Mutual Fund

Services

Unit-5
WHAT IS THE MUTUAL FUND ?
• A Mutual Fund is a trust that pools the
savings of a number of investors who share
a common financial goal.
• The money collected invested in capital
market instruments such as shares,
debentures and other securities.
• Anybody with an investible surplus of as
little as few as five hundred rupees can
invest in Mutual Funds. It gives the stock
market returns but not assured returns
HISTORY OF INDIAN MUTUAL FUNDS INDUSTRY
The mutual fund industry in India started in 1963 with the
formation of unit trust of India at the initiative of the
government of India and reserve bank The History of Indian
mutual fund history can be divided into four phases

FIRST PHASE 1964-87 Unit Trust of India (UTI) was

established on 1963 by an Act of Parliament. At the end of
1988 UTI had Rs.6,700 Crores of assets under management.

SECOND PHASE-1987-1993 (ENTRY OF PUBLIC SECTOR

FUNDS) Marked the entry of Non-UTI, public sector mutual
funds set up by public sector banks and Life Insurance
Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first
Non-UTI Mutual Fund established in June 1987. At the end
of 1993, the mutual fund industry had assets under
management of Rs.47,004 crores.
THIRD PHASE1993-2003(ENTRY OF
PRIVATE SECTOR FUNDS) 1993 was the
year in which the first Mutual Fund
Regulations came into being, under which
all mutual funds, except UTI were to be
registered and governed. The erstwhile
Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector
mutual fund registered in July 1993. As at
the end of January 2003, there were 33
mutual funds with total assets of Rs.
1,21,805 Crores

FOURTH PHASE – SINCE FEBRUARY 2003

In February 2003, following the repeal of
the Unit Trust of India Act 1963. UTI Mutual
Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions
under the SEBI Mutual Fund Regulations.
Types of Mutual Funds Schemes on the Basis of Investment

i) Open - Ended Schemes: Open - ended schemes is that

structure of mutual fund which allow investors to buy the
shares of MF at its unlimited level and time and sell it
when they want in market.

ii) Close - Ended Schemes: Close - ended schemes issue the

Mutual Funds under many restrictions like to offer to
limited investors or limit of time of issue etc.

iii) Interval Schemes: This is a mutual fund scheme whose

redemption features is between those of closed-end and
open-end funds.
Types of mutual fund schemes on the basis of investment objective

i) Growth Schemes In the growth scheme, all profits made by the fund are ploughed back into the
scheme. This causes the Net Asset Value to rise over time. The NAV is the price of a unit of a mutual
fund.

ii ) Income or Dividend Schemes The dividend option does not re-invest the profits made by the fund
through its investments. Instead, it is given to the investor from time to time.

iii) Balanced Schemes The aim of Balanced schemes is to provide both growth and regular income.
Such schemes invest both in equities and fixed income securities in the proportion indicated in their
offer documents. They generally invest 40-60% in equity and the rest in debt instruments.
Other Mutual Funds Schemes
• Money Market Schemes It is open ended mutual funds whose
amount will be only invested in money market. These funds
invest in short term (one day to one year) debt obligations such
as Treasury bills, certificates of deposit, and commercial paper.
The main goal is the preservation of principal, accompanied by
modest dividends.
• Tax Saving Schemes Tax saving schemes of mutual funds which
saves the tax of investors. Tax benefits to be mentioned under
the "objects of the offering" column. Any exclusive tax
advantages for the mutual fund company and its shareholders by
mentioning the section number of the Income Tax Act 1961
without revealing the content of the section.
HOW TO INVEST IN MUTUAL FUNDS

Step-1: Identify the investment need what are my

investment objectives need ? How much risk am
willing to take ?

Step -2: Choose the right mutual fund the track

record of performance over the last few relations to
the appropriate benchmark and similar funds in the
same category how well the mutual fund is
organized to provide efficient, prompt and
personalized service

Step-3: Select the ideal mix of schemes investing in

just 1 scheme may not meet all your investment
needs you may consider investing in a combination
of schemes to achieve your specific goals
 Regulation by SEBI
• The mutual funds are registered and regulated under the
SEBI (MF) regulations, 1996.
• These regulations deal with launching of schemes,
disclosures in the offer document, advertisements,
investment objectives, pricing of units and other related
aspects.
• SEBI regulates structure, market and investor-related
activities of mutual funds.
• But issues concerning the ownership of the AMCs by banks
fall under the regulatory preview of the RBI.
 The Association of Mutual Funds in India
The Association of Mutual Funds in India is a non-profit government organisation in the Mutual
Funds’ sector that acts as a primary regulator under SEBI.
Thus, the statutory bodies like AMFI India and SEBI were formed to keep investors informed
about the Mutual Fund market.
The organisation was incorporated on 22nd August 1995, and ever since then it helps to set various
regulations that maintain the ethics and transparency of Mutual Funds among Indian investors.
Role of AMFI in a Mutual Fund
• AMFI in Mutual Fund is to help protect the interest of Indian investors, as well as that of
the asset management companies. It also aids in making investments transparent and more
accessible to attract more people to it.
• Therefore, in a bid to make Mutual Fund investments more accessible, fund houses, trustees,
advisors, intermediaries and other concerned individuals should register under AMFI
through its website. As of now, it has 44 registered members, including 42 Asset
Management Companies registered under SEBI.
• To promote transparency regarding the Mutual Fund market, even the advertisements put
forth by AMFI inform investors about the risks associated with them.
Objectives of AMFI

