Introduction to Mutual Funds - Benefits and Regulatory Structure
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A mutual fund is the money pooled in by a large number of investors and offers an opportunity to invest in a diversified and professionally managed basket of securities at a relatively lower cost. Read for more details.
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Introduction to Mutual Funds - Benefits and Regulatory Structure
- 1. Introduction to Mutual Funds, its benefits and Regulatory structure An Investor Education & Awareness Initiative By Franklin Templeton Mutual Fund
- 2. • Pools of Investment • Each Pool of money is called a Mutual Fund Scheme • Mutual funds assist in Earning Income or Building Wealth • Utilise the knowledge and experience of a professional fund management team • Benefit from the economies of scale Mutual Funds 1
- 3. • Easy to understand • To earn income or build wealth • Offer choice of various categories of schemes • Access to ready investment portfolio and past track record • For regular and disciplined investing • Investment professionals Why Should You Invest In Mutual Funds? 2
- 4. • Status of a unit holder • Unit certificates or statements of accounts • Share in gains or loss in value of the mutual fund scheme What Do You Get As A Mutual Fund Investor? 3
- 5. • Diversification • Professional management • Lower entry level • Economies of scale • Flexible and Innovative Plans for Investors • Liquidity • Transparency • Well regulated structure Benefits Of Investing In Mutual Funds 4
- 6. • Securities and Exchange Board of India (SEBI) is the Regulatory Authority • SEBI aims to protect the interest of the investors. It has framed SEBI (Mutual Funds) Regulations, 1996 Regulatory Structure Of Mutual Funds In India 5
- 7. “Mutual fund” means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets. - Source: Sebi.gov.in SEBI (Mutual Funds) Regulations, 1996 6
- 8. • Mutual fund is established in the form of a Trust • Mutual funds raise money through sale of units to the public • Mutual fund schemes can invest in various securities Key Features Of A Mutual Fund As Per Its Defined Structure 7
- 9. Key Constituents Of A Mutual Fund 8 SPONSORS TRUST Asset Management Company
- 10. • Sponsors • Trust • Asset Management Company (AMC) Key Constituents Of A Mutual Fund (Contd.) 9
- 11. • An Industry Body created to promote the interest of mutual funds in India • All AMCs in India are members of AMFI • Maintain high professional and ethical standard • AMFI has set up ‘AMFI Code of Ethics’ • AMFI Guidelines & Norms for Intermediaries (AGNI) • AMFI recommends and promotes best business practices and code of conduct • AMFI interacts with SEBI and represents the Indian mutual fund industry Association Of Mutual Funds In India (AMFI) 10
- 12. • Custodian • Registrar and Transfer Agents (RTA) • Auditors • Fund Accountants • Mutual Fund Distributors • Collection Bankers Other Service Providers In Mutual Fund Industry 11
- 13. Key Points To Remember 12 • Mutual funds are established in the form of a Trust • Mutual funds are collective investment vehicles • Mutual funds assist investors in earning income and building their wealth • Mutual fund investors get a proportionate share in a mutual fund scheme and are called unit holders • Any Profit or Loss made by a mutual fund scheme is proportionately shared by the unit holders
- 14. Some Key Take Away Points! 13 • Mutual funds offer several benefits • SEBI is the regulatory authority for the Indian mutual fund industry • SEBI aims to protect the interest of the investors • Sponsors are the individuals or entity who initiate the process of formation of a mutual fund • Trustees of the mutual fund appoint the AMC • AMFI is an Industry Body created to promote the interest of the Mutual Fund Industry
- 15. Lets Do A Short Quiz! 14 we now invite you to test your learning by taking up this simple quiz
- 16. 1) The Primary Role of a Mutual Fund is to____________________. A. Regulate the capital markets B. Assist investors in earning income or building their wealth C. Collect money D. None of the above 2) Mutual Funds are established in the form of a Trust A. True B. False 3) Mutual Fund investors are called____________. A. Regulators B. Fund Managers C. Unit Holders D. Sponsors Quick Quiz 15
- 17. 4) ________________approach SEBI for registration of a mutual fund. A. Sponsors B. AMCs C. Trust D. Unit Holders 5) An Industry Body created to promote the interest of the Mutual Fund Industry is called______________ A. AMC B. SEBI C. Custodian D. AMFI Quick Quiz 16
- 18. 17 Thank You For Participating!
- 19. 18 Mutual Fund Investments Are Subject To Market Risks, Read All Scheme Related Documents Carefully.
