Professional Documents
Culture Documents
Definition
A trust that pools the savings of investors who share a common
financial goal is known as mutual fund. The money collected is
then invested in financial instruments such as shares, debentures
and other securities the income and capital appreciation realized
are shared by its unit holders in proportion to the number of units
owned by them.
Investment in securities are spread over a wide cross section of
industries and sectors reducing the risk of the portfolio.
Mutual funds are mobilizers of saving of the small investors in
instruments like stock and money market instruments.
Mutual funds are corporation that accept money from investors
and use this money to buy stocks, long term bonds, short term
debt instruments issued by businesses or Govt.
Features
Mobilizing small savings: mutual funds mobilize funds by selling
their own shares known as units. This gives the benefit of
convenience and satisfaction of owning shares in many industries.
Mutual fund invest in various securities and pass on the returns to
the investors.
Investment Avenue: the basic characteristic of a mutual fund is that
it provides an ideal avenue for investment for investors and enables
them to earn a reasonable return with better liquidity. It offers
investors a proportionate claim on the portfolio of assets that
fluctuate in value.
Professional management: mutual fund provides investors with the
benefit of professional and expert management of their funds.
Mutual fund employees professionals/experts who manage the
investment portfolios efficiently and profitably. Investors are
relieved from the responsibility of following the markets on a
regular basis.
Close ended scheme: when a units of a scheme liquidated only after the
expiry of a specified period it is known as close ended fund. Such funds have
fixed capitalization and remain with the mutual fund manager, units of close
ended schemes are traded on stock exchange in the secondary market. The
price is determined on the basis of supply and demand. There are 2 prices for
such funds, one that is market determined and the other is NAV based the
market price may be above or below NAV. Managing a close ended scheme is
comparatively easy for the fund Manager. The fund can be liquidated after a
specified period.
Interval scheme: it is kind of close ended scheme with a feature that it
remains open during a particular part of the year for the benefit of investors,
to either off load or to undertake purchase of units at a NAV.
Sponsor
Any corporate body which initiates the launching of a mutual
fund is referred to as The sponsor.
The sponsor is expected to have a sound track record and
experience in financial services for a minimum period of 5
years and should ensure various formalities required in
establishing a mutual fund.
According to SEBI, the sponsor should have professional
competence, financial soundness and reputation for fairness
and integrity. The sponsor contributes 40% of the net worth of
the AMC. The sponsor appoints the trustee, The AMC and
custodians in compliance with the regulations.
Trustee
Sponsor creates a public trust and appoints trustees. Trustees
are the people authorized to act on behalf of the Trust. They
hold the property of mutual fund.
Custodian
A custodians role is keeping custody of the securities that are
bought by the fund manager and also keeping a tab on the
corporate actions like rights, bonus and dividends declared by
the companies in which the fund has invested.
The Custodian is appointed by the Board of Trustees. The
custodian also participates in a clearing and settlement system
through approved depository companies on behalf of mutual
funds, in case of dematerialized securities.
Only the physical securities are held by the Custodian. The
deliveries and receipt of units of a mutual fund are done by the
custodian or a depository participant at the instruction of the
AMC and under the overall direction and responsibility of the
Trustees. Regulations provide that the Sponsor and the
Custodian must be separate entities.
It is the AMC, which in the name of the Trust, floats new schemes
and manage these schemes by buying and selling securities. In
order to do this the AMC needs to follow all rules and regulations
prescribed by SEBI and as per the Investment Management
Agreement it signs with the Trustees.
AMC cont
The AMC cannot deal with a single broker beyond a certain limit of
transactions.
The AMC cannot act as a Trustee for some other Mutual Fund.
The registrar and transfer agents are appointed by the AMC. AMC
pay compensation to these agents for their services. They carry
out the following functions
Fund Accountants
Computing the net asset value per unit of the scheme on a daily
basis
Lead Manager
Investment Advisors
Legal Advisors
Working mechanism of
AMC
Operational Efficiency of
Mutual funds
Net Returns: the operational of a mutual
fund is best judged by its ability to earn for
the investors better and safe returns in the
form of capital appreciation and the
dividends or income received on such
investment.
Returns are calculated keeping in mind
the expenses incurred while earning
such returns which include trusteeship
fee, management fee, administrative
fee, fund accounting fee, initial charges,
brokerage etc. SEBI has fixed an overall
limit on expenses as per the regulations.
Sharpes Index
rate of return
Standard Deviation of Portfolio
=
Rp Rf
Rp Rf
p
Regulations
No scheme can invest more than 15% of its NAV in rated debt
instruments of a single issuer. This limit may be increased to 20%
with prior approval of Trustees. This restriction is not applicable to
Government securities.
No scheme can invest more than 10% of its NAV in unrated paper
of a single issuer and total investment by any scheme in unrated
papers cannot exceed 25% of NAV.
No fund, under all its schemes can hold more than 10% of
companys paid up capital
Registration of mutual
funds
Every mutual fund shall be registered with
SEBI through an application to be made by the
sponsor in a prescribed format accompanied
by an application fee of Rs.25000.
Every mutual fund shall pay Rs.25lakhs
towards registration fee and Rs:2.5lakhs per
annum as service fees.
Registration shall be granted by the board on
fulfillment of conditions such as sponsors,
sound track record of 5yrs integrity, net worth
etc.
The trustees and the AMC with SEBIs prior approval shall enter into
an investment management agreement.
The trustees shall ensure the AMC has the necessary infrastructure
and personnel.
The trustees shall ensure that the EMC has been managing the
scheme independently.
The trustees should fulfill all its duties in order to protect the interest
of the investors.
The AMC shall not act as an AMC for any other mutual funds.
All the schemes to be launched by the AMC should be approved by the trustees
and are to be filed with SEBI.
The offer document should contain adequate disclosures to enable the investors
to make informed decisions.
Units of close ended schemes can be opened for redemption at a fixed interval.
The AMC shall specify in the offer document the minimum subscription to be
raised under the scheme.
The AMC may repurchase, reissue the units of close ended schemes.
The units of close ended schemes can be converted into open ended schemes.
Any scheme on mutual fund shall not be opened for subscription after 45 days.
The mutual fund and AMC shall be liable to refund the application money to the
applicants if minimum subscription is not received.
The ETF structure is such that the AMC does not have to deal
directly with investors or distributors. It instead issues units to a
few designated large participants, who are also called as
Authorized Participants (APs), who in turn act as market makers
for the ETFs.
The Authorized Participants provide two way quotes for the ETFs
on the stock exchange, which enables investors to buy and sell the
ETFs at any given point of time when the stock markets are open
for trading
Prices are available on real time and the ETFs can be purchased
through a stock exchange broker just like one would buy / sell
shares. There are huge reductions in marketing expenses and
commissions in case of ETFs.
Characteristics of ETFs
Hedge Funds
Hedge funds take extreme positions in the market, including shortselling of investments.
Ex. In a normal long position, the investor buys a share at say, Rs.
15. The worst case is that the investor loses the entire amount
invested. The maximum loss is Rs. 15 per share.
Suppose that the investor has short-sold a share at Rs. 15. There
is a profit if the share price goes down. However, if the share price
goes up, to say, Rs. 20, the loss would be Rs. 5 per share. A higher
share price of say, Rs. 50 would entail a higher loss of Rs. 35 per
share. Thus, higher the share price more would be the loss. Since
there is no limit to how high a share price can go, the losses in a
short selling transaction are unlimited.
Borrowings: Normal mutual funds accept money from unitholders to fund their investments. Hedge funds invest a mix of
unit-holders funds (which are in the nature of capital) and
borrowed funds (loans). Unlike capital, borrowed funds have a
fixed capital servicing requirement. Even if the investments are at
a loss, loan has to be serviced. However, if investments earn a
return better than the cost of borrowed funds, the excess helps in
boosting the returns for the unit-holders