WHAT IS MUTUAL FUND? COMMON POOL OF MONEY JOINT OR “MUTUAL” OWNERSHIP HENCE…LIKE SHARES OF THE JOINT STOCK COMPANY UNITS ARE THE REPRESENTATION OF OWNERSHIP
ADVANTAGES OF MUTUAL FUNDS PORTFOLIO DIVERSIFICATION PROFESSIONAL MANAGEMENT REDUCTION/DIVERSIFICATION OF RISK REDUCTION OF TRANSACTION COSTS LIQUIDITY CONVENIANCE AND FLEXIBILITY
DISADVANTAGES OF INVESTING THROUGH MF NO CONTROL OVER COST NO TAILOR-MADE PORTFOLIO MANAGING A PORTFOLIO OF FUND
HISTORY OF MF IN INDIA MF INDUSTRY STARTED IN INDIA IN 1963 WITH FORMATION OF UTI DIFFERENT PAHSES : • PHASE -1(UTI) • PHASE-2 (ENTRY OF PUBLIC SECTOR MFs) • PAHSE-3 (ENTRY OF PRIVATE MFs) • PHASE-4 (UNDER SEBI REGULATION)
PHASE-1 ESTABLISHMENT OF UTI IN 1963 LAUNCH OF FIRST SCHEME US-64 FOLLOWED BY ULIP IN 1971, CRTS(1981), CGS(1983), CGGF(1986), MASTERSHARE(1987) UTI THE ONLY PLAYER IN THE MARKET WITH MONOPOLY POWER HUGE MOBILIZATION OF FUNDS
PHASE-2 ESTABLISHMENT OF SBI-MF---THE FIRST NON- UTI MF FOLLOWED BY CANBANK-MF, LIC-MF,BOI-MF CHANGE IN THE MIND SET OF THE INVESTORS
PHASE-3 ENTRY OF THE PRIVATE SECTOR FUND IN 1993 JV OF FOREIGN FUND MANANGEMENT COMPANIES WITH INDIAN PROMOTERS MORE COMPETITIVE PRODUCT INNOVATION, INVESTMENT MANAGEMENT TECHNIQUES, INVESTORS SERVICING TECHNIQUES INVESTORS STARTED BECOME SELECTIVE
PHASE-4 SEBI- THE REGULATORY AUTHORITY UTI CAME UNDER SEBI REGULATION VOLUNTARILY GOVT.’S STEPS FOR INVESTORS’ PROTECTION
TYPES OF FUNDS CLOSE END/ OPEN END LOAD / NO-LOAD TAX EXEMPT/NON-TAX EXEMPT
OPEN END FUND: • UNITS AVAILABLE FOR SALE AND REPURCHASE AT ALL TIMES • INVESTORS CAN BUY OR REDEEM ON NAV • Ex: ETSP”. • UNIT CAPITAL - VARIABLE CLOSE END FUND: • DON’T ALLOW INVESTORS TO BUY/ REDEEM UNITS DIRECTLY FROM FUNDS • GET LISTED ON STOCK EXCHANGE TO PROVIDE LIQUIDITY. EX: MEP • “Units may be traded at a discount or premium to NAV based on investor’s perception on future performance and market factors”
LOAD FUND: • LOAD CHARGE TO COVER THE EXPENSES • ENTRY/FRONT LOAD AND EXIT/ BACK LOAD • DEFFERED LOAD - CHARGED OVER A PERIOD OF TIME • EXIT LOAD PREFFERED OVER ENTRY LOAD FOR BENEFIT OF COMPOUNDING • CONTINGENT DEFFERED SALES CHARGE- EXIT LOAD CHARGED DEPENDING ON THE PERIOD. EX:BOND FUND • EVEN CLOSE END FUNDS MAY HAVE LOADS NO LOAD FUND: • THERE IS NO LOAD- NO SALES EXPENSE CHARGE • NAV CALCULATED AFTER ACCOUNTING FOR OTHER EXPENSES
MUTUAL FUND TYPES BY NATURE OF INVESTMENTS • EQUITY, BOND, MONEY MARKET FUNDS BY INVESTMENT OBJECTIVE • INCOME, GROWTH, VALUE FUNDS BY RISK PROFILE • HIGH, LOW, MODERATE RISK FUNDS
MONEY MARKET FUND LOWEST RISK INVESTMENT IN THE SECURITY OF LESS THAN ONE YEAR MATURITY INVESTMENT IN TREASURY BILLS, CD, COM. PAPERS, CALL MONEY STRENGTH: LIQUIDITY AND SAFETY OF PRINCIPAL
GILT FUND LOW RISK BUT HIGHER THAN THAT OF MMF MEDIUM TO LONG TERM MATURITY (MORE THAN 1 YEAR) LITTLE DEFAULT RISK, HIGH INTEREST RISK IT’S PRICES FALLS IF INTEREST RATE INCREASES AND VICE VERSA
