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Transcript of MF-Detail
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THE CONCEPT AND ROLE
OF MUTUAL FUNDS
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A common pool of money into which investors placetheir contributions to be invested in accordance witha stated objective.
The ownership of the fund is joint or mutual
The fund belongs to all investors
Ownership is proportionate to contribution made byone
Concept of a Mutual Fund
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Dilemma investor faces in Equity investmentsdirectly
Buying potential Stocks ?
Market timing ?
Discipline ?
Expert recommendation ?
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Not as difficult as researching individual stocks
Portfolio Diversification
Professional Management Reduction / Diversification of Risk
Liquidity
Flexibility & Convenience
Reduction in Transaction cost
Safety of regulated environment
Advantages of Investing through
Mutual Funds over Direct Investments
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Disadvantages of Investing through
Mutual Funds over Direct Investments
No Control over Cost
No Tailor-made Portfolios
Managing a Portfolio Funds
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Phase 1 (1964-87) : Growth of UTI
Phase 2 (1987-93) : Entry of PSU Banks and FinancialInstitutions MFs
Phase 3 (1993-96) : Emergence of
Private Sector Mutual Funds
Joint Ventures between
Foreign Funds & Indian Promoters
resulting in innovations in- Investment Management
Techniques, - Investor ServicesTechniques
History of Mutual Funds
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Phase 4 (1996-99) : SEBI Regulations forInvestors Protection
Phase 5 (1999-2004) : UTI Act 1963 repealed in Feb2003
UTI Mutual Fund becomes SEBIcompliant
Assured Return Schemes of UTItaken over by a specialundertaking administered
by GOI Emergence oflarge & uniform inds.
Phase 6 (2004 onwards): Consolidation & Growth
35 AMC in 2008
History of Mutual Funds
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Growth of AUM
31 3 -1999 68,472 CRORES
31-03-2001 90587 CRORES
31-03-2004 139616 CRORES
30-11-2008 4,02,000 CRORES
31-12-2012 7,95,000 CRORES
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Top Mutual Fund Companies in In India inAUM
HDFC MutualFund
101,393 3.70
RelianceMutual Fund
90,636 4.99
ICICIPrudentialMutual Fund
81,394 6.55
Birla Sun LifeMutual Fund
76,890 5.47
UTI MutualFund
70,638 -0.20
SBI MutualFund
53,311 4.62
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Types of Mutual Fund
Mutual Funds can be classified as:
Close ended / Open-ended Funds
Load Fund / No-Load Funds : entry / front & exit /back load
Tax-exempt / Non-Tax exempt Funds
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Example on Loads and Returns
Date Action NAV (Rs) Entry Load Exit Load
1/1/1999
31/12/1999
Entry
Exit
11.00
12.00
2%
-
-
1%
ROI with Loads
Amount invested = 11 + 0.22 = 11.22 Rs.
Amount received = 12 0.12 = 11.88 Rs.
Gain = 0.66 Rs.ROI = (0.66 x 100) /11.22 = 5.88%
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Contingent Deferred Sales Charge
(CDSC) Charges varying with the holding period it is called
Contingent Deferred Sales Charge (CDSC) and it mayvary as shown under.
Redemption during the first five years from the date of
purchaseFirst Year Maximum CDSC 4%
Second Year Maximum CDSC 3%
Third Year Maximum CDSC 2%
Fourth Year Maximum CDSC 1%
Fifth Year Nil
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Types of Funds
Money Market Funds
Gilt Funds
Debt Funds
Equity Funds Hybrid Funds
ETF
Commodity
Real estate
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Invest in securities of less than 1 year maturity
High liquidity & safety of principal
Low risk and low returns
Money Market Instruments :
Treasury Bills (T-Bills By RBI for 3,6,12 Months at discount price)Commercial Papers (promissory notes that are unsecured and issuedby companies for 1 to 270 days)
Current Return in MMMF is 8.5 %
Money Market Funds
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Gilt Funds
Invest only in Government Securities of over 1 yearmaturity
Risk and return low but higher than that of MMF
No default risk but carry interest rate risk
Fund values drop when interest rates go up & risewhen interest rates go down
Returns from 11 % to 14 %
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Debt Funds & Types
Invest in Corporate Bonds and Government
Securities
Risk higher than that of Gilt Funds
Aims at regular income distribution and not at capitalappreciation
Types of Debt Funds:- Diversified Debt Funds
-Assured return Debt Funds
- Fixed Term Plan Series
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Equity Funds & Types
