Mutual funds_Financial Services


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Mutual funds_Financial Services

  1. 1. Mutual Funds Atif Ghayas Faculty of Management Studies and Research Aligarh Muslim University, Aligarh
  2. 2. Contents • Introduction & Concept of Mutual funds • Working of Mutual funds • History & Phases of Mutual funds • Structure & Composition of Mutual funds • Working & Regulations for Mutual Funds • Types of Mutual Funds • Recent Innovations In Mutual Funds • Mutual Fund Players In India • Top Mutual Fund Schemes & Fund Managers 2
  3. 3. Mutual fund and its Concept
  4. 4. What is a Mutual Fund ?  It is a trust that pools the savings of a number of investors who share a common financial goal.  Professional fund managers then invest these funds in a way that helps investors achieve their goal.
  5. 5. How Mutual Fund works? INVESTORS Pool their money with Passed back to FUND MANAGERS RETURNS Generate Invest in SECURITIES
  6. 6. OBJECTIVES OF MUTUAL FUNDS  Convenience: Adjusting the denomination of securities to suit the requirement of individual savers.  Diversification: Small investors can obtain better diversification through mutual funds than by directly purchasing securities.  Expert management: Benefit of trained, experienced & specialized management  Low cost due to economies of scale: Able to exploit economies of scale in investing
  7. 7. Advantages of Mutual Funds • Professional expertise • Diversification • Low cost of asset management • Liquidity • Ease of process • Well regulated • Convenient Administration • Return Potential • Transparency • Flexibility • Choice of schemes • Tax benefits 7
  8. 8. Disadvantages of Mutual Funds Costs: The investor pays fees as long as he remains with the fund. No tailor-made portfolios: High net-worth individuals may find this to be a constraint as they will not be able to build their own portfolio of shares. Managing a portfolio of funds: large number of funds can provide too much choice for the investor. He may need advice on how to select a fund. Delay in redemption: It takes 3-6 days for redemption of the units and the money to flow back into the investor’s account. Lower-than-market performance: Consistently beating the market is difficult. Many mutual funds just keep even with overall stock market index
  9. 9. History & Phases Of Mutual Funds
  10. 10. History of mutual fund The Boston Personal Property Trust, formed in 1893 was the first close ended mutual fund in U.S. The creation of Alexander fund in Philadelphia in 1907 was an important step in the evolution toward what we know as the modern mutual fund History of MF’s can be discussed in two parts : 1) Emergence through public players 2) Emergence through private players
  11. 11. Phases Of Mutual Fund Emergence History of mutual funds in India can be divided into 5 important phases:  Phase I . 1963-1987  UTI sole market player, created by an Act of parliament in 1963.  US 64 even today the single largest mutual fund scheme.  UTI created a number of products e.g. monthly income plans, children’s plan,  Equity oriented schemes and offshore funds during this period .  UTI managed assets of Rs.6700 cr. at the end of this phase.
  12. 12. Phases of mutual fund emergence  Phase II. 1987-1993 (Entry of Public Sector Funds)  Public sector banks and financial institutions entered the mutual funds industry.  SBI mutual fund was the first non-UTI MF to be set up in 1987.  Significant shift from deposits to MF.  Most funds were growth oriented ,closed-ended funds.  AUM of UTI grew to Rs.38,247cr. and public sector funds Rs.8750cr.
  13. 13. Phases of mutual fund emergence  Phase III 1993-1996. (Entry of Private Sector Funds)  In 1993,the mutual funds industry was open to private sector players both Indian and foreign.  SEBI’s first set of regulations were formulated.  Regulation revised in 1996.  Significant innovation in servicing, product design and information disclosure.
  14. 14. Phases of mutual fund emergence  Phase IV 1996-1999 (Entry of Private Sector Funds)  Implementation of new SEBI regulation.  Rapid asset growth .  Bank mutual funds were recast according to the SEBI recommended structure.  UTI came under voluntary SEBI supervision.
  15. 15. Phases of mutual fund emergence Phase V 1999-2003 Marked by very rapid growth in MF industry. Increase in market share of private players. AUM crossed Rs.100,000cr. Bond funds and liquid funds registered the highest growth(nearly 60% of assets). UTI share dropped to nearly 50%.
