known as unit

holders, handover their savings to the AMCs under various schemes. The objective of the

investment should match with the objective of the fund to best suit the investors needs.57

The

AMCs further invest the funds into various securities according to the investment objective. The

return generated from the investments is passed on to the investors or reinvested as mentioned in

the offer document.

Running a successful Mutual Fund requires complete understanding of the peculiarities

prevailing in the Indian Stock Market and also the psyche of the small investors which a

reasonable common man is not expected to know. Thus a Mutual Fund is the most suitable

investment for the common man as it offers them with an opportunity to invest in a diversified,

professionally managed basket of securities at a relatively low cost.

CHAPTER 7

BIBLIOGRAPHY

Book(s):

V.A. Avadhani, Investment and Securities Market in India, (Mumbai: HimalayaPublishing House) 2011

Dr. S Gurusamy, Financial markets and Services, (New Delhi: Tata Mc Grow Hill Private

Education Limited) 2009

Ms. Uma Shashikant and Ms. Sunita Abraham, Workbook for National Institute of

Securities Market(NISM)- Series-II-B: Registrars and Transfer Agents (Mutual Funds)

Certificate Examination (Mumbai: National Institute of Securities Market) 2009

Securities Market (Advanced) Module, National Stock Exchange of India Limited

57Ibid


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Articles Referred

Madhu S. Panigrahi, Mutual Performance; Growth, Performance and Prospects,

Economic and Political Weekly, Vol. 31, No. 12 (Mar. 23, 1996) P 765

Todd Houge and Jay Wellman, Fallout from the Mutual Fund Trading Scandal, Journalof Business Ethics, Vol. 62, No. 2, (Dec., 2005)

Websites referred

Available at www.investmentkit.com/mutualfunds/typesofmutualfunds.shtml

Available at www.nseindia.com

Available at www.rrfinance.com/htm/Mutual%20fund.htm

Available at http://www.moneycontrol.com/planning_desk/understandingmf.php?step1=3

Available at http://www.amfiindia.com/showhtml.aspx?page=mfindustry

Available at http://www.mutualfundsindia.com/primer.asp

Available at http://www.moneyschool.indianmoney.com/money-gyan-

modules.php?page_id=3&subcat=1&cat=4&subcat=1&topic=Mutual%20Fund&mid=48

4&lid=484

Available at http://www.slideshare.net/hemanthcrpatna/a-project-report-on-awareness-

regarding-mutual-fund-with-special-reference-to-india-infoline Available at http://www.managementparadise.com/forums/upload-download-banking-

insurance-projects-notes/21783-project-mutual-funds.html-

Available at http://www.indiastudychannel.com/projects/666-A-STUDY-ON-MUTUAL-

FUNDS-IN-INDIA.aspx

Available at http://www.charteredaccountantdelhi.com/investment-consultancy.html

Available at http://www.sec.gov/investor/pubs/inwsmf.htm

Available at onlineresearchonline.com

Available at http://www.mutualfundsindia.com/mfbasic.asp

Available at http://www.sec.gov/investor/tools/mfcc/mutual-fund-help.htm

Available at http://www.sebi.gov.in/faq/mf_faq.html Available at http://www.infosys.com/finacle/solutions/thought-

papers/Documents/understanding-financial-product-life-cycle.pdf

Available at www.sec.state.ma.us/sct/sctprs/prsamf/amfidx.htm
http://www.mutualfundsindia.com/primer.asphttp://www.sebi.gov.in/faq/mf_faq.htmlhttp://www.sebi.gov.in/faq/mf_faq.htmlhttp://www.mutualfundsindia.com/primer.asp


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