Evolution and Regulatory Framework ofMutual Funds
K.Suresh Babu
Vice President – Treasury
Reliance Capital Ltd.
Sunday, July 26, 2009 at SIES Management Institute
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Session 1 Agenda for Discussion
Mutual Fund and Basic Terms Evolution of Mutual Funds Growth of Mutual Fund Industry
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What is Mutual Fund ? A Fund
Established in the form of a Trust;
To raise monies thru the sale of units to the public under one or more schemes
For investing in securities including money market/ gold/ gold related instruments or real estates.
Pools the savings of a number of investors who share a common financial goal.
Investment of pooled savings by Fund Managers of a Mutual Fund in capital market instruments such as shares, debentures and other securities.
Sharing of income earned through investment and capital appreciation realised by unit holders in proportion to the number of units owned by them.
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Why Mutual Funds ?
Operates on the principle of ‘strength in numbers’ Small investments within the affordable reach and with a wide choice of schemes Spreads the investment risks by diversified portfolio Professionally managed basket of securities at a relatively low cost Easy liquidity by redemption at NAV based prices Transparency & Flexibility Well regulated Tax benefits
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Investing in Mutual FundsRisk Return Matrix
Higher Risk Higher Risk
Lower Return Higher Return
Equity
Lower Risk Lower Risk
Lower Return Higher Return
Bank FDs/
Postal Savings Mutual Funds
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How Mutual Fund is formed ?
Constituted in the form of a Trust
Instrument of Trust in the form of a Trust Deed
Registered under the Indian Registration Act, 1908
Executed by the Sponsor in favour of the Trustee indicated in the Trust Deed
Trust Deed contains clauses as per the Regulations that are necessary for safeguarding the interests of unit holders
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Mutual Fund – The Basic Terms
Unit
The interest of the unit holder in a Scheme which consists of each unit representing one undivided share in the assets of a Scheme
Unit holder
A person holding units in a Scheme of a Mutual Fund
Net Asset Value (NAV) per unit
Market value of the securities held by the Scheme on any particular date.
Value of all assets minus value of liabilities
(Unit Capital plus reserves) divided by no. of units
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Mutual Fund – The Basic Terms
Sale Price / Offer Price
Price payable for investment in a Scheme
Repurchase Price / Redemption Price
Price at which units are repurchased by Mutual Fund
Repurchase Load / Back-end Load / Exit Load
Charge collected by a Scheme when it buys back the units from the unit holders
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Types of Mutual Fund Schemes By Tenor
Open ended: offers units without specifying any duration for redemption.
Close ended: where the period of maturity is specified
By Asset class
Equity, Debt or Income, Balanced Schemes, Gold Exchange Traded Funds, Money Market Funds
By Position philosophy
Sector Specific (min 65%), Fixed Maturity Schemes
By Geography
Country Funds, Offshore Funds
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Types of Mutual Fund Schemes Capital Protected Schemes
Protects the capital invested thru orientation of its portfolio structure. Close ended and no repurchase before the maturity.
Index Fund
Invests in securities in the same proportion as an index of securities
Fund of Funds
Invests primarily in other schemes of the same MF or other MFs
Real Estate Mutual Fund Scheme
Invests directly or indirectly in real estate assets or other permissible assets. Close ended Scheme and listed.
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Schemes of a Mutual Fund
Plans: Dividend & Growth
Options: Payout & Reinvestment
Sub-options: Yearly, Half yearly, Quarterly, Monthly, Weekly, Daily
Sub-plans: Systematic Investment Plan
Systematic Withdrawal Plan
Systematic Transfer Plan
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Mutual Fund Options for Dividend
Growth Dividend Div-Reinvst
No.of Units 1,000 1,000 1,000
Face Value Rs.10 Rs.10 Rs.10
NAV Rs.15 Rs.15 Rs.15
Div.Declared per unit --- Rs. 5 Rs. 5
New NAV Rs.15 Rs.10 Rs.10
No.of Units (Ex-Div) 1,000 1,000 1,500
Value of Units Rs.15,000 Rs.10,000 Rs.15,000
Div. Declared --- Rs. 5,000 ---
Total Rs.15,000 Rs.15,000 Rs.15,000
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Evolution of Mutual Funds
The first investment trust, Eendragt Maakt Magt (in English it means ‘Unity Creates Strength’) setup by a Dutch merchant in 1774 followed by more investment trusts.