Invest in Equity and Equity related instruments High risk and aim at Capital appreciation
Types of Equity Funds Growth Funds
Value Funds Specialty Funds:
Sector Funds,
Foreign Securities Funds,
Mid-Cap or Small-Cap Equity Funds,
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Diversified Equity Funds
ELSS Funds
Equity Index Funds
Equity Income or Dividend Yield Fund
Equity Funds & Types
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Types of Hybrid Funds
Balanced Funds: Seek to provide regularincome & Capitalappreciation in different
proportion
Asset Allocation Funds: Flexible asset allocationbetween Debt, Equity &
MM
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Other Funds
Commodity Funds : Invest in commoditystocks
Real Estate Funds : Invest in stocksof real estatecompanies
Exchange Traded Funds :Trade like asingle stock on
exchange Fund of Funds : Invest in other Mutual
Fund Schemes
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Risk Return Hierarchy of Different
Funds
Risk High
Risk Low MMMF
Gilt Funds
Debt Funds
Balanced Funds
Index Funds
Diversified Equity Funds
Sector Funds
Low return High return
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Investments plans
SIP
SWP
STP
VIP
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FUND STRUCTURE AND
CONSTITUTENTS
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Mutual Fund Structure
Mutual Funds in U.S are setup as investment companies
Mutual Funds in U.K are either Unit Trusts (Trust) orInvestment Trust (Companies)
Mutual Funds are Public Trusts under the Indian TrustsAct, 1882
Mutual Fund is a 3 tier structure: Sponsor, Trustee and
AMC
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Mutual Funds invest in Capital market instruments
on behalf of investors
All gains and losses of funds are shared by the unitholders
MF is a pass-through structure and it has taximplications
Mutual Fund Structure
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Constituents of a Mutual Fund
1. Sponsor
2. Trustees
3. Asset Management Company
4. Custodian / Depository Participant
5. R & T Agent
6. Distributors7. Banker
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Role of Sponsor
Sponsor is a person who sets up a Mutual Fund
Sponsor settles the Trust and executes Trust Deed
Sponsor contributes to the initial capital of the Trust
Sponsor appoints the Board of Trustees
Sponsor appoints Asset Management Company
Sponsor contributes minimum 40% of net worth of AMC
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Who can be a Sponsor?
Criteria of a Sponsor are
Minimum 5 years track record
History of positive After Tax Profit for 3 out of 5 years including
fifth year
Net Worth more than Contribution for AMC
Fit and Proper person
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Board of Trustees & Role
Trustees appointed by the Sponsor with SEBIapproval
At least two third Trustees must be Independent
The Trustees have a FIDUCIARY responsibility
towards unit holders Trustees not liable for acts done ingood faith and if
they have exercised adequate due diligence
Trustees oversee the functioning of AMC
Trustees approve each MF scheme floated by AMC
The investments in MFs are held by the Trustees
Trustees receive fees for their services
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Who can be a Trustee
Eligibility Conditions :
Person of high repute and integrity
Not guilty of moral turpitude
Not convicted for economic offence under securitieslaws
Not a part of AMC eg. Director, Employee or Officer
of AMC
One can be Trustee of two MFs if approved by
Board of Trustees of both the Mutual Funds.
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Asset Management Company
Constituted as a Company under the Indian Companies
Act
Minimum Net worth of Rs. 10 crores for AMC
Minimum contribution of sponsor: 40% of share capital of
AMC
At least 50% of Directors of AMC to be independent
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AMC can do only the following businesses
Asset Management Services
Portfolio Management Services
Portfolio Advisory Services
AMC can be terminated/changed with the consent of
Majority of Trustees or
At least 75% majority of Unit holders
Asset Management Company
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Role of AMC
AMC is the Fund Manager for managing Mutual FundAssets
AMC floats different MF schemes
AMC accountable to the Trustees
AMC charges Asset Management Fees subject to ceiling
prescribed by SEBI.
Asset Management Agreement between AMC andTrustee
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Obligations of AMC
Limit of 5% of aggregate purchase and sales ofSecurities under all its scheme per broker perquarter
As far as possible AMC to avoid services of itssponsor.
All Security transactions with a Sponsor and hisassociates to be disclosed
Disclosure of transactions with a company whichhas invested more than 5% of NAV in any scheme
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Custodian / Depository Participant
Custodian / DP: Appointed by Board of Trustees
Keep record & account of Securities / Investments
Collects benefits under Securities Sponsor & Custodian / DP cannot be the same entity
Registered with SEBI
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Registrar & Transfer Agent Registrar & Transfer Agent:
Issues, redeems, transfers units of MF schemes
Keeps Unit Holders A/cs upto date
Registered with SEBI
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OFFER DOCUMENT
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Offer Document & KIM
Offer Document A Legal document
Issued by AMC on behalf of Trustees
Offer Document describes the Product/Scheme
Very important document for prospective investor
First time investors must read OD before deciding to invest For Close Ended Fund issued at the time of launching a scheme
For Open Ended Fund revised every 2 years
KIM A abridged version of Offer Document
A part of the Application Form To be in the format as prescribed by SEBI
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Offer Document
Offer Document prepared and issued by AMC Offer Document to be approved by Trustees
Offer Document filed with SEBI with fees of
Rs. 25000/-
Modifications if any advised by SEBI within 21 days of itsfiling
SEBI neither approves nor disapproves an OD
Offer Document valid for 6 months for launching of
scheme from the date of receipt of by AMC of SEBI letter
containing observations. Thereafter fresh OD to be filled
with SEBI
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Contents of Offer Document
Summary information on Cover page: Names of Trustees, AMC, Scheme, Period of Opening /Closing, Face value of unit , SEBI Disclaimer
Risk factors: Standard & Scheme Specific
Legal & Regulatory Compliance Certificate
Financial information on Schemes & Expenses for last 3years
Constitution of MF its Sponsors, Trustees, AMC & theirfunctions
Investment objectives & policies Management of Funds: Names of Fund Manager
Offer related information: Minimum Subscription amount
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Pricing of a Fund Unit
SEBI Regulations on pricing of Mutual Fund units
For Open Ended Funds
Repurchase price not lower than 93% of NAV
Sale price cannot be more than 107% of NAV Difference between the repurchase and sale price of a
Unit cannot be more than 7%
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Charges in a MF
Mutual Funds can recover two types of Expensesa. Initial issue expenses
b. Recurring Expenses
Initial Issue Expenses effective April 04 2006 allowed up to 6% for Close Ended
Funds only
Close Ended Funds cannot charge Entry Loads
Open Ended Funds can recover initial expenses through
Entry Load
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Maximum Recurring Expenses
Average WeeklyAssets
For EquityFunds
For BondFunds
For first Rs.100crs
2.50% 2.25%
For next Rs.300crs
2.25% 2.00%
For next Rs.300crs 2.0% 1.75%
On the BalanceAverage WeeklyAssets
1.75% 1.50%
Recurring Expenses cannot exceed the followingregulatory limits
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Asset Management Fees
AMC charges Asset Management Fees Limits on AMC Fees as per SEBI Regulations:
1.25% of the 1st Rs. 100 crs of weekly Average Net Assets
1.00% of the weekly Average Net Assets in excess of Rs. 100crs
AMC may charge additional 1% of weekly Average Net Assetsfor No Load Funds
Asset Management Fees are not in addition to but a part ofRecurring Expenses
Asset Management fees are usually lower for Debt Fundsas compared to Equity Funds and are disclosed in OD
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Amortization of Initial Expenses
Close Ended Funds do not charge initial expenses of fund butamortize the same over a period of years
Initial Expenses amortized on a weekly basis over the period ofthe scheme. e.g for a 5 yr scheme, amortized over 260 weeks
Investor existing before expiry of period of scheme will becharged unrecovered initial issue expenses
Conversion of close ended funds into open ended funds allowed
only after recovery of unrecovered initial expenses
Un-amortized portion added for NAV calculation as Other Assetbut no AMC fee on this amount
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Investment in unlisted shares of companies Close Ended Fund : Not more than 10% of Net Assets
Open Ended Fund: Not more than 5% of Net Assets
Investments in Equity shares under all schemes of a MF Not more than 10% of Paid up capital of a company
Investment by a Mutual Fund in ADRs / GDRs allowed Investment by a M.F. in Equities of listed overseas
companies having share holding of at least 10% allowed
Overall limit of U.S. $ 5 Billion for such overseas investmentfor entire M.F. industry
Overall limit per M.F. Not exceeding 10% of Net Assets subject to maximum USD 300
Million
Regulatory Restrictions on Investments
by Funds
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A Mutual fund can invest maximum 5% of Net Assets under all its schemes
into different fund schemes of the same AMC or of any otherAMC except Fund of Funds Scheme
The above limit does not apply to Fund of Funds Securities are to be bought or sold only on delivery
basis No short selling allowed
Securities to be bought and sold for a relevant
scheme. Purchases/Sales cannot be aggregated and allocated
later
Regulatory Restrictions on Investments
by Funds
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MFs can lend securities under the SEBI approvedStock Lending scheme
A Mutual Fund can invest only in Marketable
Securities
A Mutual Fund cannot invest in unlisted securities ofSponsor or Sponsor Group Companies
A Mutual Fund can invest in listed securities of thesponsor / Sponsor Group Companies upto 25% ofNet Assets of the Fund
Regulatory Restrictions on Investments
by Funds
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A Mutual fund can transfer Securities from one scheme toanother scheme at market prices and on spot deliverybasis
Inter-scheme transfers allowed if objectives of both theschemes are same
A Mutual fund can park its money in deposits ofScheduled Commercial Banks pending deployment intoregular investments
Borrowing by MFs restricted upto 20% of Net Assets for
maximum 6 months for paying dividend/redeeming units Record of investment decisions to be maintained.
