Assignment

Q1. How are mutual funds regulated?

Ans. A mutual fund is a type of investment company that pools money from many investors
and invests the money in stocks, bonds, money-market instruments, other securities, or even cash. Here are some characteristics of mutual funds: Investors purchase shares in the mutual fund from the fund itself, or through a broker for the fund, and cannot purchase the shares from other investors on a secondary market, such as the New York Stock Exchange or Nasdaq Stock Market. The price that investors pay for mutual fund shares is the funds approximate net asset value (NAV) per share plus any fees that the fund may charge at purchase, such as sales charges, also known as sales loads. Mutual fund shares are "redeemable." This means that when mutual fund investors want to sell their fund shares, they sell them back to the fund, or to a broker acting for the fund, at their current NAV per share, minus any fees the fund may charge, such as deferred sales loads or redemption fees. Mutual funds generally sell their shares on a continuous basis, although some funds will stop selling when, for example, they reach a certain level of assets under management. The investment portfolios of mutual funds typically are managed by separate entities known as "investment advisers" that are registered with the SEC. In addition, mutual funds themselves are registered with the SEC and subject to SEC regulation. There are many varieties of mutual funds, including index funds, stock funds,bond funds, and money market funds. Each may have a different investment objective and strategy and a different investment portfolio. Different mutual funds may also be subject to different risks, volatility, and fees and expenses. Fees reduce returns on fund investments and are an important factor that investors should consider when buying mutual fund shares. Regulation of mutual funds, compared to other pooled investment options (think: hedge funds) is extensive. Mutual funds must comply with a strict set of rules that are monitored by the Securities and Exchange Commission. The SEC monitors the funds compliance with the Investment Company Act of 1940, as well as its adherence to other federal rules and regulations.

Since their development, the regulation of mutual funds has provided investors with confidence in terms of the investment structure and offered a number of benefits, such as:

Transparency: The holdings of mutual funds are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for.

Liquidity: Shares of mutual funds are redeemed by the fund company on the trade date, which assures daily liquidity for investors.

Audited Track Records: Funds must maintain their performance track records and have them audited for accuracy, which ensures that investors can trust the funds stated returns.

Safety: If a mutual fund company goes out of business, fund shareholders receive an amount of cash that equals their portion of ownership in the fund. Alternatively, the funds Board of Directors might elect a new investment advisor to manage the funds.

The Acts and Regulations of Mutual Funds The rules and regulations of mutual funds are extensive. The key regulations of mutual funds are: The Investment Company Act of 1940 -- The Act regulates mutual funds (as well as other companies). The Act focuses on disclosures and information about investment objectives, investment company structure and operations. The Securities Act of 1933 -- The Act has the objective of requiring that investors receive certain significant information pertaining to securities being offered for sale in the public markets. The Act also prohibits fraud and misrepresentations in the sale of securities. The Securities Act of 1934 -- The Act created the SEC and empowers the SEC with authority over the securities industry.

Q2. What are the benefits of investing in mutual funds? Ans.

Benefits of investing in a mutual fund

As an investor, you would like to get maximum returns on your investments, but you may not have the time to continuously study the stock market to keep track of them. You need a lot of

time and knowledge to decide what to buy or when to sell. A lot of people take a chance and speculate, some get lucky, most don t. This is where mutual funds come in. Mutual funds offer you the following advantages : Professional management. Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.

Diversification. The clich, "don't put all your eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.

More choice. Mutual funds offer a variety of schemes that will suit your needs over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.

Affordability. As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.

Tax benefits. Investments held by investors for a period of 12 months or more qualify for capital gains and will be taxed accordingly. These investments also get the benefit of indexation.

Liquidity. With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardised, making it quick and efficient so that you can get your cash in hand as soon as possible.

Rupee-cost averaging. With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment's unit price. As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.

Transparency. The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unitholder, you are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy.

Regulations. All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI.