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Mutual Funds - Detailed

Mutual Funds - Detailed. Concept & Role of Mutual Funds. It is a pool of money, collected from investors, and is invested according to certain investment objectives The contributors and beneficiaries are the same class of people namely the investors

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Mutual Funds - Detailed

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  1. Mutual Funds - Detailed

  2. Concept & Role of Mutual Funds

  3. It is a pool of money, collected from investors, and is invested according to certain investment objectives • The contributors and beneficiaries are the same class of people namely the investors • A mutual funds business is to invest the funds thus collected, according to the the wishes of the investors who created the pool • e.g. money market mutual fund seeks investors to invest predominantly in Money Market Instruments What is a Mutual Fund ?

  4. The ownership is in the hands of the investors who have pooled in their funds. • It is managed by a team of investment professionals and other service providers. • The pool of funds is invested in a portfolio of marketable investments. • The investors share is denominated by ‘units’ whose value is called as Net Asset Value (NAV) which changes everyday. • The investment portfolio is created according to the stated investment objectives of the fund. Important characteristics of a Mutual Fund?

  5. Advantages of Mutual Funds Portfolio Diversification Professional Management Reduction of risk Reduction of transaction costs Liquidity Convenience and flexibility Access to information

  6. Tax Benefits in Mutual Funds • Dividends Tax Free in the hands of investors for all type of MF schemes • There will be Dividend Distribution Tax Debt Funds … Individuals 12.50% + surcharge Corporates 20.00% + surcharge Effective tax rate is much lower than on interest of bank FD for higher tax bracket Individuals and Corporate investors • Dividend Tax Free for all Equity and Balanced schemes

  7. Tax Benefits in Mutual Funds - Continue • Capital Gain Tax - For Equity / Balanced Funds LT Capital Gain Tax Nil ST Capital Gain Tax @ 10% - For Debt Funds LT Capital Gain Tax @ 10% ST Capital Gain Tax Tax bracket of Investors Deduction upto Rs. 1 lakh available u/s 80C for investment in ELSS from FY2005-06

  8. What are the disadvantages of investing through Mutual Funds? • No control over the costs. Regulators therefore limit the expenses of Mutual Funds. • No tailor made portfolios. • Managing a portfolio of funds. ( Investor has to hold a portfolio for funds for different objectives ).

  9. Mutual Funds Industry in US vs. India • IN US the asset under management crosses $ 9 trillion (that is approx. Rs 378 lacs crores) • In India the Asset under management is around Rs.2 lacs crores Cleary Indicates the Fact that Indian Investors needs to be educated on the most accepted investment vehicle worldwide. Source ici.org

  10. Important phases in Indian Mutual Fund Industry

  11. Mutual Fund Products

  12. What are open-ended funds? • In an open ended fund, investors can buy and sell units of the fund, at NAV related prices, at any time, directly from the fund. • Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, in the initial offer period. After a pre-specified period say 30 days, the fund is declared open for further sales and repurchases • Investors receive account statements of their holdings

  13. A closed -end fund is open for sale to investors for a specified period, after which further sales are closed. • Any further transactions happen in the secondary market where closed-end funds are listed. • The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV. • Investors receive either certificates or depository receipts, for their holdings What are closed end funds?

  14. Equity Debt Money Market Equity Funds Index Funds Sector Funds Fixed Income Funds Money Market Mutual Funds Balanced Funds Liquid Funds Types of Funds - By Investment Objective

  15. What are equity funds? • Predominantly invest in equity shares of the company • Choices in equity funds • Aggressive Growth Funds • Growth Funds • Specialty Funds • Sector Funds • Offshore Funds • Small Cap Equity Funds • Option Income Funds • Diversified Equity Funds • ELSS • Index funds • Value Funds • Equity Income Funds

  16. What are Gilt Funds? What are liquid and money market funds? • These debt funds invest only in instruments with maturities less than a year. • The investment portfolio is very liquid and enables investors to hold their investments for very short horizons of a day or more. • It invests only in securities that are issued by the Government and therefore do not carry any credit risk • It invests in both long-term and short-term paper. • Ideal for institutional investors who have to invest in Govt. Securities • Enables retail Participation

  17. How are funds different in terms of their risk profile? Investors have to face the risk- return trade off

  18. Investment horizon 3 years Days 1 year Risk Profile… Sectoral Funds Diversified Equity Funds Risk Balanced Funds MIPs Gilt Funds Income Funds Short Term Plans Floating Rate Funds Money Market Returns >>

  19. Why Equity Mutual Funds are successful?

  20. Why Equity Mutual Funds are successful?

  21. CAGR(%) 1 Yr 3 Yr 5 Yr 9 Yr Sensex 27.4 26.6 3.8 5.4 Actively Managed Funds 46.3 56.8 21.2 21 ACTIVE Vs PASSIVE : THE INDIAN EXPERIENCE Performance Comparison For the chart: Adjusted NAV price and the Sensex closing price for the first trading day every month have been considered. The Equity fund composite comprises of five funds for which data was available for the last nine years(1/10/95 to 1/10/2004). The values were indexed to arrive at a common scale For the Table: Daily NAV’s and Sensex closing prices have been considered for a time period from 1/10/1995 to 1/10/2004.A buy and hold strategy has been assumed for 1, 3, 5 and 9 year time periods. Source: Credence Analytics

  22. Fund Structure and Constituents

  23. AMC Savings Investments Trust Units Unit holders Returns Registrar Trust SEBI Custodian AMC How does a Mutual Fund work?