DEBT/INCOME FUND RISK HIGHER THAN G-SEC FUND MORE EMPHASIS ON INCOME DISTRIBUTION THAN CAPITAL APPRECIATION TYPES • DIVERSIFIED • FOCUSED • HIGH YEILD (Investment in lower rate) • ASSURED RETURN
TYPES OF EQUITY FUNDS AGGRESSIVE GROWTH FUNDS:Investment in less researched or speculative/non-blue chip stocks GROWTH FUNDS: Investment in stocks with above average growth prospects over 3-5 years.Ex:Tech Stock SPECIALITY FUNDS: Sector, Offshore, Small-cap equity, Option income funds DIVERSIFIED EQUITY FUNDS: ELSS. Ex: ETSP EQUITY INDEX FUNDS VALUE FUNDS: Invest in fundamentally sound companies with low P/E ratio. EQUITY INCOME FUND:Invest in sectors where low fluctuation in stock price and high dividend is expected.
TYPES OF HYBRID FUNDS BALANCED FUNDS: More or less equal proportion GROWTH -INCOME FUNDS: Mix between good dividend paying records and with potential of capital appreciation. ASSET ALLOCATION FUNDS:Asset allocation between equity,debt or money market and asset allocation policy may be pre-determined or flexible. OTHER FUNDS COMODITY FUNDS REAL ESTATE FUNDS
FUND STRUCTURE AND CONSTITUENTS LEGAL STRUCTURE ROLE OF DIFFERENT OPERATING BODIES FUND MERGERS AND SCHEME TAKEOVERS
LEGAL STRUCTURE IN INDIA • ISSUE OF OPEN AND CLOSE END FUNDS IN SAME LEGAL STRUCTURE • FOLLOW THE SEBI REGULATION • TRUST FORM SPONSOR: ESTABLISHES THE MUTUAL FUND • Must contribute 40% of the net worth of the AMC • Need to have sound financial track record • Appoint trustees
LEGAL STRUCTURE TRUSTEES:Manages the Mutual Fund and look after the operations of the appointed AMC. The investments are held by the Trustee. The beneficiaries from the assets are the unit holders. The trustees have a fiduciary responsibility. Trustees approve each MF scheme floated by AMC. Trustees receive fees for their services. Trusts are formed through “Trust Deed” “Furnish report to SEBI on half yearly basis on AMC and Fund functioning” Amc:acts as investment manager of the trust under the board supervision and direction of the trustees “AMC Submit report to Trustees on quarterly basis, mentioning activity and compliance factor.
LEGAL STRUCTURE AMC: Acts as investment manager of the trust under the board supervision and direction of the trustees. AMC is the fund manager AMC floats the different MF schemes. AMC is responsible to the trustees. AMC fees have a ceiling decided by SEBI – Initial issue expenses not exceeding 6% – Recurring expenses such as trustee fees, audit fees, etc. – When net assets do no exceed Rs.100 crores, asset management fee is maximum 1.25% of average weekly net assets. – When assets exceed Rs.100 crores, an additional asset management fee of maximum 1% of additional net assets. – If the scheme is a no-load scheme, further fee of maximum 1% of average weekly net assets.