❑ Help set uniform and professional ethical standards for all Mutual Fund related
operation.
❑ Ensure that investors and member companies adhere to the regulations and maintain
ethics in due course of business.
❑ Assist distributors, advisories, agents, asset management companies, and other bodies
(those involved in financial service fields or capital markets) to comply with the set
guidelines.
❑ Work closely with SEBI and comply with the Mutual Fund regulations set by it.
❑ Informs investors across the country about the different risks associated with investing
in Mutual Funds.
❑ AMFI is a representative of the RBI, SEBI, finance ministry and other
bodies related to money market investments.
❑ An important role of AMFI in Mutual Funds is to distribute information
about these investments and also conduct various workshops about
different funds.
❑ Ensure that code of conduct is maintained by everyone involved and also
take disciplinary action on the event of breach.
❑ To safeguard the interest of investors, the All India Mutual Fund
association has also introduced a facility through which individuals can
put forth grievances or register complaints against fund managers or
any asset management company.
❑ Inversely, it also helps to safeguard the interest of asset management
companies.
 Risk in Mutual Fund
+ Standard Risk Factors
• Mutual Fund Schemes are not guaranteed or assured return products.
• Investment in Mutual Fund Units involves investment risks such as trading volumes,
settlement risk, liquidity risk, default risk including the possible loss of principal.
• As the price / value / interest rates of the securities in which the Scheme invests
fluctuates, the value of investment in a mutual fund Scheme may go up or down.
• In addition to the factors that affect the value of individual investments in the Scheme,
the NAV of the Scheme may fluctuate with movements in the broader equity and bond
markets and may be influenced by factors affecting capital and money markets in
general, such as, but not limited to, changes in interest rates, currency exchange
rates, changes in Government policies, taxation, political, economic or other
developments and increased volatility in the stock and bond markets.
• Past performance does not guarantee future performance of any Mutual Fund
Scheme.
 Specific Risk Factors
+ RISKS ASSOCIATED WITH INVESTMENTS IN EQUITIES
+ Risk of losing money:
+ Investments in equity and equity related instruments involve a degree of risk and investors should not
invest in the equity schemes unless they can afford to take the risk of possible loss of principal.
+ Price Risk:
+ Equity shares and equity related instruments are volatile and prone to price fluctuations on a daily basis.
+ Liquidity Risk for listed securities:
+ The liquidity of investments made in the equities may be restricted by trading volumes and settlement
periods. Settlement periods may be extended significantly by unforeseen circumstances. While securities
that are listed on the stock exchange carry lower liquidity risk, the ability to sell these investments is limited
by the overall trading volume on the stock exchanges. The inability of a mutual fund to sell securities held
in the portfolio could result in potential losses to the scheme, should there be a subsequent decline in the
value of securities held in the scheme portfolio and may thus lead to the fund incurring losses till the
security is finally sold.
+ Event Risk:
+ Price risk due to company or sector specific event.
 Alternative Investment Market
+ The Alternative Investment Market (AIM) is a sub-market of
the London Stock Exchange (LSE) that is designed to help
smaller companies access capital from the public market. AIM
allows these companies to raise capital by listing on a public
exchange with much greater regulatory flexibility than the main
LSE stock market.
• The Alternative Investment Market (AIM) is a specialized unit of
the London Stock Exchange (LSE) catering to smaller, more risky
companies.
• The companies listed on AIM tend to be smaller and more highly
speculative, in part due to AIM's relaxed regulations and listing
requirements.
• Since launching in 1995, AIM has helped more than 3,988
companies raise over £130 billion.
 Understanding AIM
+ Companies seeking an initial public offering (IPO) and listing on AIM
are usually small companies that have exhausted their access to
private capital but are not at the level required to undergo an IPO
and list on a large exchange.
+ Although AIM is still referred to as the Alternative Investment
Market, or London’s Alternative Investment Market in the financial
press, the LSE has made a practice of referring to it by its acronym
only.
 AIM and Nomads