  24. Unit Trusts – Constituents • Fund Sponsor • Mutual Fund as Trust • Asset Management Company • Other fund constituents • Custodian and Depositories • Bankers • Transfer Agent • Distributors

  25. 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

  26. Who can be the Sponsor? What does the Sponsor do? • The sponsor establishes the mutual fund and registers the same with SEBI • Sponsor appoints the Trustees, custodians and the AMC with prior approval of SEBI and in accordance with SEBI Regulations • Sponsor must have a 5-year track record of business interest in the financial markets • Sponsor must have been profit making in at least 3 of the above 5 years. • Sponsor must contribute at least 40 % of the AMC

  27. How are Mutual Funds Structured? • Company Form • Trust Form • Company Form is popular in US • In India, Mutual funds are organised as trusts. The trust is either managed by a Board of Trustees, or by a trustee company

  28. 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

  29. What are the rights of the Trustees? • Trustees appoint the AMC, in consultation with the sponsor and 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

  30. Trustees must ensure that the transactions of the mutual fund are in accordance with the trust deed • Trustees must ensure that the AMC has systems and procedures in place, and that all the fund constituents are appointed • Trustees must ensure due diligence on the part of AMC in the appointment of constituents and business associates • Trustees must furnish to the SEBI, on half yearly basis a report on the activities of the AMC • Trustees must ensure compliance with SEBI regulations What are the obligations of the Trustees?

  31. Only SEBI registered AMC can be appointed as investment managers of mutual funds • AMC must have a minimum net worth of Rs. 10 Cr., at all times • An AMC cannot be an AMC or Trustee, of another Mutual Fund • AMC’ s cannot indulge in any other business, other than that of asset management • At least half of the members of the Board of an AMC, have to be independent • The 4th Schedule of SEBI regulations spells out rights and obligations of both trustees and AMC’s Regulatory requirements for the AMC?

  32. The trustees, on the advice of the sponsors usually appoint the AMC • 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 Rs. 10 Cr. • The trustees sign an investment management agreement with the AMC, which spells out the functions of the AMC Who appoints the AMC and defines its functions?

  33. How are Indian mutual funds organised? • Though the trust is the mutual fund, the AMC is its operational face • The AMC is the first functionary to be appointed and is involved in the appointment of all other functionaries • The AMC structures the mutual fund products, markets them and mobilises the funds, manages the funds and services the investors • All the functionaries are required to report to the trustees who lay down the ground rules and monitor their working

  34. What are the obligations of the AMC? • Investments have to be according to the investment management agreement and SEBI regulations • The actions of its employees and associates have to be as mandated by the trustees • AMC’ s have to submit detailed quarterly reports, on the working and performance of the mutual fund • AMC’ s have to make the necessary statutory disclosures on portfolio, NAV and price to investors

  35. What are the restrictions on the AMC ? • AMC’ s cannot launch a scheme without the prior approval of the trustees • AMC’ s have to provide full details of investments by employees and Board members in all cases where the investment exceeds Rs.1 Lakh • AMC’ s cannot take up any activity that is in conflict with the activities of the mutual fund

  36. What do the Registrar and Transfer Agents do? • They are responsible for investor servicing functions • Process investor applications • Record details of Investors • Send information to Investors • Process dividend payout • Incorporate changes in investor information • Keeping Investor information up to date

  37. What is the role of Brokers in a mutual fund? • Enable investment managers to buy sell securities • Brokers are registered members of the stock exchange • They charge a commission for their services. • In some cases provide investment managers with research reports • Act as an important source of market information

  38. What is the role of selling and distribution agents ? • Selling agents bring investors funds for a commission • Distributors appoint agents and other mechanisms to mobilize funds from investors • Banks and post offices also act as distributors • The commission received by the distributors is split into initial commission which is paid on mobilization of funds and trail commission which is paid depending on the time the investor stays with the fund

  39. What are the functions of the custodians ? • Responsible for the securities held in the mutual fund’s portfolio • Keep an investment record of the mutual fund • Collect dividends and investment payments due on the mutual funds investment • Track corporate actions like bonus issues, right offers, offer for sale, buy back and open offers for acquisition

  40. What are the various forms of Fund mergers and takeovers in India? • Merger of AMC ( Example : HB Mutual and Tauraus Mutual ) • AMC takeover by sponsors ( Example : ITC Threadneedle and 20th century taken over by Zurich) ( ITI by Franklin Templeton) • Scheme take over (Apple’s scheme taken over by Birla AMC )

  41. What are the conditions under which two AMC’s can be merged? • SEBI regulations require the following : • SEBI and Trustees of both funds must approve of the merger • Unit holders should be notified of the merger, and provided the option to exit at NAV, without load

  42. Under what conditions can an AMC be taken over by another sponsor ? • SEBI approval is required of the change of ownership and unit holders have to be informed of the takeover What is scheme take over? • If an existing mutual fund scheme is taken over by another AMC, it is called as scheme take over. The two mutual funds continue to exist.Trustee and SEBI approval and notification of unit holders are required for scheme takeovers

  43. Legal and Regulatory Framework

  44. SEBI • RBI • - as a supervisor of bank owned mutual funds • - as a supervisor of MMMFs • Ministry of Finance • Company Law Board, Department of Company Affairs and Registrar of Companies • Stock Exchanges (self regulatory Organization) • Office of the Public Trustee Regulating agencies for MF & its Constituents

  45. 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

  46. 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

  47. 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

  48. 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.

  49. Investing in Mutual Funds: Understanding the Process

  50. 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

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