LEGAL STRUCTUREThe Sponsor A sponsor appoints the asset management company. Sometimes, this power is given by the sponsor to the trustees through the trust deed. At least 50% of directors on the board of asset management company should be independent of the sponsor. Asset management company shall not deal with any broker/firm associated with sponsor beyond 5% of daily gross business of the MF. All security transactions of the asset management company with its associates should be disclosed.
Contingent Deferred Sales Charge For no-load schemes Redemption during the first four years after purchase First year maximum 4% Second year maximum 3% Third year maximum 2% Fourth year maximum 1%
Ceiling on Expenses Excepting initial and redemption expenses, the total of all other expenses should be a maximum of Average weekly Fees as % of net assets (Rs.Crores) average weekly net assets 0-100 2.5% next 300 2.25% next 300 2.0% balance 1.75%
LEGAL STRUCTURE CUSTODIAN: • APPOINTED BY BOARD OF TRUSTEES FORSAFEKEEPING OF SECURITIES. • IT’S AN ENTITY INDEPENDENT OF SPONSORS BANKERS TRANSFER AGENTS • ISSUE AND REDEEM OF UNITS AND OTHER RELATED SERVICE DISTRIBUTORS • APPOINTED BY AMC • MAY ACT ON BEHALF OF DIFFERENT FUNDS • AGENTS - AS INDIVIDUAL
FUND MERGER & TAKEOVERS CONSTITUTION CAN CHANGE IN MANY POSSIBLE WAYS • AMC TAKEN OVER BY ANOTHER SPONSOR • MERGER OF TWO AMCs • DECISION OF TRUSTEE TO CHANGE AMC • CHANGE OF TRUSTEES • MERGER OF TWO SCHEMES WITH SAME AMC/TRUSTEES
MERGER OF TWO AMCs • NEEDS TO FOLLOW INDIAN CO. ACT • SEBI APPROVAL REQUIRED • CONSENT OF UNIT HOLDERS WITH 75% VOTING RIGHTS AMC TAKEOVER BY NEW SPONSORS • HIGH COUT APPROVAL NOT REQUIRED BUT SEBI CLEARANCE REQUIRED SCHEME TAKE OVER • AMC CANNOT WITHDRAW OR TRANSFER THE MANAGEMENT OF SCHEME TO ANOTHER AMC WITHOUT UNIT HOLDERS CONSENT • TRUSTEES CANNOT EFFECT THE CHANGES IN AMC WITHOUT UNITHOLDERS CONSENT“ANY AMMENDMENTS IN SCHEME REQUIRECONSENT OF UNIT HOLDERS IN CASE OF ONLY CLOSE END FUND. OEN END FUND NEEDS TO JUST INFORM”
Legal and Regulatory Environment
Regulators in India SEBI – SEBI regulates MFs – All MFs have to be registered with SEBI RBI – Bank-owned MFs are under RBI and SEBI • Ownership of AMC by the bank • Guarantees issued by the bank as sponsor • Fund mergers of bank-sponsored MFs – Permission to access inter-bank call money market
Regulators in India… Ministry of Finance Company Law Board – Department of Company Affairs • Registrar of Companies Stock Exchanges Charity Commissioner – Office of the public trustee • Board of trustees of MFs
Self-regulatory Organization An organization specially empowered to regulate activities of its members AMFI is not a self-regulatory organization
AMFI Promote the interests of the mutual funds and unit-holders Set ethical, commercial, and professional standards in the industry Increase the public awareness of MF industry
Investors Rights and Obligations Right of Proportionate “beneficial Ownership” Right to Timely Service Right to Information Right to Approve changes in Fundamental Attributes Right to Wind Up a Scheme Right to Terminate the AMC
Legal Limitations to Investors Rights Investors cannot Sue the Trust. Investors can initiate legal proceedings against the trustees Sponsors of a MF have no obligation to meet the shortfall in non- assured schemes Only if the OD has specifically provided such guarantee by a named sponsor the investors have a right to sue the sponsors Prospective Investors cannot sue the Trust / the AMC or any other constituent.
