GURPREET SINGH 08-MBA-2008

NAMRATA SOODAN 12-MBA-2008

NEHA SARAF 14-MBA-2008
SONALI RAINA 29-MBA-2008
THE CONCEPT OF MUTUAL
FUNDS
 HISTORY OF INDIAN MUTUAL FUND
INDUSTRY

 First Phase – 1964-87

 Second Phase – 1987-1993
(Entry of Public Sector Funds)
 Third Phase – 1993-2003
(Entry of Private Sector Funds)
 Fourth Phase – since February 2003
GROWTH IN ASSETS UNDER
MANAGEMENT
 TYPES OF MUTUAL FUNDS

1. Mutual fund schemes by structure

 Open ended schemes
 Close-Ended funds
 Interval fund
2. Mutual Fund schemes by investment objectives
 Growth funds
 Income funds
 Balanced funds
 Money market funds
3. Geographical classification
 Domestic funds
 Offshore funds
Organisation of mutual funds
 Who can be the Sponsor?
The sponsor establishes the mutual fund and registers the
same with SEBI

Sponsor appoints the Trustees, custodians and the AMC

Sponsor must have a 5-year track record of business interest in

the financial markets

Sponsor must contribute at least 40 % of the net worth of AMC

 How are Mutual Funds
Structured?

Company Form

Trust Form
 What are the rights of the
Trustees?
• Trustees appoint the AMC, in consultation with the sponsor &
according to SEBI Regulations
• All Mutual Fund Schemes floated by the AMC have

to be approved by the Trustees

• Trustees can seek information from the AMC regarding the
Operations and compliance of the mutual fund.
• Trustees can seek remedial actions from AMC, and in cases
dismiss the AMC
• Trustees review and ensure that net worth of the AMC is
according to stipulated norms, every quarter
 There must be at least 4 members in the Board
of Trustees and at least 2/3 of the members of
the board of trustees must be independent

Trustee of one mutual fund cannot be a trustee

of another mutual fund
Who appoints the AMC and defines its
functions?

 The AMC is usually a private limited co., in

which the sponsors and their associates or JV
partners ,are shareholders

 The AMC has to be a SEBI registered entity,

with a minimum net worth of
 The trustees sign an investment management
agreement with the AMC, which spells out the
functions of the AMC
 What are the various forms of Fund mergers
and takeovers in India?

 Merger of AMCs ( Example : HB Mutual and

Taurus Mutual )

AMC takeover by other sponsors ( Example :

ITC Threadneedle taken over by Zurich Group)
( ITI by Franklin Templeton)

Scheme take over (Apple’s scheme taken over

by Birla AMC )
 How does a Mutual Fund
work?
AMC
Savings

Trust Investments
Units
Unit holders Returns

Registrar

Trust
SEBI
Custodian AMC
FINANCIAL PLANNING
&&
MUTUAL FUNDS
The steps in developing a model portfolio for an
investor

RELATIONSHIP WITH THE CLIENT

DEFINE CLIENT’S GOALS

CREATE ASSET ALLOCATION PLAN

ACTUAL INVESTMENT

REVIEW AND REBALANCING

Stage Financial Choice of
Needs investment
ACCUMULATION Investing for long Growth options and
STAGE term identified long term products.
goals High risk appetite
TRANSITION Near term needs Liquid and medium
STAGE for funds term investments.
Lower risk appetite

REAPING STAGE Higher liquidity Highly Liquid and

requirements short term
investments. Prefer
income and debt
Products
 What is the recommended portfolio for
investors in accumulation phase?

 Diversified Equity : Sector and balanced funds

– 65 – 80%
 Income and gilt funds :
– 15 – 30%
 Liquid funds and bank deposits :
– 5%
Jacob’s Model Portfolio

5% Liquid Funds

Income and Gilt Funds

15-30%

Diversified Equity

65-80%

Accumulation Phase
What is the recommended portfolio
for investors in distribution phase?
 Diversified Equity and balanced funds:
– 15 – 30%
 Income funds :
– 65 – 80%
 Cash funds:
– 5%
 Bogle’s model portfolio
Accumulati Distribution
on Stage Stage

Younger 80% Equity 60% Equity

Investor 20% Debt 40% Debt
Older 70% Equity 50% Equity
Investor 30% Debt 50% Debt
 ADVANTAGES OF MUTUAL FUNDS

 PORTFOLIO DIVERSIFICATION

 PROFESSIONAL MANAGEMENT

 DIVERSIFICATION OF RISK

 REDUCTION IN TRANSACTION COST

 LIQUIDITY
 DISADVANTAGES

 NO CONTROL OVER COST

 NO TAILOR MADE PORTFOLIOS

 RISK FACTORS
PLACE OF MUTUAL FUND IN
FINANCIAL MARKETS:
 Risk and Return
Sectora
l funds
Equity
funds
Index
funds
Balance
Retur

d funds
n

Debt
Funds
Gilt
funds
ST debt
funds
Liquid
funds

Risk
 What is the regulatory
structure of MF in India?
• The structure of mutual funds in India is governed by
SEBI(Mutual Fund)Regulations, 1996.

• It is mandatory to have a three tier structure of

Sponsor-Trustee-Asset Management Company.

• The Sponsor is the promoter and he appoints the

Trustees who are responsible to the investors of the
fund.