  16. 16. Growth in Mutual fund Industry
  17. 17. Structure & Constitution of Mutual Funds
  18. 18. Structure of Mutual Fund
  19. 19. Constitution of MF in India • The constitution are designed to safeguard investors, check speculative activities of mutual funds & ensuring financial discipline through transparency & fair play. • SEBI ( Mutual Fund ) regulation require a four tier system to organize Mutual Fund. i.e. - Sponsor - Trustee - Asset Management Company - Custodian
  20. 20. Sponsors • One who thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI), which is the market regulator and also the regulator for mutual funds. • SEBI checks a persons integrity ,experience in the financial sector, his net worth etc. • Sponsor is to contribute 40 per cent of the net worth of AMC. • Mutual fund is created by sponsor as a trust under Indian Trust act 1982. • Sponsor appoints a trustee.
  21. 21. Trustees • A trustee is a person who holds 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. • To ensure fair dealing at least 75 per cent of trustees are to be independent of the sponsors. • The trustee role is not to manage money. Their job 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 fund schemes.
  22. 22. Asset Management Company (AMC) • The sponsor or trustees appoint an AMC, also known as ‘Investment Manager’, to manage the affair of mutual fund. • The AMC has to be approved by SEBI. The AMC functions under the supervision of it’s Board of Directors, and also under the direction of the Trustees and SEBI. • It is the AMC, which in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities. • Whenever the fund intends to launch a new scheme, the AMC has to submit a Draft Offer Document to SEBI. This draft, after getting SEBI approval becomes the offer document (OD) of the scheme.
  23. 23. Custodians • A custodian’s role is safe keeping of securities 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. • SEBI requires that each mutual fund shall have a custodian who is not in any way associated with AMC.
  24. 24. Working & Regulations for Mutual Funds
  25. 25. Working Mechanism Of AMC • Fund Manager: To decide when , where & how much & at what rate securities are to be bought & sold. • Committees in mutual fund: In bank sponsored funds , committees are created to handle investments: Investment committee- broad committee deciding about primary market investments Market Operations Committee- having the assignment of divestments & interaction with secondary market .
  26. 26. • Research & Planning cell Created by AMC for the requirement of sensitive & technical information The research can be with respect to securities as well as prospective investors • Dealers: To execute the sale/purchase transactions in capital or money market , a separate section may be created under the charge of a person called dealer having deep understanding of stock market operations
  27. 27. Functions of Asset Management Company  Receiving & processing the application form of investors  Issuing unit certificates  Sending refund orders  Recording all transfer of units  Repurchasing the units  redemption of units  Issuing dividend or income warrants  May hire the service of registrars & transfer agents if quantum of work is huge & need specialized services
  28. 28. Fund Accounting:  Computing net asset value per unit of the scheme  Maintaining its books & records  Maintaining compliance with the scheme investment limitations and SEBI regulations  Lead mangers are appointed to coordinate the activities of ad agency, printers , collection centers & marketing of their services. They get fees on the basis of funds mobilized. They are normally engaged by AMCs for extensive campaign of the scheme to attract the investors  During the planning & execution of scheme , a lot of legal exercise is undertaken for which a group of advocates & solicitors may be appointed as legal advisors.
  29. 29. Regulations • Governed by SEBI (Mutual Fund) Regulation 1996 – 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 under Companies Act, 1956 • SEBI- Very detailed guidelines for disclosures in offer 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 – Select Benchmark depending on scheme and compare
  30. 30. Operations of Mutual Funds : Regulatory Mechanism I. Registration of mutual fund with SEBI II. Constitution & management of mutual funds & operation of trust III. Constitution & management of AMC & custodian IV. Schemes of mutual funds V. Investment objectives & valuation policies VI. Real state mutual fund schemes VII. General obligations VIII. Inspection& audit IX. Procedure for action in case of default
  31. 31. Registration of mutual funds • To carry on business , mutual funds must be registered with SEBI . The application for registration , with a non- refundable fees of Rs. 25,000 should be made in the prescribed form
  32. 32. Eligibility criteria for registration of sponsors • Should have a sound track record, reputation of fairness & integrity in all his business transactions • Should contribute at least 40% of net worth of AMC • Should not have been guilty of any fraud or economic offence • Appointment of trustees or trustee company • Appointment of AMC set up under the provisions of Cos act • Appointment of custodian • Should meet the criteria specified in SEBI intermediaries regulations , 2008
  33. 33. Terms & conditions of registration 1) Trustee/ sponsor/ AMC / custodian would have to comply with SEBI regulations 2) MF would immediately inform SEBI about any change in info having material impact on registration of SEBI 3) Payment of • • Registration fee of 25 lacs •  application fee of 1 lac Annual fee based on net assets SEBI may not permit a MF who has not paid the annual fee to launch any scheme
  34. 34. Constitution and Management of an Asset Management Company (AMC) and custodian The sponsors of MF or trustees would appoint the AMC with the prior approval of SEBI. Its appointment can be terminated by majority of trustees or by 75% unit holders of the scheme. Any change in its appointment would also require prior approval of SEBI as well as the unit holders.
