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MUTUAL FUNDS- ANMUTUAL FUNDS- ANOVERVIEWOVERVIEW

:-acilitated byrashant Agarwal

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Mutual funds are financial intermediaries which collectfunds from the public and invest them in a diversified

portfolio of securities, including equity, bonds, debentures andotherinstruments issued by business or government

undertakings. Mutual funds help small investors participatein the securities market indirectly and, thus, contribute to itsspread while reducing risk.

MUTUAL FUNDSMUTUAL FUNDS

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IMPORTANCE OF MUTUAL FUNDSIMPORTANCE OF MUTUAL FUNDS

Mutual funds all over the world have played a veryimportant role in pooling the small savings of individualsand investing them in proper portfolios. They have beensuccessful extensively in UK and USA. In UK, nearly 80%of investors look to mutual funds for their investments.

With a large choice, the Western investor does not have todepend on the same stereotyped schemes. The modernmutual fund industry has achieved a prominent position as a

major supplier of investment services to the American publicand a major source of capital for the securities market.

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Classification of Mutual FundsClassification of Mutual Funds

The mutual funds can be classified primarily into:

Public Sector mutual funds

Private Sector mutual funds Money market mutual funds

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The Unit Trust of India was the first mutual fund to beestablished in India in the public sector. It was followed bythe following seven institutions:

1.State Bank of India (SBI) Mutual Fund2.Bank of India Mutual Fund3.Indian Bank Mutual Fund4.Canara Bank Mutual Fund (Canbank MF)5.Punjab National Bank (PNB) Mutual Fund

6.LIC Mutual Fund7.General Insurance Corporation (GIC) Mutual Fund.

PUBLIC SECTOR MUTUAL FUNDSPUBLIC SECTOR MUTUAL FUNDS

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PRIVATE SECTOR MUTUAL FUNDSPRIVATE SECTOR MUTUAL FUNDS

Till 1991, the big eight mutual funds had monopoly in thisfield. The new economic policy of liberalization encouragedentry of many mutual funds in the private sector. The privatesector mutual funds provided a competitive edge and a widescope of options to the investors. Their emergence was the resultof failure of the public sector mutual funds to live up to the

expectations of the common investors. Therefore, the Securitiesand Exchange Board of India permitted a number of players inthe private sector to sponsor mutual funds.

An important feature of the private sector mutual funds was

their collaboration with foreign investment and fund managers.For example, the Kithara is tied up with the Pioneer of US and theTwentieth Century with the Kemper Corporation of US.

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MONEY MARKET MUTUAL FUNDSMONEY MARKET MUTUAL FUNDS

The Reserve Bank of India proposed to set up MoneyMarket Mutual Funds (MMMFs) in order to make availablethe benefits of investing in money markets to smallinvestors. MMMFs invest primarily in money instrumentsof very high quality and of very short maturities. They can

be set up only by commercial banks and public financialinstitutions.

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Mutual Fund SchemesMutual Fund Schemes

Mainly two types of Schemes:

1.1. Open-ended SchemesOpen-ended Schemes

2.2. Close-ended SchemesClose-ended Schemes

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1. Open-ended Schemes1. Open-ended Schemes

These schemes are available for subscription throughoutthe year excluding the period of book-closing. They may ormay not have a specified redemption period. The sale andrepurchase prices are fixed by the mutual fund from time totime. It does not have any fixed amount of share capital.

The fund can repurchase the mutual fund units when theholders want to sell the shares. Usually open-ended mutualfund shares have no secondary market and are not traded onstock exchanges. The buying and selling prices are calculated

on the basis of the net asset value. The minimum corpus isRs. 50 crore. The Unit Scheme 1964, Cancigo and Cangilt areexamples of this scheme.

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2. Close-ended Schemes2. Close-ended Schemes

Such schemes are open for subscription only during aspecified period. It has a fixed amount of capital. The sharesare issued only by public offering and are traded on stockexchanges. The duration of the scheme varies between fiveand seven years. Repurchase during the intervening period

may or may not be allowed. Some of the schemes have provision for repurchase facility after a certain period. Manyof these schemes are listed on the stock exchange. Theminimum corpus is Rs. 20 crore. Canstcok, Canshare,

mastershare, Magnum, Can80CC and Dhanshree etc. areexamples of close-ended schemes.

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Classification of Mutual Fund SchemesClassification of Mutual Fund Schemes

Mutual funds can be classified on the basis of investment objective

and geography. On the basis of investment objective, the existingschemes can be divided into four major categories.

1.1.Income SchemesIncome Schemes:: These schemes provide returns in theform of dividends. The returns may be cumulative over non-cumulative on a monthly, quarterly, half-yearly or yearly basis.As the flow of returns is steady and regular, the funds aremainly invested in fixed income securities such as debentures,

bonds and government securities. Only a lower percentage is

invested in shares.2.

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.. rowthrowth SchemesSchemes::These are usually close-ended. The mainaim of investing in such schemes is capital appreciation.Therefore, a major portion of the corpus is invested in equities

and convertible debentures. Such schemes are usually listed onstock exchanges and the capital appreciation is reflected in theirmarket quotations.

.. -quity linked Savingquity linked Saving SchemesSchemes:: These are tax- planning schemes. They are close ended growth schemes. Itsimportant features are:

( )b % ( % , , ,Tax rebate of 20 25 in case of artists writers actors andsuch others is allowed under the Section 88 of the Income Tax

.Act

( )c .Duration is generally ten years( )d ,Repurchase is allowed after a specified period usually three.years

( )e .They are listed on stock exchanges after three years( )f - ,During this lock in period of three years the units cannot be

,traded.pledged of transferred

3.