A FOF cant invest in other FOF scheme
Regulatory Restrictions on Investments
by Funds
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Expense Ratio / Income Ratio
Method of Fund Evaluation
Funds can be evaluated based on Expense ratio andIncome ratio
Expense Ratio: It is the ratio of total expenses to AverageNet Assets of the fund. This ratio is important for evaluating Bond Funds
Expenses do not include brokerage paid since it iscapitalized and therefore expenses may be understated
Income Ratio = Net Investment IncomeNet Assets
Income ratio is important for evaluating Bond Funds
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Portfolio Turn Over Rate
Method of Fund Evaluation
Another Measure of Fund Evaluation is Portfolio TurnOver Rate
Portfolio Turnover Rate = Total Sales & Purchases
Net Assets of the Fund.
Higher Turn Over Rate indicates More churning of Portfolio
More transaction costs
Portfolio turn over ratio relevant for actively managedfunds
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LEGAL & REGULATORY
FRAMEWORKS
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Regulators in India
SEBI is Capital Market Regulator with legal powers SEBI regulates Mutual Funds.
All Mutual Funds to be registered with SEBI
RBI is Money Market Regulator
SEBI is regulator for Liquid Funds Investing in MM instruments MOF supervisory body for RBI & SEBI
Security Appellate Tribunal setup in 2003 to hear appeal against SEBI
decisions
Registrar of Companies(ROC) ensures compliance by AMC & byTrustee Company with the Indian Companies Act 1956
ROC supervised by Department of Company Affairs (DCA)
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Regulators in India
DCA frames and modifies regulations relating to thecompanies
DCA is a part of Company Law Board
CLB is a part of Ministry of Law and Justice Company Law Board carries out judicial proceedings
for offences under Companies Act
Mutual Fund Trustees accountable to Public Trustees
Public Trustee reports to Charity Commissioner
UTI set up under UTI Act 1963
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Self Regulatory Organisations
SROs are second tier in the regulatory structure
SRO is an association of Market Participants
Approval of SRO given by MOF
All Stock Exchanges are SROs and are supervised by
SEBI Close Ended Funds listed on SE observe listing
Agreement Requirements of SEs
AMFI was incorporated in 1995 and is not an SRO
Role of AMFI To promote interest of MFs & Unit Holders
To set ethical, commercial & professional standards
To increase public awareness of MF industry
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Investors Rights & Obligations
Right of proportionate beneficial ownership
Right to timely service
Right to information eg. NAV Calculation, Unit Pricing
Right to approve changes in fundamental attributes of
the scheme
Right to wind up a close ended scheme with 75%
majority of unit holders Right to terminate the AMC with 75% majority of unit
holders
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Investor Rights to Services
Investor to be informed about change in fundamentalattributes of the scheme eg. from No Load fund to Loadfund or change in Pricing norms for purchase/sale of Units
Open ended Fund must reopen within 30 days after theOffer period
Nomination facility allowed
Redemption proceeds to be sent to investor within 10working days otherwise Penal interest at the rate specifiedby SEBI for the full period
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Investor Rights to Services
Annual Holding statements and Transaction
statements to be sent to investors
Dividend Warrants to be dispatched within 30 days ofdividend declaration by MF
Mandatory portfolio disclosure for half-yearly period
to unit holders within 1 month
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Investors right to inspect documents such as
Trust deed,
AMC Agreement,
Balance Sheets of MF Schemes and
Balance Sheet of AMC
Investor Rights to Services
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Legal limitation to Investor Rights
Investors cant sue the Trust
Investor can sue the Trustee
Sponsor of fund not responsible for shortfall in nonassured scheme
Prospective investors cant sue the trustees/AMC/Custodians
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