  35. 35. Eligibility criteria for AMC a) An existing AMC should have a sound track record / general reputation & fairness in transactions and should be a fit and proper person b) The directors of AMC should have adequate professional experience in finance & financial service related fields c) Key personnel of the AMC have not been found guilty of moral turpitude or been convicted of any economic offence or violation of securities law or worked for any AMC during the period when its registration has been suspended d) The AMC has net worth capital of not less than Rs. 10 crore
  36. 36. Appointment of Custodian The MF should appoint a custodian to carry out the custodial services for the scheme & send intimation of the same to SEBI within 15 days of the appointment .  In case of gold ETF the asset may be kept in the custody of the bank registered as custodian with the SEBI  In case of real estate MF scheme the title deed of the assets held by it may be kept in the custody of SEBI registered custodian
  37. 37. Net Asset value (NAV) (NAV) represents a fund's per share market value. This is the price at which investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund company. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding. An NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities. The valuation shall be documented and the supporting data in respect of each security so valued shall be preserved at least for a period of five years after the expiry of the scheme.
  38. 38. Types Of Mutual Funds
  39. 39. TYPES OF MUTUAL FUNDS Type of Mutual Fund Schemes Structure Investment Objective Special Schemes Open Ended Funds Growth Funds Industry Specific Schemes Close Ended Funds Income Funds Index Schemes Balanced Funds Sectoral Schemes Money Market Funds
  40. 40. Types of Mutual Fund Schemes • By Structure Open-Ended – anytime enter/exit Close-Ended Schemes – listed on exchange, redemption after period of scheme is over. • By Investment Objective Equity (Growth) – only in Stocks – Long Term (3 years or more) Debt (Income) – only in Fixed Income Securities (3-10 months) Liquid/Money Market (including gilt) – Short-term Money Market (Govt.) Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years) • Other Schemes Tax Saving Schemes Special Schemes ULIP
  41. 41. Open-ended Mutual funds • These are the schemes which offers units for sale without specifying any duration for redemption. • Sells and repurchase the units of mutual fund on a continuous basis at a price called Net Assets Value. • Essential feature of open ended schemes is the liquidity. • Example- The Unit Scheme-1964.
  42. 42. Close-ended Mutual funds • These are the schemes in which period of redemption is specified. • Limited number of units are sold to investors during a specified period only. • Market price is determined by the market forces of demand and supply. • Liquidity to the investor is provided by the market.
  43. 43. Growth Funds • These are the schemes which offer capital appreciation as well as dividend opportunities. • Objective is to seek capital appreciation by making investment in securities. • Good and suitable for those investors who invest for long term perspective. • Example- UTI Growth and Value Fund.
  44. 44. Income Fund • Also known as Dividend schemes • Promise a guaranteed return in the form of dividends to the investors. • Portfolio of these schemes consist of fixed income investments i.e. Bonds, Debentures etc. • Ideal for those investors who seek intermediate cash flow.
  45. 45. Balanced Funds • Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. • These schemes invest in both shares and fixed income securities.
  46. 46. Money Market Mutual Fund • The fund collected by these mutual funds are invested in money market instruments such as commercial papers, commercial bill, t bills etc. • Open ended funds. • These funds are very liquid and risk free. • Provide better return than short term bank deposits.
  47. 47. Tax saving schemes • Design to avail tax exemption and concession (under section 88 of Income tax act) to the investors. • Also known as Equity-linked saving schemes. • Example- HDFC tax plan, PNB-ELSS etc.