- 20. © 2014 Franklin Templeton Investments. All rights reserved. Franklin Templeton Asset Management (India) Pvt. Ltd. Indiabulls Finance Centre, Tower 2, 12th and 13th floor, Senapati Bapat Marg, Elphinstone (W) Mumbai 400013 Tel (91-22) 6751 9100 Fax (91-22) 6639 1281 www.franklintempletonindia.com
Editor's Notes
- INTRODUCTION (Many investors at times are absolutely fascinated about investing in mutual funds. But, in our opinion mere fascination is not enough. Investing wisely and with the right insight helps one make the right investment decision. If you do not have the right perspective, mutual fund investing could be a challenge. If you are not cautious, then you could easily go down the wrong path, reaching an unwanted destination. Hence, it is imperative that you understand the various aspects about mutual fund investments. And from this session we start guiding you on various aspects that you should know when it comes to mutual fund investing)
- (So let’s start with understanding the term called…) Mutual Funds A mutual fund is a legal vehicle that enables a collective group of individuals to: (Create various) Pools of Investment(…by pooling their surplus money and collectively invest in stocks, bonds and other securities for a common investment objective.) Each Pool of money is called a Mutual Fund Scheme(…which may have different investment objectives based on investor need and preference) Mutual funds assist in Earning Income or Building Wealth (…this is a primary investment objective which is achieved by participating in opportunities available in various securities and markets) Utilise the knowledge and experience of a professional fund management team(…a capacity that individual investors may not possess) Benefit from the economies of scale(…which is facilitated by large size of the pool, and which may not be available on an individual basis) (So investing in a mutual fund is like an investment made by a collective group of individuals, who may have a lesser amount of money at their disposal, than say a group of friends put together. To simply put, a mutual fund is the money pooled in by a large number of investors and offers an opportunity to invest in a diversified and professionally managed basket of securities at a relatively lower cost.)
- Why Should You Invest in Mutual Funds? Easy to understand (…If you are aware of the broader asset class where mutual funds invest your money, you could easily understand your mutual fund scheme) To earn income or build wealth (…Mutual funds are a simple tool, that can help you easily allocate your money across various asset classes like Equity, Debt or Gold, based on your objective or planned allocation. Mutual funds offer various avenues to invest in - regular income generating debt instruments or build wealth through investing in equity instruments) Offer choice of various categories of schemes (Mutual Funds offer you various category of schemes under each asset class, to suit your investment objective and varying needs for various financial goals) Access to ready investment portfolio and past track record (…As mutual funds invest in and build a portfolio of securities, you as an investor can know where your money is invested. The past performance track record of the mutual fund scheme can help you judge and compare the mutual fund scheme vis-à-vis its benchmark index and peers, before investing) For regular and disciplined investing(…Systematic Investment Plan (SIP) offered by Mutual Funds facilitates in investing regularly. Via SIPs you can commit a portion of your ‘money saved’, every month or quarter, towards your financial goals. It inculcates financial discipline and may even help you in long term wealth creation) Investment professionals (…and it is worth mentioning that through Mutual Funds you can easily render the services of investment professionals at a relatively low cost, irrespective of the size of your investment portfolio. As many of you may not be well-equipped to closely track the developments in the markets and draw its impact on your portfolio holdings; the professional fund manager will do the same for you)
- What do you get as a Mutual Fund Investor? Status of a unit holder(…When the investor invests money in a mutual fund scheme, in return, he receives “Units” of the scheme. You as a mutual fund investor will hold units of the respective mutual fund schemes. The number of units held by you basically represents the fraction of the fund that you hold, based on your investment amount) Unit certificates or statements of accounts(…As a mutual fund unit holder, you receive unit certificates or statements of accounts confirming your title in the respective mutual fund scheme. You can store it as a proof of your investment and refer to it for details like folio no, balance units, holding status etc. for future transactions) Share in gains or loss in value of the mutual fund scheme (…Any increase or decrease in market price of the underlying instruments impacts the asset value of your mutual fund scheme and so the value of your mutual fund investments. The post expense profits due to appreciation in value or loss due to depreciation in value is passed on to the unit holders in the proportion of the number of units held by each investor)