Investors Obligations / Complaint RedressalInvestors should: SEBI intervention Read Offer Document For issue of due diligence Understand Risk factors certificate for new Monitor Investments scheme by compliance officer Ask for information Companies Act cannot required protect investors as fund“Monitoring is entirely his/ her investors are neither own responsibility” shareholders in the AMC nor depositors
Who can invest in Mutual Funds in India? Residents : Resident Individuals Indian Companies Indian Trusts/ Charitable Institutions Banks / NBFCs Insurance Companies Provident funds
Who can invest in Mutual Funds in India? Non Residents : NRIs OCBs Foreign Entities: FIIs registered with SEBI
Role of the Distribution Channels“MFs are primarily vehicles for large collective investments , based on the principle of pooling the funds from a large number of investors” Hence, “Majority of schemes are targeted at the retail level, from where a substantial portion of investment takes place” So, “Distribution network becomes critical in view of the spread of investor community”
Types of Distribution Channels:1.Individual Agents2. Distribution Companies3. Banks / NBFCs4. Direct Marketing ( By the Sales Officers)5.Current Distribution patterns - Non UTI fundsrely on the 2&3 above.
Sales Practices in MF Market
Agents’ Commission•Commission can be paid upfront or trail commission.• Market Practice: 1-1.5% (Equity funds) 0.6-0.8% (Debt Funds)• Higher commission paid for Tax-benefit schemes as there is a lock-in period.
Agents’ Commission•The initial issue expense cap of 6% includes brokerage as well.•All SEBI regulated open ended funds are authorized to chargeexit /entry loads to cover the funds’ distribution expenses.• A no load fund includes these expenses as a part of the regularmanagement & marketing expenses.• SEBI prescribes a cap on all the total expenses that can be chargedto a scheme each year. Any additional expense will have to be borneby the AMC
Effective Selling of MF Schemes• Know the important characteristics of the scheme.• Know your client profile (age, risk tolerance,income levels)• Understand clients’ needs (investment objective,return expectation,cash flow requirement)• Assistance in making the right choice of investment• Encourage regular investment and seek commitment from the clientto invest.• Personalized post sales service.
SEBIs Advertising Code• The code protects from misleading investors.• Past performance is not a guarantee• Dividends declared/paid shall be mentioned in Rs.per unit• Only compound and annualized yield can be advertised for schemes for more than one year.• Annualised yield must be shown for at least one, three fine and since launch.• For less than one year performance may be shown in terms of total returns should not be annualized.• Appropriate benchmark should be chosen. And once chosen it should be consistent.• Where any ranking has been made should be explained.
Appointment of AgentsThe key terms of agreement are as follows:• The agent will provide a copy of the abridged OD to the customerand will make available for inspection a copy of the OD and sell atprice currently in effect.• The agent will execute all the transactions on behalf of thecustomer who will not have any recourse to the agent in case of anerrors/problems/quality of investment.• The agent must make the customer know that the funds’ units arenot endorsed by him and do not constitute his obligation.•Agent responsible at his expense to ensure compliance withapplicable regulation in each jurisdiction.•Fund not responsible for any losses claims or damages.
Key terms of Agreement………….2• The agent will offer/sell/purchase unit at the current public offeringprice.• All orders become effective only upon acceptance and confirmationby the fund.• The agent is responsible to ensure compliance with the applicableregulations in each transaction he deals in and the fund is notresponsible for any breach by agent in this regard.
AMFI Code of EthicsAMFI has recommended a code of practices with respect to overall fund operation including distribution and selling.1. Management of fund should be in the interest of unit holders.2. High standards of service are expected from funds3. Adequate disclosure standards4. Professional Selling practices.5. Fund Management in accordance to stated investment objective.6. Avoid conflict of interest in its dealing with its employees.7. Refrain from unethical market Practices.
Fund broking practices in US Cap on sales/distribution expenses. Broker is not allowed to describe a fund as no load fund if it has front-end or default load. Broker prohibited from recommending that purchase of units before ex-dividend may be advantageous. Prohibited from using commission as a basis for recommending a fund. Preferred pricing to specific investors prohibited.