The Foreign and Colonial Govt Trust formed in London in 1868.
The Massachusetts Investors Trust formed in US in 1924.
The Great Depression in 1929 lead to the birth of powerful regulators with enactment of legislations
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Growth in the US Mutual Fund Industry
The $ 500 million AUM in 1940 rose to $ 17 billion by 1960
With new investment exposures and higher returns than banks, the AUM had reached $ 95 billion by the end of 1970
With more maturity in the financial markets, the AUM had reached $ 7.4 trillion in 2004 with a retail investor base of 91 million.
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Evolution of MF industry in India1964-1987 - Birth of UTI
UTI gave birth to MF industry in December 1963 with the enactment of UTI Act and under RBI’s control and later delinked in 1978 to IDBI
The first IPO, US 64 in July 1964 mobilised 126,000 applications for Rs.17.40 crores and later AUM crossed Rs.1000 crores in 1991
The second scheme, ULIP launched in 1971
UTI Mastershare, India’s first true mutual fund scheme launched in 1986 and total AUM reached Rs.6,700 crores at the end of 1988.
AUM of UTI reaches Rs.6,700 crores in 1988
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Evolution of MF industry in India1987-1993 – Entry of Public Sector
PSU banks and insurers allowed to float mutual funds in 1987
SBI was first to launch mutual fund in Nov 1987 followed by Canbank in Dec 1987, LIC in 1989 and Indian Bank in 1990
The AUM of UTI crossed Rs.38,247 crores and PSU funds Rs.8,757 crores by 1993.
Investors shifting away from bank deposits to mutual funds by allocating > 6% of the savings to fund investments
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Evolution of MF industry in India1993-1996 – Entry of Private Sector
The entry of private sector and foreign players allowed in 1993. Kothari Pioneer was the first private fund house to start operations followed by 11 others.
Morgan Stanley was the first foreign player in 1994.
SEBI was setup in 1993 to regulate the MF industry with SEBI Mutual Fund Regulations came in force in 1996.
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Evolution of MF industry in India1996-2003 – Regulated Markets
Deregulation and liberalisation introduced competition and provided impetus to the growth of the industry
33 Mutual Funds with AUM of Rs.121,805 crores; UTI with Rs.44,541 crores AUM ahead of others.
UTI bifurcated in 2002 and came under SEBI purview.
SEBI tightened regulations, banned agents from giving commissions to investors, made AMFI registration compulsory for new agents.
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Evolution of MF industry in India2003-2004 – Growth Phase
UTI bifurcation in February 2003
Assured return schemes (US 64) with AUM of Rs.29,835 crores into specified undertaking of UTI under the Administrator controlled by Govt.
UTI Mutual Fund with AUM of Rs.76,000 crores comes under the purview of SEBI
AUM reaches Rs.153,108 crores by September 2004 with 29 funds and 421 schemes.
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Evolution of MF industry in IndiaJuly 1993 - June 2008 (15 years growth)
Beginning of the era of privatisation in July 1993
11 times growth in AUMs from Rs.47,000 crores to Rs.530,000 crores in 15 years
Top 5 of 35 MF houses account for more than half of the MF industry’s AUM.
Four of the Top 5 fund houses are privately owned.
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Unit holding Pattern of Mutual Fund Industry – March 2009
Category No.of Investors Net Assets (Rs.crs)
Individuals 460,75,763 (96%) 155,283 (37%)
NRIs 9,71,430 ( 2%) 22,821 ( 5%)
FIIs 146 (<1%) 4,983 (1 %)
Corporates/ Institutions 5,75,938 (1%) 236,233 (56%)
Total 476,23,277 419,321
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AUM - June 2009
Average AUM as at the end of June 2009 increased to Rs.670,937 crs
An increase of Rs.106,185 crs (18.80%) over Rs.564,752 crs as at June 2008.
Of the total AUM of Rs.670,937 crs as at the end of June 2009,
Bank sponsored (4) Rs.113,386 crs
Institutional (1) Rs. 32,415 crs.
Private Sector (30) Rs.525,136 crs.