- (So what are the…) Benefits of Investing in Mutual Funds Diversification(…By putting your money into just a few stocks, you can subject yourself to considerable risk. Any major decline in a single stock can have an adverse impact on your investments, damaging the returns of your portfolio. A mutual fund, by investing in several stocks, tries to overcome the risk of investing in just 3-4 stocks. By holding, say 25 to 30 stocks, the mutual fund avoids the danger of one rotten apple spoiling the whole portfolio. A diversified portfolio of a mutual fund may fall to a lesser extent, even if a few stocks fall dramatically. Also, a mutual fund’s NAV may certainly drop; but mutual funds tend to not fall as freely or as easily as stocks) Professional management(…Active portfolio management requires not only sound investment sense, but also considerable time and skill. By investing in a mutual fund, you as an investor do not have to track the prospects and potential of the companies in the mutual fund portfolio. This is already being done for you, by skilled professionals appointed by the mutual fund houses. These are the professionals whose job is to continuously research and monitor these companies, and take appropriate measures for the benefit of the investors) Lower entry level(…There are very few quality stocks today that investors can buy with Rs 5,000 in hand. This is especially true when valuations are expensive. Sometimes, with as much as Rs 5,000 you can buy stocks of just a single company. In the case of mutual funds, the minimum investment amount required is as low as Rs 500. This is especially encouraging for investors who start small and at the same time take exposure to the fund’s portfolio of 25-30 stocks) Economies of scale(…By buying a handful of stocks, the stock investors lose out on economies of scale. This directly impacts the profitability of their portfolio. If you as an investor buy or sell actively in stocks, it may impact your profitability. On the other hand, in case of mutual funds, frequent voluminous purchases/sales results in proportionately lower trading costs than individuals, thus translating into relatively better investment performance) Flexible and Innovative Plans for Investors(…Mutual Funds offer various innovative plans like Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs), Systematic Withdrawal Plans (SWPs), Asset Allocation Plans, Trigger plans etc. As these plans can help you systematically invest or withdraw funds according to your needs and convenience, they can be effective as a tool for you to efficiently manage your portfolio from a financial planning perspective too) Liquidity(…The best feature your investments can offer is the access to your money when you need it the most. Mutual funds can offer the much required liquidity while investing. In case of an open-ended fund, you can buy/sell at that day's NAV by simply approaching the fund house directly, or by approaching your mutual fund distributor, or even by transacting online - and you can get your money back generally within 3-4 working days) Transparency(…You may not be always comfortable when it comes to handing over your money to someone else. You need to know what is happening with your money. In the case of Mutual Funds, your money is handed over to investment professionals, whose job is to keep track of developments in the markets and look out for the best opportunities for you. Moreover the monthly factsheets published by mutual funds can help you keep regular track and know the facts about the scheme in which you have invested. It provides you the holding details of the scheme in which you have invested your money, % of exposure in top ten companies, the ratings of debt instrument in your portfolio, fund managers’ name, performance data etc.Apart from this, the NAVs are disclosed by fund houses may help you know the current value of your investments) Well regulatedstructure(…All Mutual Funds are registered and monitored bythe regulatory body,SEBI. Mutual Funds have to function as per the regulations designed to protect the interests of investors. So you need not worry much about your investment in mutual funds being in safe hands) [So on account of the advantages which mutual funds offer, they have emerged as an immensely popular investment avenue, especially for retail investors, and for investors looking to build wealth over time]
- [Now let us see, what is the…] Regulatory Structure of Mutual Funds in India Securities and Exchange Board of India (SEBI)is the Regulatory Authority(…for the Indian Mutual fund industry) SEBI aims to protect the interest of the investors (…and in order to do so, SEBI has consistently introduced several regulatory measures) It has framed SEBI (Mutual Funds) Regulations, 1996(…which is the principal regulation for the Mutual fund industry in India. As the regulator of the Indian capital market, SEBI had framed its first mutual fund regulations in 1993. In these guidelines SEBI expressed the need for creating a compliance mechanism for the functioning of the mutual fund industry. These regulations were revised and enlarged subsequently in 1996.)
- SEBI (Mutual Funds) Regulations, 1996 To understand the legal structure of mutual funds in India, let us take a look at how the SEBI (Mutual Funds) Regulations, 1996 has defined mutual funds: SEBI (Mutual Funds) Regulations, 1996defines “mutual fund” as: “Mutual fund” means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets. - Source: Sebi.gov.in
- So what are the Key Features of a Mutual Fund as per its Defined Structure Mutual fund is established in the form of a Trust Mutual funds raise money through sale of units to the public(…or a section of the public under one or more schemes) Mutual fund schemes can invest in various securities(…They can invest in various securities like equity, debt, money market instruments and gold or gold related instruments as well as real estate assets.
