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Introduction

A mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities. A fund is mutual as all of its returns, minus its expenses, are shared by the funds investors.

Advantages
Professional management Portfolio diversification Reduction in transaction cost Liquidity Tax benefits Transparency Stability to the stock market Equity research

Convenience Flexibility Protection of interest of investors Promoting, industrial development of the country

Limitation of Mutual Funds


Market risk Misappropriation of funds Political risk Biasness of fund manager

Mutual fund investors


Resident Indian individuals Indian companies Indian trusts/charitable institutions Banks Non-banking finance companies Insurance companies Provident funds Non-residents, including Non-resident Indians Foreign entities(FIIs)

The Sponsor The trustees The Asset Management Company

Organization of a mutual fund

Sponsor
The sponsor is similar to the promoter of a company as he gets the fund registered with the SEBI. Sound track and general reputation for minimum 5 years Not have been found of guilty of fraud

He forms trust and appoints a board of trustees Also appoints AMC as fund managers And appoints a custodian to hold the fund assets. The sponsored is required to contribute at least 40% of the min net worth of the asset management company

A mutual fund is sponsored by


Banks Financial institutions Companies(Indian or foreign or joint venture)

Out of 39 mutual funds


4 by bank 1 by LIC 16 by Indian entities 5 by foreign entities Remaining are joint ventures

The trustees
A mutual fund is a trust that pools the savings of investors and invests these savings in capital market/money market instruments. The duty of the trust is to review the performance of the fund and thereby safeguarding the interest of the investors.

Cont
A mutual fund in India is constituted in the form of a public trust created under the Indian Trusts Act,1882. The trust is formed by sponsor and registered with SEBI The fund sponsors act as the settler of the trust, contributes to initial capital and appoints trustees

Cont
Collected funds are managed by board of trustees, who are independent body and acts as a protector of the unit holders interest. At least 2/3 of the trustees are independent trustees

Asset Management Company


Asset management company manages the funds by investing in various securities. It acts like the investment manager of the trust. The success or failure of the mutual fund depends upon the efficiency of AMC AMC is a company formed and registered under companies act,1956. They charge a fee for the service rendered to mutual fund trust.

Manages the different investment schemes as per the SEBI regulation and the trust deed. AMC should be registered with the SEBI Net worth of at least Rs.10 crore in the form of cash Most AMCs in India are private limited companies

Other Administrative Entities


Custodian :A custodian is responsible for safe keeping of cash securities gold or gold related instruments or real estate mutual fund instruments. A custodian also participates in the clearing system through approved depository. Registrar and transfer agents is a vital communication link between the unit holder and mutual fund.

FIXED DEPOSITS Investment for a fixed period Assured return on fixed deposits

MUTUAL FUND SCHEMES No fixed tenure in open ended schemes No assurance for either returns of capital growth High returns

Low returns

High safety in banks

Safety depends upon the investment objective

Objective is to earn income

Objective is to earn income and capital growth

Types of Mutual Fund Schemes


Functional Investment classification Portfolio classification Geographical Other

Openended schemes Closeended schemes

Equity fund

Income

Domestic

P/E ratio fund

Debt fund

Growth

Off shore

Exchange traded funds

Interval schemes

Hybrid fund

Balanced

Gold exchange traded funds Real estate mutual funds

Investment classification
Equity fund Diversified Value Special Sectoral Derivatives arbitrage Tax savings

Debt funds Money market mutual funds Short term bond Long term bond Gilt Floating maturity plans Fixed maturity plans Capital protection Schemes

Other classification
P/E ratio fund Exchange traded funds Gold exchange traded funds Real estate mutual funds

Useful Terminology
NAV KIM OD Tracking error Entry and Exit load Expense ratio SIP STP SWP