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Status of AUM - June 2009
No.of Schemes AAUM (Rs.crs)
Income/ Debt oriented 485 488,653
Growth/ Equity oriented 341 162,242
Balanced Schemes 37 15,732
Exchange Traded Fund 18 1,636
Fund of Funds 10 2,673
Total 891 670,937
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Session 2Agenda for Discussion
Constituents of Mutual Fund Pricing & Regulations Investment Restrictions & Valuation Norms Accounting Policies & Standards
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Mutual Fund Constituents
Sponsors Trustees Asset Management Company Agents/ Distributors Custodians/ Depositories Fund Accountants Registrar & Transfer Agents The Regulator - SEBI
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Sponsors of Mutual Fund
Initiates the idea to setup a mutual fund and establishes the mutual fund
Should have a sound track record and general reputation of fairness and integrity in all business transactions
Contributes at least 40% of the networth of the AMC
Should not have been guilty of fraud or has not been convicted of an offence involving moral turpitude or has not been found guilty of any economic offence
Has a net worth of not less than Rs.10 crs
Appoints the AMC, Trustee and Custodian
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Trustees
Holds the property of the mutual fund in trust for the benefits of the unit holders
Persons of integrity not convicted of any economic offence or violation of security laws
Internal regulators to protect the interests of unit holders.
Appointed by Sponsors with SEBI’s prior approval
Minimum 4 trustees with two-thirds be independent.
No Director/ Employee of a MF shall be eligible to be appointed as a Trustee of any other MF.
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Rights and Obligations of the Trustees
Accountable as the Custodian of the funds/ property of MF and hold them in trust for the unit holders’ benefit
Appoints AMC and enters into an IMA for making investments Appoints Custodian and enters into a Custodian Agreement, appoints Key
Personnel, Compliance Officer, R&T and designs internal control mechanism. General and Specific Due diligence before the launch of any scheme by MF Reviews quarterly all transactions of the MF, service contracts of AMC,
investors complaints/ redressal mechanism and reports half yearly to SEBI Right to obtain information from the AMC and to terminate the appointment of
AMC Appoints different auditors for MF and AMC.
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Asset Management Company
Investment Manager – Responsible to Trustees Sound track record and reputation for fairness and integrity with a minimum net
worth of Rs.10 crores One-half to be ‘independent directors’ No AMC/ Directors/ Officers of AMC shall be eligible to be appointed as a
Trustee of any MF. Appointment can be terminated by majority of unit holders or by Trustees Handles operational matters from launching schemes to managing them to
interacting with investors Ensures that AMC Board has at least 50% directors who are not associated with
the Sponsor or Trustees. Directors of AMC shall not hold the office of Director of another AMC Submits information / documents to the Trustees periodically
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Obligations of the Asset Management Company
Shall maintain proper books of account, records for each Scheme.
Shall follow the accounting policies and standards and provide details of distribution and accumulation of income accruing to the unit holders in a fair manner.
Shall submit quarterly report on the functioning of MF Schemes to the Trustees.
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Responsibilities of the Asset Management Company
Management of schemes as per the IMA
Due Diligence in all investment decisions
Responsible for regulatory compliance and submits quarterly reports to Trustees, SEBI on fund activities
Charges AMC fee as per Regulations
Appoints key personnel / R&T and set up systems for investment management, accounting, internal audit etc.
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Code of Conduct by AMC and Trustees
Shall maintain high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgement.
Not to organise, operate, manage the portfolio of Schemes in the interests of sponsors, AMC and Trustees.
Disseminate to all unit holders of adquate, accurate, timely information about the investment policies, objectives, financial position and general affairs of the Scheme.
Avoid excessive concentration of business with broking firms and avoid conflicts of interest in managing the Scheme affairs.
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Custodian & Fund Administrators
Provide post-trading and custodial services for schemes
Keep securities and other instruments belonging to the Scheme in safe custody
Ensure the benefits due to the holdings of the MF are recovered
Be responsible for loss of or damage to the securities due to negligence
Accounting policies and standards prescribed by SEBI
NPA provisioning
Scheme Accounting, NAV computation and Audit
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R & T Agent Accepting and processing investors’ applications for issue and redemption of
units on behalf of fund
Handle communications with investors
Perform data entry services
Despatch account statements
Processing redemption and dividend pay-out
Payment of brokerage to agents
Systems facilities and back up of investors’ records
Responsible for customer service
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Agents & Distributors
Appointed by AMC
May act on behalf of different Funds
Independent individuals are appointed as Agents
Should be AMFI registered
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Regulators
SEBI
AMFI
RBI
Ministry of Finance
Company Law Board
Stock Exchanges for listed schemes
Office of the Public Trustee
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Pricing - Net Asset Value
Indicates the Market Value of the assets of a Scheme minus its liabilities
Indicates the Price at which units are subscribed/ sold and are repurchased/ redeemed
Calculated for each Plan or Scheme of the Fund every day including the close ended Schemes (other than ELSS) and published in 2 daily newspapers.
Value of Net Assets divided by the number of units outstanding in each Scheme/ Plan on the valuation date.
Updating the on the AMFI website by 10 am the following business day
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Load Structure
Exit Loads (Entry Loads since waived for all Mutual Fund Schemes effective August 1, 2009)
Redemption Price not lower than 93% of NAV
Of the Exit Load charged to investors, a maximum of 1% of the redemption proceeds shall be maintained in a separate account which can be used by the AMC to pay commission to the distributors and meet marketing / selling expenses. Any balance shall be credited to the Schemes immediately.
Adequate disclosure in the OD / SID/ SAI and modifications prospectively
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Regulations - Advertisements
Shall not be misleading or contain false and incorrect information
Shall disclose the investment objectives of each Scheme, names of the Settlor, Trustee and make a statement that all MF investments are subject to market risks and there can be no assurance that the fund’s objectives will be achieved.
Shall disclose prominently the risk factors
Shall be in conformity with the Advt code specified and submitted to SEBI within 7 days from the date of issue.
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Regulations – Borrowing Powers Shall not borrow except to meet temporary liquidity needs of MFs for
repurchase, redemption of units or payment of interest/ dividend to the unit holders.
Shall not borrow > 20% of net assets of the Scheme and duration shall not exceed 6 months.
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Regulations – Expenses of Scheme
Clear identification and appropriation of expenses in individual Schemes. AMC advisory fee at :
1.25% of weekly average net assets outstanding for the Scheme in each year for the net assets upto Rs.100 crs and 1% of the excess over Rs.100 crs.0.75% of the weekly average net assets in case of Index Fund Scheme
Recurring expenses at 2.50% for the first Rs.100 crs of average weekly net assets; 2.25% for next Rs.300 crs., 2% on the next Rs.300 crs. And 1.75% on the balance of the assets.1.5% for Index Funds.Expenses Chargeable:Marketing / Selling expenses; brokerage, R&T/ Audit/ Custodian/ Trustee fees; Cost of statutory advertisements; Cost of providing statement of accounts, cheques for redemption/ dividend warrants.
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Regulatory RestrictionsClose-ended Schemes
Disclosure of portfolio of debt oriented close ended and interval Schemes/ Plans on a monthly basis within 3 days
Prohibition of disclosure of indicative portfolio/ yields in debt/ fixed income Schemes.
Restrictions on investments in/ purchase of debt and money market securities with maturity of upto 91 days only effective May 09.
Mandatory listing of units of all close ended Schemes (except ELSS) launched after December 12, 2008. Such units shall not be repurchased before the maturity.
Repurchase price of units of close ended Schemes prior to December 12, 2008 not lower than 95% of the NAV.
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Investment Restrictions
Investments in accordance with the investment objectives of the relevant MF Scheme
Inter-Scheme transfer of investments done at prevailing market price, without charging AMC fee and as per the investment objectives of the relevant Scheme.
Buy/ Sell securities on delivery basis and get transferred in relevant MF Scheme.
No investment in unlisted / listed security-privately placed of group company of the Sponsor.
Restrictions on lending in call money market
Derivatives for hedging and portfolio rebalancing as per norms
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Investment Restrictions Not invest more than 15% of NAV in rated debt and 10% in unrated debt issued
by a single issuer.
No MF under all Schemes own >10% of any company’s paid up capital.
Not to invest >10% of the Scheme’s NAV in equity of any company, except in case of index fund/ sector specific fund.
Aggregate value of illiquid securities not to exceed 15% of the total assets of the Scheme
No MF shall invest > 30% of its net assets in MMIs of an Issuer except for investments in GSec, TBs and CBLOs.