- Now let’s learn what are the… Key Constituents of a Mutual Fund When we talk about the constituents of a mutual fund, the Indian mutual fund industry follows a 3-tier structure as shown here: [Let’s understand each of these in detail:]
- Key Constituents of a Mutual Fund (Contd.) Sponsors(…Sponsors are the individuals or entity who initiate the process of formation of a mutual fund. For registration of a mutual fund, the Sponsor approaches SEBI. Not everyone can start a mutual fund. SEBI grants permission to start a mutual fund only to a person of integrity, having sound track record and reputation, having significant experience in the financial sector, a certain minimum net worth etc. Sponsors are the main people behind the mutual fund formation.) Trust Once SEBI is satisfied with the credentials and eligibility of the proposed Sponsors, the Sponsors then establish a Trust under the Indian Trusts Act, 1882. Trustees are the individuals/entity authorized to act on behalf of the Trust. Contracts are entered into in the name of the Trustees. Once the Trust is created, it is registered with SEBI, after which, this Trust is known as the mutual fund. Trustees have a significant role in ensuring that the mutual fund complies with all the regulations and protects the interest of the investors. Asset Management Company (AMC) The Trustees then appoint the AMC, which is established as a legal entity, to manage the investor’s (unit holder’s) money. The AMC handles the day to day operations and money management. In return for this money management on behalf of the mutual fund, the AMC is paid a fee for the services provided. This fee is borne by the investors and is deducted from the money being managed. Also in all its investment decisions, AMCs are required to exercise due diligence and care.
- Before we move ahead, let us tell you about an important body in the mutual fund industry Association of Mutual Funds in India (AMFI) AMFI is An Industry Body created to promote the interest of mutual funds in India All AMCs in India are members of AMFI Its role is to Maintain high professional and ethical standard in all areas of operations of the mutual fund industry. To maintain ethical standards, AMFI has set up ‘AMFI Code of Ethics’ which is to be followed by all AMCs. AMFI has also set AMFI Guidelines & Norms for Intermediaries (AGNI) which are the guidelines and norms for the mutual fund distributors So AMFI recommends and promotes best business practices and code of conduct which need to be followed by members and entities engaged in the mutual fund activity in India AMFI interacts with SEBI and represents the Indian mutual fund industry to SEBI, Government, RBI and other bodies on all matters pertaining to the Indian mutual fund industry
- Also there are some… Other Service Providers in Mutual Fund Industry Custodian(…Custodian is an entity appointed by the mutual fund to hold the custody of the assets of a mutual fund scheme. The custodian needs to accept and give delivery of securities for every purchase and sale transaction by a mutual fund scheme.) Registrar and Transfer Agents (RTA) (…RTA is an entity registered with SEBI, and is appointed by the AMCs for handling the documentation and maintaining the records of the mutual fund investors. While many AMCs appoint RTA to handle transactions, some AMCs handle this activity in-house.) Auditors(…The accounts of mutual fund schemes need to be regularly audited by independent auditors. As per guidelines, the auditors appointed for audit of the scheme accounts need to be different from the auditor of the AMC.) Fund Accountants(…AMCs need to publish the Net Asset Value (NAV) of all mutual fund schemes on a regular basis. This role of calculating the NAV of all mutual fund schemes is performed by the fund accountants.) Mutual Fund Distributors(…AMFI registered Mutual Fund Distributors play a role in selling suitable mutual fund schemes to the investors. To be eligible for distribution activity, Mutual fund distributors need to pass the prescribed certification test and get registered with AMFI.) Collection Bankers(…AMCs appoint collection bankers for accepting application forms for the schemes)
- (So far we have learned about mutual fund and its benefits, its constituents and the regulatory framework set for the mutual fund industry, which is aimed for the protection of investor interest. Now let us quickly wrap-up this session by reviewing some important points about mutual funds, that you must keep in mind) Key Points to Remember Mutual funds are established in the form of a Trust Mutual funds are collective investment vehicles(…they mobilize money from investors and invest in various securities and asset classes) Mutual funds assist investors in earning income and building their wealth (…by investing in various asset classes like equity, debt, gold etc) (…based on the invested money) Mutual fund investors get a proportionate share in a mutual fund scheme and are called unit holders Any Profit or Loss made by a mutual fund scheme is proportionately shared by the unit holders
- Mutual funds offer several benefits(…like Diversification, Economies of Scale, Professional Management, Transparency, Liquidity etc) SEBI is the regulatory authority for the Indian mutual fund industry SEBI aims to protect the interest of the investors (…and has framed the principal regulation for the mutual fund industry in India) Sponsors are the individuals or entity who initiate the process of formation of a mutual fund Trustees of the mutual fund appoint the AMC(…to handle the day to day operations and money management) AMFI is an Industry Body created to promote the interest of the Mutual Fund Industry(…The role of AMFI is to Maintain high professional and ethical standard in all areas of operations of the mutual fund industry) [Hope our session today has provided you with a good insight about mutual funds, the constituents behind its functioning and its regulatory structure]
- And to end our learning exercisetoday ,