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Classification of Mutual Fund SchemesClassification of Mutual Fund Schemes

4.4. Miscellaneous Schemes:Miscellaneous Schemes: There are also some otherschemes designed to serve specific purposes such as childrenseducation and hospitalization expenses for senior citizens theUnit Linked Insurance Plan, the Childrens Gift Growth Plan,the Fut.s Senior Citizens Unit Plan, the Childrens College andCareer Fund and the LIC Mutual Funds Dhanvidya areexamples of such schemes. These are generally open-ended.

1.

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Usually, investments are made by Indian nationals resident inIndia, those residing outside India and the foreigners. On the basisof geographical location, the mutual funds are classified into:

1.1.Domestic Mutual FundsDomestic Mutual Funds: The funds are the saving schemesopened for mobilizing investment of the nationals within thecountry. All the schemes of the existing mutual funds are meantfor this purpose.

2.2. Offshore Mutual Funds:Offshore Mutual Funds: The basic objective of this schemeis to attract foreign capital for investment purpose in thecountry. These schemes open up domestic capital markets tointernational investors. Like domestic mutual funds, the

offshore mutual funds could also be classified into close-endedor open-ended funds.

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Organisation of Mutual FundsOrganisation of Mutual Funds

Mutual fund is a fund established in the form of a trust by asponsor to raise money through the sale of units to the public.A mutual fund organisation consists of: SponsorSponsor

Mutual Fund TrustMutual Fund Trust Asset Management Company(AMC)Asset Management Company(AMC) CustodianCustodian

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Sponsor :Sponsor :The sponsor of a mutual fund could be a companyregistered under the Companies Act 1956. The company can be

either a public limited or a private limited. One or more of thesecompanies can join to sponsor a mutual fund. The sponsorsshould satisfy certain conditions such as track record,experience in the relevant field of financial services (minimum

period of 5 years), and financial soundness. In addition, thesponsor(s) should be able to contribute not less than 40% of thenet worth of the worth of the asset management company.

The sponsors play an important role in theEstablishment of mutual fund trust. They appoint the

fund managers or the asset management company. AfterObtaining permission from SEBI, the role of sponsordiminishes as the dealings are taken over by the trust.

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Organisation of Mutual FundsOrganisation of Mutual Funds

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Mutual Fund Trust :Mutual Fund Trust :The Mutual Fund Trust is created bythe sponsors under the Indian Trust Act 1882. The trust

performs the following functions:

1. Planning and formulating the mutual fund schemes.2. Obtaining SEBIs approval for these schemes.3. Marketing the schemes for public subscription.

4. Ensuring that the asset management company complies with theguidelines, and report periodically to the unit-holders of the mutualfund.5. Making certain that the securities are safely kept in custody withapproval custodian.

6. Ensuring that the income on investment is properly accounted.7. Submitting an annual report to the unit-holders or members of the

fund.8. Ensuring that the investments made by the asset management

company are according to prescribed guidelines.

1.

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Asset Management Company :Asset Management Company : The asset managementcompany is responsible for the investing of the collected funds.It takes investment decisions and makes investment eitherdirectly in the primary market or through brokers in thesecondary market. It is its duty to maintain proper accounts andgive necessary information regarding investments and fund

management operations to the trustees.1.

O M FO M F

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Custodian :Custodian :The custodians takes the custody of investments.

It is their duty to check and verify the securities. They dealwith transfer of shares, settlement etc. and act as transferagents by attending to transfer , exchange, redemption, receiptof dividends, maintenance of detailed records of transactions.

1.

O M FO M F

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The following benefits are derived from investment in mutualfunds:

1.Small investors can get diversification of their investments as thefund invests the money collected from them in various securities.

2.They arte managed by experts.3.They provide liquidity as their units or shares traded in the

secondary market or repurchased by the funds themselves.4.All mutual fund schemes get tax relief under the Section 80L of

the Income Tax Act.

5.Allotment is assured to the investors except under tax-savingschemes for which there are limits.

Benefits of Mutual Fund InvestmentsBenefits of Mutual Fund Investments

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All mutual funds are regulated by the Securities andExchanges Board of India(SEBI). It issued detailed guidelinesfor their setting up and operation on 20thJanuary, 1993. Thefollowing are the highlights of SEBI regulations:

1.Mutual funds are to be established in the form of a trust under the

Indian Trusts Act, 1882 and operated by separate assetmanagement companies (AMC)2.They have to set up a Board of Trustees and Trustee Companies

and constitute their Board of Directors.3.The minimum net worth of AMCs is stipulated at Rs. 5 crore(later

increased to Rs. 10 crore).4.The AMCs and trustees are to be two separate legal entities and an

arms length relationship must be maintained between the two.

SEBI Guidelines for Mutual FundsSEBI Guidelines for Mutual Funds

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5.An AMC or its affiliate cannot act as a manager in any other fund.6.The AMCs are required to furnish SEBI their respective

Memorandum and Articles of Association for approval.7.Mutual funds dealing exclusively with money market

instruments(Such as CDs, CPs and bill discounting) are to beregulated by the Reserve Bank of India.8.All schemes floated by mutual funds are to be registered with

SEBI.

1.

SEBI Guidelines for Mutual FundsSEBI Guidelines for Mutual Funds