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Regulations on Investments in ADRs/ GDRs/ Foreign Securities
Overall ceiling limit of USD 7 bln.
Individual MF sub-ceiling 10% of net assets managed as on March 31 of each relevant year subject to a maximum of USD 300 mln. Per MF.
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Investment Restrictions - NFOs
No Scheme shall park more than 15% of the net assets in STDs of all banks together. (Can be raised to 20% with Trustees’ approval)
No Scheme shall park more than 10% of the net assets in STDs with anyone scheduled bank.
Tenor not to exceed 91 days.
No funds of a Scheme shall be parked in STDs of a bank which has invested in that Scheme.
No AMC charges on parking of funds in STDs in case of liquid/ debt oriented Schemes.
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Investment Valuation Norms
Value of the traded securities shall be at the last quoted closing price on any Exchange on the valuation day or day not more than 30 days before.
Non-traded securities shall be valued in good-faith by AMC. All expenses and incomes accrued upto the valuation date shall be
considered for computation of NAV. Valuation of Debt instruments and G-Sec on Y-to-M basis on the prevailing
market rates with appropriate discount for lower liquidity, if any. The value of Rights Shares, until their trading, shall be calculated on the basis
of the number of rights divided by original shares multiplied by the difference between ex and cum Rights offer.
All investments shall be shown at market value with necessary provision for exclusion of unrealised gain arising out of appreciation of investment which cannot be distributed to unit holders.
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Session 3 Agenda for Discussion
Investors Rights and Information Investors Service Standards The Road Ahead for Mutual Fund Industry
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Investors Rights – Initial/ Regular Subscription
Right to get refund of application money within 6 weeks from closure of subscription if MF fails to receive the minimum subscription.
Entitled for interest at 15% pa from the expiry of 6 weeks from closure of subscription for failure to get refund
15% interest for delayed redemptions of more than 10 working days. AMC liable for penalty for failure to despatch redemption proceeds within stipulated time.
Unclaimed redemptions and dividend at the prevailing NAV up to 3-year period
Uniform cut-off timings for applicable NAV
Minimum investors limit of 20 and 25% of the AUM
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Investor’s Rights
Right to obtain any information and inspect material documents Right to receive Scheme portfolio before the expiry of one month from the close
of each half year unless published in local newspapers Right to receive the Schemewise Annual Report of a MF or abridged summary
within 4 months from accounting closure. Right to approve change in Fundamental Attributes of the Scheme Right to wind up a Scheme and terminate the AMC with 75% voting If NAV of a Scheme differs by >1% due to non-recording of transactions,
whereby unit holders are allotted/ charged at higher/ lower price for sale/ purchase of their units, the AMC shall pay the difference in amount to/ by the Scheme.
Investor Complaints Redressal Mechanism
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Investor’s Right to Information
Easy availability of Scheme Information Document (SID)/ Statement of Additional Information (SAI) to all Distributors and confirmation thereof by Trustees to SEBI
Updation of SID / KIM within 3 months from the end of the financial year for the Schemes launched in the I-HY and within 3 months of the end of subsequent financial year for Schemes launched in II-HY.
Updation of SID once a year thereafter.
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What to look at the Offer Document Main features of the Scheme, Risk Factors
Recurring expenses charged, Load structure
Sponsor’s track record
Work experience of Fund Manager and Key Personnel of AMC
Performance of other Schemes launched by the MF in the past
Pending litigations and penalties imposed.
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Investor’s Right to InformationAccount Statements
Statement for every transaction within 10 working days Statement if specifically requested within 5 working days Statement along with Portfolio Statement or Annual Report for no transactions in
a year Statement for SIP/ STP/ SWP transactions once in a quarter within 10 working
days Right to get Statement of accounts within 6 weeks from the closure of initial
subscription in NFO. Allotment of units and despatch of account statement within 30 days in respect
of initial/ regular subscription.
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Investors Service Standards - Dividend DistributionUniform Standards
Dividend quantum and record date be fixed by the Trustees and public notice within 1 day
Dividend subject to availability of distributable surplus and NAV adjusted to the extent of dividend distributed at the close of record date
Record date shall be 5 calendar days from the notice
Notice not compulsory for schemes having frequency of dividend distribution from daily upto monthly dividend
Despatch the dividend warrants within 30 days of the declaration.
