2 DefinitionA trust that pools the savings of investors who share a common financial goal is known as mutual fund. The money collected is then invested in financial instruments such as shares, debentures and other securities .The income and capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.Investment in securities are spread over a wide cross section of industries and sectors reducing the risk of the portfolio.Mutual funds are mobilizers of saving of the small investors in instruments like stock and money market instruments.Mutual funds are corporation that accept money from investors and use this money to buy stocks, long term bonds, short term debt instruments issued by businesses or Govt.
3 FeaturesMobilizing small savings: mutual funds mobilize funds by selling their own shares known as units. This gives the benefit of convenience and satisfaction of owning shares in many industries. Mutual fund invest in various securities and pass on the returns to the investors.Investment Avenue: the basic characteristic of a mutual fund is that it provides an ideal avenue for investment for investors and enables them to earn a reasonable return with better liquidity. It offers investors a proportionate claim on the portfolio of assets that fluctuate in value.Professional management: mutual fund provides investors with the benefit of professional and expert management of their funds. Mutual fund employees professionals/experts who manage the investment portfolios efficiently and profitably. Investors are relieved from the responsibility of following the markets on a regular basis.
4 Diversified investment: mutual fund have the advantage of diversified investment of funds in various industries and sectors. This is beneficial to small investors who cannot afford to buy shares of established companies at high prices. Mutual fund allow millions of investors who have investments in variety of securities of different companies.Better liquidity: mutual fund have the distinct advantage of better liquidity of investment. There is always a market available for mutual funds. In case of mutual funds it is obligatory that units are listed and traded thus offering our secondary markets for the funds. A high level of liquidity is possible for the fund holders because of more liquid securities in the mutual fund portfolio.Reduced risks: the risk on mutual fund is minimum. This is because of expert management diversification , liquidity and economies of scale in transaction cost.
5 Investment protection: mutual funds are regulated by guidelines and legislative provisions put in place by regulatory agencies such as SEBI in order protect the investor interest the mutual funds are obligated to follow the provisions laid down by the regulators.Switching facility: mutual funds provide investors with the flexibility to switch from one scheme to another, this flexibility enables investors to switch from income scheme to growth scheme and from close ended scheme to open ended scheme.Tax benefits: mutual funds offer tax shelter to the investors by investing in various tax saving schemes under the provisions provided by the income tax act.Low transaction cost: the cost of purchase and sale of MF’s is relatively lower.
6 Economic development: MF’s contribute to economic development by mobilizing savings and channelizing them to more productive sectors of the economy.Convenience: MF units can be traded easily with little or no transaction cost.
8 HISTORY OF MF’s History of MF’s can be discussed in two parts : 1) Emergence through public players; and2) Emergence through private players
9 History of Mutual Funds Phase I – 1964 – 87: In 1963, UTI was set up by Parliament under UTI act and given a monopoly. The first equity fund was launched in 1986.Phase II – 1987 – 93: Non-UTI, Public Sector mutual funds.Like-SBI Mutual Fund,Canbank Mutual Fund,LIC Mutual Fund,Indian Bank Mutual Fund,GIC Mutual Fund andPNB Mutual Fund.
10 History of Mutual Funds Phase III – 1993 – 96: Introducing private sector funds. As well as open-end funds.Phase IV – 1996: Investor friendly regulatory measure were taken. Action taken by SEBI to protect the investor, and To enhance investor’s returns through tax benefits.
12 By Structure:Open-ended Funds2. Closed-ended Funds3. Interval Funds
13 By Investment Objective: Growth Funds2. Income Funds3. Balanced Funds4. Money Market Funds5. Load Funds6. No-Load Funds
14 OTHER SCHEMES Tax Saving funds Hybrid fund Sector fund Technology fund Commodity funds
15 Advantages of Mutual Funds Portfolio diversification: It enables him to hold a diversified investment portfolio even with a small amount of investment like Rs. 2000/-.Professional management: The investment management skills, along with the needed research into available investment options, ensure a much better return as compared to what an investor can manage on his own.Reduction/Diversification of Risks: The potential losses are also shared with other investors.Reduction of transaction costs: The investor has the benefit of economies of scale; the funds pay lesser costs because of larger volumes and it is passed on to the investors.Wide Choice to suit risk-return profile: Investors can chose the fund based on their risk tolerance and expected returns.
16 Advantages of Mutual Funds Liquidity: Investors may be unable to sell shares directly, easily and quickly. When they invest in mutual funds, they can cash their investment any time by selling the units to the fund if it is open-ended and get the intrinsic value. Investors can sell the units in the market if it is closed-ended fund.Convenience and Flexibility: Investors can easily transfer their holdings from one scheme to other, get updated market information and so on. Funds also offer additional benefits like regular investment and regular withdrawal options.Transparency: Fund gives regular information to its investors on the value of the investments in addition to disclosure of portfolio held by their scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook
17 Disadvantages of Mutual Funds No control over costs: The investor pays investment management fees as long as he remains with the fund, even while the value of his investments are declining. He also pays for funds distribution charges which he would not incur in direct investments.No tailor-made portfolios: The very high net-worth individuals or large corporate investors may find this to be a constraint as they will not be able to build their own portfolio of shares, bonds and other securities.Managing a portfolio of funds: Availability of a large number of funds can actually mean too much choice for the investor. So, he may again need advice on how to select a fund to achieve his objectives.Delay in redemption: It takes 3-6 days for redemption of the units and the money to flow back into the investor’s account.
18 Mutual Funds Prove Best! While instruments like shares give high returns at the cost of high risk, instruments like NSC and bank deposits give lower returns and higher safety to the investor.Mutual Funds aim to strike a balance between risk and return and give the best of both to the investor.