+ The process for a company listing on AIM follows much the same path
as a traditional IPO, just with less stringent requirements. There is still a
pre-IPO marketing blitz, with historical financial information to stir up
interest, and a post-IPO lock up, for example.
+ One key difference is the role nominee advisors, commonly known
as nomads, play in the process. These nomads are seen as the
regulatory system for AIM and are tasked with advising the companies
pre-IPO and after.
+ One issue that is frequently raised about this relationship is the
fact that nomads are responsible for ensuring regulatory
compliance, but they also profit in the form of fees from the
companies they list and continue to oversee as part of the listing
agreement.
 Difference Between LSE and AIM?
+ The Alternative Investment Market (AIM) is a sub-segment of the
London Stock Exchange (LSE). AIM was created with the goal of
helping smaller or riskier companies have access to capital via the
public markets. These are companies that would not qualify to be
listed on the LSE.
 Alternative Investment Market (AIM) a
Recognized Stock Exchange?
+ The Alternative Investment Market (AIM) is regulated by the London
Stock Exchange (LSE), which is a recognized stock exchange. Companies
listed on AIM adhere to AIM Rules for Companies, not the Listing Rules
of the LSE.
+ Meeting the listing requirements of large stock exchanges can be
difficult for smaller companies, yet, these companies still have a need
to access exchanges in order to raise capital. The Alternative Investment
Market (AIM) of the London Stock Exchange (LSE) caters to small
companies, providing them with the opportunity to list their shares and
raise capital for their business needs.
 Demerits of AIM
AIM is seen as a more speculative investment forum due to its relaxed
regulations compared to larger exchanges.
The regulation for companies listed on AIM is often referred to as
being light-touch regulation, as it is essentially a self-regulated market
where nomads are tasked with adhering to the broad guidelines.
AIM is not a stranger to outright fraud as cases of nomads failing to do
their duties are high.
AIM has been criticized for being a financial wild west where
companies with questionable ethics go for money.
Hedge Fund

• Hedge funds are actively managed funds focused on alternative

investments that commonly use risky investment strategies.
• A hedge fund investment typically requires accredited investors and a high
minimum investment or net worth.
• Hedge funds charge higher fees than conventional investment funds.
• The strategies used by hedge funds depend on the fund manager and relate
to equity, fixed-income, and event-driven investment goals.
• A hedge fund investor's investment usually is locked up for a year before
they may sell shares and withdraw funds.
Types of Hedge Funds

+ Four common types of hedge funds are:

• Global macro hedge funds: These are actively managed funds that attempt to profit from
broad market swings caused by political or economic events.
• Equity hedge funds: These may be global or specific to one country, investing in lucrative
stocks while hedging against downturns in equity markets by shorting overvalued stocks or
stock indices.
• Relative value hedge funds: These funds seek to exploit temporary differences in the prices
of related securities, taking advantage of price or spread inefficiencies.
• Activist hedge funds: These aim to invest in businesses and take actions that boost the stock
price such as demanding that companies cut costs, restructure assets, or change the board
of directors.
Pension Fund

+ Pension funds are financial tools that help you in accumulating

funds for your post-retirement years. By investing a certain amount
regularly towards your pension fund, you will build up a
considerable sum in a phase-by-phase manner. They generally have
two stages–
• Accumulation stage: You pay a specific amount regularly until you
retire.
• Vesting stage: Once you retire, you get a steady flow of income for
life.
 Types of Pension Plans in India
+ 1. NPS
+ The government of India introduced the National Pension Scheme (NPS) as a
financial cushion for retired persons. Some of its features are as follows:
• You have to invest in this scheme until 60 years of age.
• The least sum you must invest is ₹ 1000/-. There is no upper limit.
• Your money will be invested in debt and equity funds based on your preference.
• The returns depend on the performance of the funds you choose.
• When you retire, you can withdraw 60% of your savings.
• You must use the remaining 40% to buy an annuity – a retirement plan offering
periodic income.
 Types of Pension Plans in India
+ 2. Public Provident Fund (PPF)
+ PPF is a long-term investment scheme with a 15 years tenure. Thus, the impact of
compounding is enormous, especially towards the end of the term.
+ Every year you can invest a maximum of ₹ 1.5 lakh in your PPF account. You can pay upfront
or through twelve instalments staggered over the financial year. Your PPF investments are
eligible for deductions* under Section 80C of the Income Tax Act, 1961 (ITA).
+ The government sets the interest rate on PPF every financial quarter, based on the profits
from government securities. The funds are not market-linked.
+ 3. Employee Provident Fund (EPF)
+ EPF is a government savings platform for salaried employees. Both your employer and you
have to make equal contributions towards your EPF account. Your share is deducted from
your salary every month. The Employees' Provident Fund Organisation (EPFO) sets the
interest rate on the investment. On retirement, you receive the total funds contributed by
you and your employer along with the accrued interests.
 Types of Pension Plans in India
+ 4. Annuity plans
+ Such plans provide a life cover along with a regular source of income. If an unfortunate event occurs while the plan is
active, your family member receives a lump sum payout, however, there are other options too that do not offer this
financial coverage. Annuity plans are of two types:
+ A. Deferred Annuity
+ It is a contract with an insurance provider helping you build a retirement corpus. You can make a single lump sum
payment or pay regular premiums over a fixed time frame – the policy term. Thus, this scheme helps you invest as per
your resources.
+ When the policy period ends, your pension starts. If your retirement date is far in the future, this plan is suitable for
you.
+ B. Immediate annuity
+ It is a contract between an individual and an insurance company, wherein the individual pays a lump sum amount and
receives guaranteed~ income for a lifetime, starting almost immediately.