• AMC is the business face of the mutual fund as it

manages all the affairs of the fund
 Regulating agencies for MF & its
• SEBI
Constituents
• RBI
- as a supervisor of bank owned mutual funds

Ministry of Finance
• Company Law Board, Department of Company
Affairs and Registrar of Companies
• Stock Exchanges (self regulatory Organization)
• Office of the Public Trustee
 What is the regulatory jurisdiction of RBI
over mutual funds ?
• RBI is the monetary authority and the regulator of the
banking system

• Bank sponsored mutual funds were under the dual control

of RBI and SEBI

• Presently RBI is only the regulator of the sponsors of bank

sponsored mutual funds. SEBI is the regulator of all mutual
funds

• Mutual funds are affected by the RBI stipulations on

structure, issuance, pricing & trading of Govt. Securities
 What is the role of Ministry of Finance in
mutual fund regulations ?

• The finance ministry is the supervisor of both the RBI

and SEBI

• Aggrieved parties can make appeals to the MoF on the

SEBI rulings relating to mutual funds
What are self regulatory organisations (SRO’s)?

• SRO’ s are the second-tier regulatory mechanism created

by market participants, to regulate the working of a group
of persons/organizations

• If the SRO is registered with the regulatory authority, it

obtains certain powers from the regulatory authority

• For example though the stock exchanges are regulated by

SEBI, they are also registered SRO’ s
 What are the objectives of AMFI ?

AMFI is an industry association, incorporated in 1995, is

not an SRO, so it can just issue guidelines to members. It
cannot enforce regulations.

Objectives
• To promote the interests of mutual funds and unit holders.
• To set ethical, commercial and professional standards in
the industry.
• To increase public awareness of the mutual fund industry.
AMFI is governed by a board of directors elected from
mutual funds and is headed by a full time chairman.
 Where can the investor find out the details about a
MF scheme, before investing?

• The mutual fund is required to file with SEBI a detailed

information memorandum called the prospectus , in a
prescribed format giving all the information of the fund and
the scheme.

• An abridged version of the offer document, in a prescribed

format is appended to the application form.

• Investors can get a summary of the offer document in the

abridged version known as the Key Information
Memorandum
 What does the Offer Document usually
contain?
It contains information regarding,
• Objective of the scheme
• Asset allocation
• Sale and repurchase procedure
• Load and expense structure of the scheme
• Accounting and valuation policies
It also contains
• Structure of the mutual fund
• Its constituents
• Operational details as how to apply
• Rights and duties of the investors
 Why is the offer document
important to investors?
• Information about the product , and its fundamental
attributes, are specified in the offer document. It forms
the basis of investors decisions

• Offer Document is a legal document that specifies the

details of the offer made by the mutual fund
 Is the offer document issued only when the
MF issues units for the first time?
• Closed ended scheme- offer document during the IPO
• Open ended scheme- offer document is valid through the
life of the scheme, which is revised every 2 years
• Major changes that have to be notified to the investors:
• Change in the AMC or Sponsor of the mutual fund
• Changes in the load structure
• Changes in the fundamental attributes of the schemes
• Changes in the investment options to investors;
inclusion or deletion of options
What are the broad contents of the O
• Summary Information D?• Associate Transactions
• Glossary of Defined terms • Borrowing policy
• Risk Factors faced by the fund • NAV Valuation
• Legal and regulatory compliance • Description of Accounting policies
• Financial Information
• Tax treatment of investments
• Constitution of the Mutual Fund
• Investors rights and services
• Investment Objectives and Policies
• Redressal mechanism for Investor
• Management of the Fund
Grievances
• Offer related Information
• Penalties , pending litigation or
• Investment procedure
proceedings
• Schemes policy on dividends and
Inter-scheme transfers
What are the mandatory disclosures to
be made on the cover page of the
OD?
• Name of the mutual fund.
• Name of the scheme.
• Type of scheme.
• Name of the AMC.
• Classes of units offered for sale.
• Price of units plus applicable load.
• Name of the guarantor in case of assured return
schemes.
• Opening , closing and earliest closing date of offer.
• Mandatory statements.
 What is the Key Information
Memorandum (KIM)
• Since the offer document is very detailed, it is not
feasible to provide them to all investors

• SEBI regulations allows mutual funds to summarize the

key points in a summary document called as key
information memorandum

• It is mandatory to provide KIM to all investors

 Is the offer document verified by SEBI for
its accuracy?
• No
• SEBI does not approve or disapprove anything contained
in the offer document
• The offer document is prepared as per a certain format
prescribed by SEBI
• The contents of the offer document are verified by the
trustees, and the compliance officer
• The compliance officer has to also certify that the
constituents of the fund are all SEBI registered entities
• The AMC is responsible for the contents and accuracy of
information in the offer document
What are the categories of investors eligible to buy
MF units?
• Resident Individuals
• Indian Companies
• Indian trusts and charitable institutions
• Banks
• NBFC’s
• Insurance companies
• Provident funds
• Non-resident Indians
•SEBI registered FII’s
 The mutual fund scandal and you
 Late trading
 Market timing
 Here is an example. Assume a mutual fund with
$500 million in assets sees its investments rise
2%, or $10 million, during the trading day. After
hours, a hedge fund throws in $50 million. Even
though that money was never invested, it claims
a share of the profits. Now that $10 million profit
is spread over $550 million in assets, not $500
million, and a 2% return has become 1.8%. Late-
traders walk away with net profits of $900,000,
or 9 cents of every dollar earned -- and every
penny subtracted directly from the rightful profits
of long-term shareholders
 Q: Should I sell all my mutual funds?

 Q: Do I need to hurry to change my

investments?

 Q: How can I be sure there isnt another

scandal out there waiting to be discovered?
 Thank you!!!
 Any
?