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Investor Service Standards - How to Invest
Prevention of Money Laundering & Know Your Customer (KYC)
KYC compliance mandatory for subscriptions of Rs.50,000/- above
Mandatory to provide IT PAN along with a self attested copy of PAN card
Bank account details mandatory
Email communication mandate
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Uniform Cut off timings & Applicable NAV for Liquid Schemes Purchases
Closing NAV of the day immediately preceding the day of receipt of application for applications received upto12 noon and funds available for utilisation on the same day.
Closing NAV of the day immediately preceding the next business day for applications received after 12 noon and funds available for utilisation on the same day.
Closing NAV of the day immediately preceding the day on which the funds are available for utilisation for applications received irrespective of time where funds are not available for utilisation on the day of application
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Uniform Cut off timings & Applicable NAV for Liquid Schemes Repurchases
Closing NAV of the day immediately preceding the next business day for applications received upto 3 pm
Closing NAV of the next business day for applications received after 3 pm
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Uniform Cut off timings & Applicable NAV for other than Liquid Schemes Purchases
Closing NAV of the day of receipt of applications for applications received upto 3 pm with a local cheque/ DD payable at the place where it is received.
Closing NAV of the next business day for applications received after 3 pm with a local cheque/ DD payable at the place where it is received.
Closing NAV of the day on which the cheque/ DD is credited for applications received with outstation cheques/ DDs not payable at the place where it is received.
Closing NAV of the day on which the funds are available for utilisation in respect of purchase of units in Income/ Debt oriented Schemes (other than Liquid Fund Schemes) with amount equal to or more than Rs.1 cr.
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Uniform Cut off timings & Applicable NAV for other than Liquid Schemes Repurchases
Closing NAV of the day of receipt of application for applications received upto 3 pm.
Closing NAV of the next business day for applications received after 3 pm.
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Tax Benefits
Income of MF exempt from IT Sec 10(23D)
MF will receive income without TDS
Exemption to open-ended equity MFs from paying distribution tax on dividends distributed
Exemption of income in the hands of unit holders Sec.10(35). No TDS on dividends distributed by MF.
Units not liable for Wealth-tax and Gift-tax
Specific tax laws for long term / short term capital gains, securities transaction tax, non-residents, foreign companies
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Tax Benefits
100% IT exemption on all Mutual Fund Dividends.
Equity Funds: STCG taxed at 15%
LTCG not applicable
Debt Funds: STCG is taxed as per slabs applicable
LTCG at 10% without indexation and 20% with indexation
Open-ended Funds with equity exposure of > 65% are exempt from payment of Dividend Tax for a period of 3 years from 1999-2000.
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How to know the performance of a MF Scheme Service standards, Professional management of AMC Watch the NAVs of all MFs Half yearly performance, returns/ yields in last 6 months/ 1 year/ 3 years/ 5
years and since inception of Schemes. Percentage of expenses of total assets in Scheme. Research reports on Schemes’ performance, Ranking of various Schemes in
terms of their performance. Comparison of performance with other MF Schemes in same category and
those of benchmarks like BSE Sensitive Index, S&P CNX Nifty etc. Portfolio details of Scheme and details on illiquid securities, investments in
unrated securities, NPAs etc.
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The Road Ahead
MF industry growing at 37.87% over the past 5 years
Worldwide MF assets were estimated to be around $26 trillion at the end of 2007, whereas Indian assets stood at $150 billion.
Domestic MF assets as a % of GDP stand at around 10%, while it is around 73% in the US.
While 33% US population invests in Mutual Funds, the figure for India is barely 3%
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The Road Ahead
A well regulated environment with liberalised and proactive economic reforms make mutual funds powerful wealth creation vehicles.
Potential retail market remaining untapped:
Retail investors held nine times more in bank deposits than in mutual funds barely beating inflation.
Given the fact that 95% of India’s population has not invested in equities so far, it would be a great time for the first time investors to build equity portfolio
India with a billion+ people has 350 million bank account holders but of those barely 30 million people have MF accounts and less than 13 million hold demat accounts.
Thank youFor your Time, Attention and Interest
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