19 Fund Structure Fund Sponsor Trustees Asset Management Company DepositoryAgentCustodian
20 Structure Of Mutual Funds In India Mutual Funds in India follow a 3-tier structure.The first tier is the sponsor who thinks of starting the fund.The second tier is the trustee. The Trustees role is not to manage the money. Their job is only to see, whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund.Trustees appoint the Asset Management Company (AMC) who form the third tier, to manage investor’s money. The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them
21 SponsorAny corporate body which initiates the launching of a mutual fund is referred to as “The sponsor”.The sponsor is expected to have a sound track record and experience in financial services for a minimum period of 5 years and should ensure various formalities required in establishing a mutual fund.According to SEBI, the sponsor should have professional competence, financial soundness and reputation for fairness and integrity. The sponsor contributes 40% of the net worth of the AMC. The sponsor appoints the trustee, The AMC and custodians in compliance with the regulations.
22 TrusteeSponsor creates a public trust and appoints trustees. Trustees are the people authorized to act on behalf of the Trust. They hold the property of mutual fund.Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund. The Trustees role is not to manage the money but their job is only to see, whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund.A minimum of 75% of the trustees must be independent of the sponsor to ensure fair dealings.Trustees appoint the Asset Management Company (AMC), to manage investor’s money.
23 Asset Management Company (AMC) The investment manager of a mutual fund is technically known as ‘ASSET MANAGEMENT COMPANY’ and is appointed by sponsors and trustees.AMC manages affairs of mutual fundThe role of the AMC is to manage investor’s money on a day to day basis. Thus it is imperative that people with the highest integrity are involved with this activity
24 AMC cont- The AMC cannot act as a Trustee for some other Mutual Fund. Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC.Finally, it is the AMC which is responsible for the acts of its employees and service providers.
25 CustodianA custodian’s role is keeping custody of the securities that are bought by the fund manager and also keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested.The Custodian is appointed by the Board of Trustees. The custodian also participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities.Only the physical securities are held by the Custodian. The deliveries and receipt of units of a mutual fund are done by the custodian or a depository participant at the instruction of the AMC and under the overall direction and responsibility of the Trustees. Regulations provide that the Sponsor and the Custodian must be separate entities.
26 Registrar to an issue He plays important role The task of getting applications together, sorting them and arranging in an order is undertaken by registrar to issueSEBI guidelines stipulate that a company offering public issue of shares should appoint merchant banker as registrar to issueThe registrar should be registerd with SEBI
27 Role of registrar Should maintain proper books of accounts and records Shall intimate SEBI the place where books are maintainedShall preserve books of accounts and other records for minimum period of 3 yrsShall appoint compliance officer
28 After the close of each financial yr,asap,but not later than 6 months from yhe close period furnish SEBI copies of p/l a/c, balance sheet, CAR,etc
29 underwriterA company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, buys them from the issuer and sells them to investors via the underwriter's distribution network.
30 To act as an underwriter, a certificate of registration must be obtained from Securities and Exchange Board of India (SEBI). The certificate is granted by SEBI under the Securities and Exchanges Board of India (Underwriters) Regulations, These regulations deal primarily with issues such as registration, capital adequacy, obligation and responsibilities of the underwriters. Under it, an underwriter is required to enter into a valid agreement with the issuer entity and the said agreement among other things should define the allocation of duties and responsibilities between him and the issuer entity. These regulations have been further amended by theSecurities and Exchange Board of India (Underwriters) (Amendment) Regulations, 2006.
31 Role of underwriterThe primary role of the underwriter is to purchase securities from the issuer and resell them to investors.Underwriters act as intermediaries between issuers and investors, providing for an efficient of capital.The underwriters take the risk that it will be able to resell the securities at a profit.Perhaps the most visible and familiar element of the initial public offering process is the underwriter. The underwriter is the organization that is actually responsible for pricing, selling, and organizing the issue, and it may or may not provide additional services.
32 ASSOCIATION OF MUTUAL FUNDS IN INDIA Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995.(AMFI) modeled on the lines of a Self Regulating Organization (SRO) with a view to 'promoting and protecting the interest of mutual funds and their unit-holders, increasing public awareness of mutual funds, and serving the investor’s interest by defining and maintaining high ethical and professional standards in the mutual funds industry'Association of Mutual Funds India has brought down the Indian mutual fund industry to a professional and healthy market with ethical lines enhancing and maintaining standards.It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders.
33 OBJECTIVES OF AMFIAMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.To recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management including agencies connected or involved in the field of capital markets and financial services.Association of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry.It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry.
34 Cont…….AMFI undertakes all India awareness programme for investors in order to promote proper understanding of the concept and working of mutual funds.Association of mutual fund of India also disseminate information on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.
35 Evaluation of Mutual Funds It is essential that the performance of Mutual fund is evaluated and appraised. Such appraisal helps the fund to compare itself with other funds besides being a potential source of information to the present and prospective investors.Evaluation includes simple evaluation tools to sophisticated models which take into consideration the risk and uncertainty associated with the returns. Some of the models used are Treynor’s Model and Sharpe’s Model
36 Sharpe’s Performance Index: It offers a single value for performance ranking of different funds or portfolio. It measures the risk premium of the portfolio in terms of its total risk.Sharpe’s Index = Average portfolio return – Risk free rate of returnStandard Deviation of Portfolio= Rp – Rfσp
37 Treynor’s Performance Index: Here the fund’s performance is measured against the market performance. It is used to calculate return per unit of market risk.Treynor’s Index = Average portfolio return – Risk free rate of returnMarket risk of Portfolio= Rp – Rfβp