Mutual funds allow investors to pool their money together into a portfolio that is professionally managed. The key benefits of mutual funds include diversification of risk, professional management, and reduced transaction costs. A mutual fund is made up of a trust that holds the securities in the fund. The trust is managed by a board of trustees and an asset management company. Regulators like SEBI oversee the mutual fund industry in India and work to protect investors. Distribution channels play an important role in helping mutual funds reach retail investors. Agents and brokers are typically compensated through upfront and trail commissions.
2. 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
3. ADVANTAGES OF MUTUAL FUNDS
PORTFOLIO DIVERSIFICATION
PROFESSIONAL MANAGEMENT
REDUCTION/DIVERSIFICATION OF
RISK
REDUCTION OF TRANSACTION COSTS
LIQUIDITY
CONVENIANCE AND FLEXIBILITY
4. DISADVANTAGES OF INVESTING
THROUGH MF
NO CONTROL OVER COST
NO TAILOR-MADE PORTFOLIO
MANAGING A PORTFOLIO OF FUND
5. 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)
6. 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
7. 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
8. 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
9. PHASE-4
SEBI- THE REGULATORY AUTHORITY
UTI CAME UNDER SEBI REGULATION
VOLUNTARILY
GOVT.’S STEPS FOR INVESTORS’ PROTECTION
10. TYPES OF FUNDS
CLOSE END/ OPEN END
LOAD / NO-LOAD
TAX EXEMPT/NON-TAX EXEMPT
11. 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”
12. 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
13. 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
14. 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
15. 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
16. 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
17. 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.
18. 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
19. FUND STRUCTURE AND
CONSTITUENTS
LEGAL STRUCTURE
ROLE OF DIFFERENT OPERATING
BODIES
FUND MERGERS AND SCHEME
TAKEOVERS
20. 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
21. 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.
22. 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.
23. LEGAL STRUCTURE
The 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.
24. 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%
25. 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%
26. 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
27. 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
28. 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”
30. 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
31. 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
32. Self-regulatory Organization
An organization specially empowered to
regulate activities of its members
AMFI is not a self-regulatory
organization
33. 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
34. 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
35. 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.
36. Investors Obligations /
Complaint Redressal
Investors 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
39. Who can invest in Mutual Funds in India?
Residents :
Resident Individuals
Indian Companies
Indian Trusts/ Charitable Institutions
Banks / NBFCs
Insurance Companies
Provident funds
40. Who can invest in Mutual Funds in India?
Non Residents :
NRIs
OCBs
Foreign Entities:
FIIs registered with SEBI
41. 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”
42. Types of Distribution Channels:
1.Individual Agents
2. Distribution Companies
3. Banks / NBFCs
4. Direct Marketing ( By the Sales Officers)
5.Current Distribution patterns - Non UTI funds
rely on the 2&3 above.
44. 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.
45. Agents’ Commission
•The initial issue expense cap of 6% includes brokerage as well.
•All SEBI regulated open ended funds are authorized to charge
exit /entry loads to cover the funds’ distribution expenses.
• A no load fund includes these expenses as a part of the regular
management & marketing expenses.
• SEBI prescribes a cap on all the total expenses that can be charged
to a scheme each year. Any additional expense will have to be borne
by the AMC
46. 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 client
to invest.
• Personalized post sales service.
47. SEBI's 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.
48. Appointment of Agents
The key terms of agreement are as follows:
• The agent will provide a copy of the abridged OD to the customer
and will make available for inspection a copy of the OD and sell at
price currently in effect.
• The agent will execute all the transactions on behalf of the
customer who will not have any recourse to the agent in case of an
errors/problems/quality of investment.
• The agent must make the customer know that the funds’ units are
not endorsed by him and do not constitute his obligation.
•Agent responsible at his expense to ensure compliance with
applicable regulation in each jurisdiction.
•Fund not responsible for any losses claims or damages.
49. Key terms of Agreement………….2
• The agent will offer/sell/purchase unit at the current public offering
price.
• All orders become effective only upon acceptance and confirmation
by the fund.
• The agent is responsible to ensure compliance with the applicable
regulations in each transaction he deals in and the fund is not
responsible for any breach by agent in this regard.
50. AMFI Code of Ethics
AMFI 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 funds
3. Adequate disclosure standards
4. 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.
51. 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.