Mutual Funds

The Basics

What is a Mutual Fund?

Mutual funds are investment avenues that pool the money of several investors to invest in financial instruments such as stocks, debentures etc.

The appreciation made on the investments is distributed among the investors on the basis of the units held by each of them.
Mutual fund companies have fund managers who invest the unit holders money in the above mentioned avenues to rake in maximum returns.

Due to a large pool of investors, the individual risk is spread. So individually you take on low risk. The mutual funds in India are governed by Association of Mutual Funds in India, the umbrella body for mutual funds, which is in turn governed by the Securities and Exchange Board of India.

Concept of Mutual Fund

Various Types of Mutual Funds

By structure: Open Ended: These are funds that you can buy and sell anytime throughout the year.

Close Ended: These are funds that are open only for a specific period after which you'd have to buy them from the secondary market. Interval schemes: These schemes combine the features of open ended and close ended schemes and are available for purchase or sale during a selected period.

Various Types of Mutual Funds

By investment objective: Growth: These are highly aggressive schemes and invest mainly in equities.

Income: Income funds invest in medium to long-term debt instruments. These are low risk and aim at a fixed current income .
Money market schemes: These schemes invest in short term debt instruments and are highly liquid.

Balanced: Also called Hybrid funds, these are a combination of growth, debt and money market funds.
Tax saving: These are equity linked saving schemes that offer tax benefits under Section 80 C and have a compulsory lock in period of three years. Special schemes: These are select funds that aim at replicating the performance of an index. Also there are funds that invest in specific sectors that fall under this category.

Regulation of Mutual Funds

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Sponsor

Sponsor is the person who act alone or in combination with another body corporate establishes a mutual fund.

Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.
The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.

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Trust

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.

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Trustee

Trustee is usually a company or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, and

The provisions of the Trust Deed and the Offer Documents of the respective Schemes.
At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.

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Asset Management Company (AMC)

The Trustee as the Investment Manager of the Mutual Fund appoints the AMC. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund.

At least 50% of the directors of the AMC is an independent director who is not associated with the Sponsor in any manner.
The AMC must have a net worth of at least 10 Crore at all times.

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Registrar and Transfer Agent

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund.

The Registrar processes the application form; redemption requests and dispatches account statements to the unit holders.
The Registrar and Transfer agent also handles communications with investors and updates investor records.

NAV..
NAV or Net Asset Value is the market value of the assets per unit after deducting the liabilities. Here's how the NAV is calculated: (Market Value of the Scheme's Investments) + Other Assets (including accrued interest)+ Un amortized Issue Expenses (only in case of schemes launched on a load basis) All Liabilities except unit capital and reserves)}

Divided by the number of units outstanding at the end of

the day.

Lock-in Period
If investment is in equity linked saving schemes (ELSS) the lock in period is three years. Which means your money will remain locked in with the mutual fund company for a period of three years.

SIP
SIP or Systematic Investment Plan enables you to invest an amount on a regular basis and bring about a disciplined approach to investing. Through SIP you are able to get more or less units of a fund over a period of time with the investment amount remaining constant. If you're planning a SIP note that the minimum amount you can invest is Rs.500.