What is a Mutual Fund? Explain the different types of schemes of the
mutual funds.
Answer
A M
trust) that pools the savings of a number of investors called as unit holders who
share a common goal. The money thus collected is invested by the professional fund
managers in different types of securities depending upon the objectives of the
scheme. The return/ loss on investment is shared by the unit holders in proportion to
the number of units owned by them.
A mutual fund is an ideal investment vehicle in today's complex financial scenario.
Price changes in the financial assets are driven by so many events (including events
taking place in other countries). An ordinary investor is unlikely to have thethat cater to needs of investors of
different age-groups, having different financial positions, risk tolerance and return
expectations. Each scheme has a pre-determined objective. On the basis of their
structure, all mutual fund schemes can be divided into 2 categories: (1) Open-ended
(2) Close-ended.
• An open-ended scheme is one that is available to subscription all through the
year. These schemes do not have a fixed maturity. Investors can conveniently
buy and sell units at net asset value based price at any time. The key feature
of this type of scheme is liquidity.
• A close-ended scheme has a stipulated maturity period. The fund is open for
subscription for a limited period only. Generally, units of such schemes are
quoted on the stock exchanges. This is the exit route for those who want to
go out and entry route for those who want to invest after the subscription
period is over.
The other types of schemes are:
(1) Tax saving schemes,
(2) Sector specific schemes, and
(3) Index-based schemes.
Tax saving schemes is meant for those who want to save income tax under section
80C of Income-tax Act, 1961. SBI Magnum Taxgain, Fidelity tax Advantage etc are
the examples of such schemes in India.
Sector specific schemes invest only in the equity shares of a particular sector, i.e.,
IT fund, pharma fund, fast moving consumer goods (FMCG) fund, etc.
Index fund invests their funds in the equity shares included in an index like BSE’s
Sensex, NSE's Nifty or some other Index. Examples are: HDFC Index Sensex, UTI
Nifty Index Franklin India Index BSE Sensex.Explain the regulation of the mutual funds by the SEBI.
Answer
REGULATION OF MUTUAL FUNDS IN INDIA
In India, mutual funds are regulated by SEBI. Money market mutual funds are also
regulated by RBI. Important regulations of SEBI are as follows:Mutual Fund Structure
•
MF must be in the form of trust. It should be registered with SEBI.•
MF is established by a sponsor having a sound record and experience.•
company is appointed as trustee, its Board of Directors will constitute the
Board of Trustees for the trust. 2/3 members of the Board of Trustees should
be independent persons, not related to sponsors.
The sponsor should appoint a trustee-company or a Board of Trustees. If a•
(AMC) as investment manager of the MF trust. Sponsor should hold at least
40 per cent of net worth of the AMC. The minimum net worth of the AMC
should be Rs. 10 crore. The AMC should be registered with SEBI.
The sponsor/Board of Trustees should appoint (i) a SEBI registered custodian for
safe custody of the assets of the MF, and (ii) a registrar to handle the registry work
of the unit holders.
Other Important Regulations
The sponsor/Board of trustees should appoint an Asset Management company•
and a copy should be filed with SEBI along with filing fees.
Before launching any scheme, it should be approved by the Board of Trustees•
order to enable the investors to make informed judgment.
The offer document shall contain such disclosures which are adequate in•
contain any incorrect or false statement.
The advertisements issued by the MF should not be misleading. It should not•
debt instruments issued by a single issuer which are rated below investment
grade by any credit agency (approved by SEBI).
A mutual fund scheme should not invest more than 15 per cent of its NAV in•
company's voting right shares.
No MF under its all schemes should own more than 10 per cent of any•
exceed 6 per cent of funds raised under that scheme. Such expenses should
be amortized on weekly basis over the life of the scheme.
The recurring expenses are subject to following limits:
The initial issue expenses in respect of any close-ended scheme may not•
First Rs. 100 crore : 2.50 per cent of weekly of average net assets.•
Next Rs. 300 crore : 2.25 per cent of weekly average net assets.•
Next Rs. 300 crore : 2 per cent of weekly average net assets.•
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On the balance : 1.75 per cent of weekly average net assets.•
funds can invest up to $ 7 Billion per year in overseas listed securities )
A MF may invest up to $ 300 million in overseas listed securities. (all the Mutual•
followed as accounting year. Scheme wise annual report should be sent to the
investors. A copy should be sent to SEBI within 6 months of end of financial year.Explain, how to establish a Mutual fund.
Answer
(1) MF must be in the form of trust. It should be registered with SEBI.(2) MF is established by a sponsor having a sound record and experience.
(3) The sponsor should appoint a trustee-company or a Board of Trustees. If a
company is appointed as trustee, its Board of Directors will constitute the
Board of Trustees for the trust. 2/3 members of the Board of Trustees should
be independent persons, not related to sponsors.
(4) The sponsor/Board of trustees should appoint an Asset Management company
(AMC) as investment manager of the MF trust. Sponsor should hold at least
40 per cent of net worth of the AMC. The minimum net worth of the AMC
should be Rs. 10 crore. The AMC should be registered with SEBI.
(5) The sponsor/Board of Trustees should appoint (i) a SEBI registered custodian
for safe custody of the assets of the MF, and (ii) a registrar to handle the
registry work of the unit holders.(i) who can be appointed as Asset Management company (AMC)?
(ii) Write the conditions to be fulfilled by an AMC.
(iii) What are the obligations of AMC? (i) A company, incorporated under companies Act, 1956, registered with SEBI to
work as an asset management company can be appointed as Asset Management
company to manage the investments of a Mutual fund.
(ii) Conditions to be fulfilled:
(i) Minimum net worth Rs. 10 Crores
(ii) good reputation
(iii) Directors have the knowledge about capital market
(iv) At least 50% directors should be independent
(v) Chairman of the AMC should not be the trustee of the MF trust.
(iii) Obligation:
(i) Due care of investment
(ii) Follow code of conduct prescribed by SEBI
(iii) To see that (a) SEBI regulations regarding MFs and (b) the provisions
regarding the trust deed are not violated
(iv) Responsible for the omissions and commissions of the employees
(v) Quarterly report regarding the investment activities to sponsors
(vi) Should declare the investments made by its key-personnel.Write short note on the role of Mutual funds in the financial market
Mutual funds are important segments of the financial market. They channelize the
savings and invest in the financial market, mainly in capital market and money
market. Ordinary investor has neither skill nor time to recognize the investment
opportunity and act immediately. MFs, on their behalf, make use of investment
opportunities to earn attractive returns. They provide a good balance of risk and
return with different options to suit the various needs of various investors.
Mutual Funds and Household Savings
Savings is encouraged when it finds safe and proper channels for investments. MFs
have encouraged savings by providing such channels. In the absence of MFs, the
household savings would have been at low levels.
Mutual Funds and Capital Market
MFs constitute one of important segments of capital market. A major part of savings
of ordinary households will not come to capital market except through mutual funds.
Mutual funds aim to strike a balance between risk and return, and give best of both
to its unit holders. They also provide the unit holders with liquidity. The result is that
a large portion of household savings come to capital markets through mutual funds.
With large funds under their management, MFs strongly support the capital market.
Their action, based on intelligent decisions, reduce the volatility of capital markets.
Many times, the actions of MFs have helped in controlling the unwarranted crash in
the capital market. On other occasions, their actions have controlled unreasonable
increase in prices. Corporate debt market, in India, survives mainly due to MFs. They
are major investors of debt issues particularly of long term maturities.
Mutual Funds and Money Market
Money market is an important part of financial market. It plays a crucial role in
maintaining the equilibrium between the short-term demand and supply of money. It
is a market for short-term money. Such schemes invest in safe highly liquid
instruments included in commercial papers. certificates of deposits and government
securities.