  48. 48. Domestic Funds • These are the schemes which are open for subscription by the investors of the country of origin only. • Most of the mutual funds launched in India are domestic funds.
  49. 49. Off-shore Funds • These are the funds which are to be subscribed abroad. • Example- Ind bank off-shore mutual fund, common wealth equity mutual fund.
  50. 50. Unit-Linked Plan (ULIP)  Unit-linked plan offers the interesting option of combining protection as well as tax advantages with the attractive prospects of investing in equities.  It works on a minimum premium basis and not on a sum assured one.  Investor decide the amount contributed at regular intervals.  ULIP offers cover till needs are fulfilled, beyond that it becomes an investment avenue.
  51. 51. Fixed Maturity Plans (FMPs)  The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities.  The tenure can be of different maturities, ranging from one month to five years.  FMPs can be compared to Fixed Deposits of a bank. While a Fixed Deposit offers a 'guaranteed' return, returns in FMPs are only 'indicative'.  The fund house fixes a 'target amount' for a scheme.
  52. 52. Monthly Income Plans (MIPs)  MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments.  MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor.  These are generally monthly, quarterly, half-yearly and annual options.
  53. 53. SPECIALIZED SECTOR FUNDS Under this scheme funds are planned to be invest in a particular region, industry or sector like:-  Pharmaceuticals  Information Technology  Fast Moving Consumer Goods (FMCG)  Petroleum stocks, etc.
  54. 54. Gilt Funds  Funds of these schemes are invested in government Securities.  These funds are low return and low risk and suitable for risk averse investors.  Example- Gilt plus, FT Gilt, Gilt treasury etc.
  55. 55. Recent Innovations In Mutual Funds
  56. 56. Electronic Traded Funds (ETFs) A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.  Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.
  57. 57. Gold ETF  Buying Gold ETF is purchasing gold in electronic form.  You buy them just like you buy stock of any company from your broker.  Gold ETF makes it easier for you to invest in gold.  The investment objective of Gold ETFs is to provide you with returns that closely correspond with the domestic price of real gold. Each Gold ETF unit that you buy is roughly equal to the price of 1 gm of gold. 57
  58. 58. Benefits of gold ETF • With GOLD ETF, you don't have to pay any premium, making or delivery charges. • With Gold ETF, since your gold is now in demat form there are no worries of theft and you also save on locker charges. • Gold ETFs can be sold anytime through your broker at transparent prices available for view at NSE's website.
  59. 59. On Gold ETF, you pay no sales tax, securities transaction tax, VAT or wealth tax. They are easy to buy since you can even buy just one gram at a time. Over time, you can build up your gold portfolio to the level you want, just as you would with your bank or jeweler, only this is easier.
  60. 60. Mutual Fund Players In India
  61. 61. Distribution Channels • Mutual Funds are primary vehicles for large collective investments, working on the principle of pooling funds. • Agents and distributors are a vital link between the mutual funds and investors.  Agents  Is a broker between the fund and the investor and acts on behalf of the principal.  He is not exclusive to the fund and also sells other financial services. This in a way helps him to act as a financial advisor.  Distribution Companies  Is a company which sells mutual funds on behalf of the fund.  It has several employees or sub-broker under it.  It manages distribution for several funds and receives commission for its services.
  62. 62. Distribution Channels  Banks and NBFCs  Several banks, particularly private and foreign banks are involved in a fund distribution by providing similar services like that of distribution companies.  They work on commission basis  Direct Marketing  Mutual funds sell their own products through their sales officers and employees of the AMC.  This channel is normally used to mobilize funds from high net worth individuals and institutional investors.
  63. 63. List of Mutual Fund Companies in India Some of the popular firms that deal in mutual funds in India are: Reliance Mutual Funds HDFC Birla Sun Life Deutsche Bank ING HSBC ICICI Prudential LIC
  64. 64. • JP Morgan • Kotak Mahindra • JM Financial • State Bank of India (SBI) • Sahara Mutual Funds • Tata • UTI • Standard Chartered
  65. 65. Top mutual funds in India • Reliance Mutual Fund • HDFC Equity Fund • ICICI Prudential Fund • SBI Mutual Fund
  66. 66. Top Fund Managers In India