Mutual Fund

What is mutual fund

A mutual fund is a pool of money

collected from investors and is
invested according
to stated investment objectives.
Mutual fund investors are like
shareholders and they own the
fund.
What it means

Investors

Receive
Contribute dividend/capital
money appreciation

Trust
(pool of money)
Receive
Invest in interest,
dividend or
markets
capital growth
Markets
(volatile, has fluctuation)
The MF Cycle
 History of Mutual Funds

Birthplace of Mutual Funds – USA

History in India:
1964-1987 (Phase I) – Growth of Unit Trust of India
1987-1993 (Phase II) – Entry of Public Sector Funds
1993-1996 (Phase III) – Emergence of Private Funds
1996-1999 (Phase IV) – Growth and SEBI Regulation
1999-2004 (Phase V) – Emergence of large & uniform Industry
2004 onwards (Phase VI) – Consolidation and Growth.
 Types of Funds
Existing funds New Gen Mutual Funds
Open-ended (OEF) Fund of Fund
 Close-ended (CEF) Commodity fund
Growth, Income and Hybrid Real Estate fund
Equity, Debt and Balance Asset Allocation fund
Load & No-Load Exchange-traded fund
Guaranteed & Non- Derivative fund
Guaranteed
Tax-exempt & Non tax-
exempt

© 2005 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

 Risk-Return Hierarchy

Retur
n Sectoral
funds
Equity
funds
Index
funds
Balanced
funds
Debt
Funds
Gilt
funds
ST debt
funds
Liquid
funds Risk
 OEF & CEF
OEF CEF

Continuous sale & Sale of units only during

purchase by the fund NFO No subscription
Subscription is not after closure of NFO
mandatory Exit window –
Fund size changes periodically repurchase of
everyday units by the fund
No secondary market Listing – secondary
market trading of units, like
trading stocks
Daily NAV (calc & Weekly NAV (cal.weekly
disclosure) but disclosure daily).
 Offer Document

• Offer Document (OD) is the most important source of information for

investors.

• Abridged version of the OD is called as Key Information Memorandum

(KIM).

• Investors are required to read and understand the offer document.

• 3 years track record of investors’ complaints and redressal should be

disclosed in the OD.

•The OD and KIM are documents of a mutual fund and there will be no
information about other mutual funds in an OD. There will be no
comparisons are data on performance of other mutual funds.
MF Constituents

SEBI

Sponsor

Trustee Trust

AMC

Custodian & Banker R&T Agent Distributor

Depository
Securities Investor
Dealer /
Broker
Securities
Markets
 Sponsor

• Promoter of the mutual fund

• Creates a Trust under Indian Trusts Act, 1882 and
registers it with Office of Public Trustee
• Appoints Board of trustees/trustee company
• Creates AMC under Indian Companies Act, 1956
• Fulfills necessary formalities and applies to SEBI
for registration of the Trust as a Mutual Fund.
 Sponsor Criteria

• Min 5 years track record in financial services

• Bank, corporate or an FI
• Profit making in at least 3 out of past 5 years,
including the previous year
• Positive Net Worth in last 5 years
• At least 40% of the capital of the AMC
• Net worth in the immediately preceding year more
than the capital contribution to the AMC.
 Trustee

• Appointed by sponsor with SEBI approval

• Have Registered ownership of investments
• Formed either as Board of Trustees or Trustee
Company
• Power to appoints all other constituents
• Appoint AMC through the ‘Investment Management
Agreement’ and delegate powers.
 Trustee Criteria

• Minimum number of trustees is 4

– 2/3rd should be independent trustees i.e. no

connection of profit (what so ever) with the
sponsor
• Meet at least 4 times in a year to review functioning of AMC
• Trustees hold the unit-holders money in fiduciary capacity
• All major decisions need trustee approval
• Right to seek regular information and take remedial action.
AMC

• Required to be registered with SEBI

• Appointed as Investment Manager of the mutual fund
• Appointed by the trustees via an Investment Management Agreement
• Responsible for operational aspects of the mutual fund
• Net Worth of at least Rs.10 crore at all times
• At least 1/2 of the board members must be independent
• Mostly, structured as a private limited company where Sponsor and
associates hold capital
• Quarterly reporting to Trustees.
Advantages of Mutual Funds

Portfolio diversification
Professional management
Reduction / diversification of risk
Reduction of transaction cost
Liquidity
Convenience and flexibility
 Disadvantages

No control over costs

No tailor-made portfolio
Managing a portfolio of funds

© 2005 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

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