Money market MF schemes generally provide high returns and highest safety to the
ordinary investors. Money market MF schemes are active players of the money
market. They channallize the idle short funds, particularly of corporate world, to
those who require such funds. This process helps those who have idle funds to earn
some income without taking any risk and with surety that whenever they will need
their funds, they will get (generally in maximum three hours of time) the same.
Short-term/emergency requirements of various firms are met by such MFs.
Participation of such. MFs provide a boost to money market and help in controlling
the volatility.
Mutual Funds and Corporate Finance
Corporates require huge amount of funds for their workings, MFs provide these
funds some times directly by way of participation in public offers and private
placements and other times indirectly by being important part of capital and money
markets.
What are the rights and obligations under Mutual Fund Regulations?
Answer
Rights of a Mutual Fund Investor
1. Receive unit certificates or statements of accounts confirming your title
within 30 days from the date of closure of the subscription under open-end
schemes or within 6 weeks from the date of request for a unit certificate
received by the Mutual Fund;
2. Receive information about the investment policies, investment objectives,
financial position and general affairs of the scheme (Every investor has the
right to receive a copy of the annual statement);
3. Receive dividend within 30 days
redemption or repurchase proceeds within 10 days from the date of
redemption or repurchase;
4. Vote in accordance with the Regulations to:
a. change the Asset Management Company; and
b. wind up the schemes;
5. To receive communication from the Trustee about change in the fundamental
attributes of any scheme or any other changes which would modify the
scheme and affect the interest of the investors and to have option to exit at
prevailing Net Asset Value without any exit load in such cases;
6. Inspect the documents of the Mutual Funds specified in the scheme's offer
document;
7. Investors have proportionate right in the beneficial ownership of the scheme's
assets as well as any dividend or income declared under the scheme; and
8. To inspect major documents i.e. material contracts, Memorandum of
Association and Articles of Association (M.A. & A.A) of the AMC, Offer
document etc.
Obligations of a Mutual Fund Investor
(i) To study the offer document carefully before investing, and
(ii) To study the various reports sent by the Mutual Fund from time to
time.Explain briefly the advantages of investing in mutual funds.
Advantages of investing in a mutual fund :
(1) Professionally managed portfolio
(2) Diversified portfolio
(3) Low cost of investment
(4) Liquidity
(5) Transparency
(6) Simplicity
Explain the disadvantages of investing in Mutual funds.
Answer
(i) The investors in the Mutual funds depend on the skill, experience and
analysis of professional managers. The returns on their investments
depend on the fund manager's skill and judgment. Investors invest their
money in the Mutual funds on the basis of the faith they have in some
Mutual Fund Manager. If that Manager leaves the Mutual Fund, the
investors have to depend on the skill and judgment of some other
Manager.
(ii) Mutual funds incur various expenses – fund manager fees/salary and
bonus, administration charges, advisory charges, custodian expenses,
registration expenses, trustee expenses, accounting and auditing fees,
publicity expenses etc. The investors have to share the burden of
these expenses.
(iii) Some times the small investors suffer on account of actions of large
investors. Suppose a large investor opts for redemption, the Mutual
fund has to redeem its holding immediately – this may be the case of
forced sale and the redemption proceeds may be less than the market
level. This brings down the NAV and the end result is that the small
investor suffers.
(iv) Some times the Mutual funds hold large amount of cash. This reduces
the return to the investors.
Write a short note on Fund of Funds with reference to the Mutual funds.
FOF is a mutual fund that invests in other mutual fund schemes, rather than investing
in shares and debt instruments. In today's world, when a fairly large number of
mutual fund schemes are available in the finance market, an ordinary investor, who is
short of expertise as well time, gets confused and is unable to choose the scheme
that suits him. In this situation, he may opt for FOF. Kotak Flexi Fund of Funds is an
example of this. The concept has not been popular in India, mainly on account of tax. The tax benefits available for ordinary Mutual Funds are not available forangles
Fund of Funds. The Association of Mutual Funds in India has approached the
government to re-look in this matter.1 of their declaration and receive theProper accounts should be maintained and get audited. Financial year should beUTUAL fund is an organization (in India this organization must be in the form of a
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