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 select 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 .

Balanced: Also called Hybrid funds, these are a combination of growth,

debt and money market funds.

Money market schemes: These schemes invest in short term debt

instruments and are highly liquid.

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

1-

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.

2-

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.

3-

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.

4-

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.

5-

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.