3.MUTUAL FUNDS and AMCs-Unit 2

8/7/2019 3.MUTUAL FUNDS and AMCs-Unit 2

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MUTUAL FUND

Faculty

HARSHAD THAKKER


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What is a Mutual Fund?

Mutual fund is a pool of money from many investors who wish to saveor make money. Investing in mutual funds can be a lot easier ascompared to buying and selling individual stocks or bonds on yourown. Here, the funds are kept in units of Rs.10/-

An investor can redeem his/her holdings partially or fully at any pointof time and collect the proceedings on a (t +2) basis.

The basic idea behind Mutual Fund is that investors lack time, theinclination and skills required to manage their own investments.Professional Mutual Fund managers are highly experiencedpersonnels and act on behalf of the mutual fund company that

manages the investments for the benefit of the investors in return of amanagement fees.

The organization that manages the investment is known as AssetManagement Company [AMC]

In India, operations of AMC are supervised and regulated by theSecurities and Exchange Board of India (SEBI).


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ConceptofMutual Fund


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NET ASSET VALUE What is Net Asset Value (NAV) of a scheme? The performance of a particular scheme of a mutual fund is

denoted by Net Asset Value (NAV).

Mutual funds invest the money collected from the investors insecurities markets. In simple words, Net Asset Value is themarket value of the securities held by the scheme. Sincemarket value of securities changes every day, NAV of ascheme also varies on day to day basis. The NAV per unit isthe market value of securities of a scheme divided by the totalnumber of units of the scheme on any particular date. For

example, if the market value of securities of a mutual fundscheme is Rs 200 lakhs and the mutual fund has issued 10lakhs units of Rs. 10 each to the investors, then the NAV perunit of the fund is Rs.20. NAV is required to be disclosed bythe mutual funds on a regular basis - daily or weekly -

depending on the type of scheme.


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How is a mutualfund set up?

How is a mutual fund set up? A mutual fund is set up in the form of a trust, which has sponsor,

trustees, asset management company (AMC) and custodian. Thetrust is established by a sponsor or more than one sponsor who islike promoter of a company. The trustees of the mutual fund holdits property for the benefit of the unit holders. Asset Management

Company (AMC) approved by SEBI manages the funds by makinginvestments in various types of securities. Custodian, who isregistered with SEBI, holds the securities of various schemes ofthe fund in its custody. The trustees are vested with the generalpower of superintendence and direction over AMC. They monitorthe performance and compliance of SEBI Regulations by the

mutual fund. SEBI Regulations require that at least two thirds of the directors of

trustee company or board of trustees must be independent i.e.they should not be associated with the sponsors. Also, 50% of thedirectors of AMC must be independent. All mutual funds arerequired to be registered with SEBI before they launch anyscheme.


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What Does Asset ManagementCompany - AMC Mean?

A company that invests its clients' pooled fund into securities thatmatch its declared financial objectives. Asset managementcompanies provide investors with more diversification and investingoptions than they would have by themselves.

Investopedia explains Asset Management Company - AMCMutual funds, hedge funds and pension plans are all run by assetmanagement companies. These companies earn income by chargingservice fees to their clients.

AMCs offer their clients more diversification because they have a

larger pool of resources than the individual investor. Pooling assetstogether and paying out proportional returns allows investors toavoid minimum investment requirements often required whenpurchasing securities on their own, as well as the ability to invest ina larger set of securities with a smaller investment.


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What is an asset reconstructioncompany/ asset management

company? The word asset reconstruction company is a typical Indian

word - the global equivalent of which is asset managementcompanies. The word "asset reconstruction" in India owesits origin to Narsimham I which envisaged the setting up ofa central Asset Reconstruction Fund with moneycontributed by the Central Government, which was to beused by banks to shore up their balance sheets to clean uptheir non-performing loans. This idea never worked: soNarsimham II thought of asset reconstruction companies,the likes of which had already been successful in Malaysia,Korea and several other countries in theWorld. To keep thetune the same as the original idea of asset reconstructionfund, as also to give an impression that ARCs are notmerely concerned with realization of bad loans but they aregoing to do "reconstruction", that is, try and resurrect badloans into good ones, the word ARC has been used in India.


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Would the ARCs representtoany"reconstruction" or merely realization?

On the face of it, it is difficult to see the ARCs

doing substantially more than mere realization

of bad loans. Even the definition of the word"asset reconstruction" in the Ordinance talks

of mere realization and not reconstruction. As

ARCs would anyway not have the capital to

do any further funding of bad loans, it isdifficult to see them doing any such

"reconstruction" to qualify for that term.


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Why Asset management companies or ARCs?

Asset management companies have been set up in various countriesinternationally as an answer to the global problem of bad loans.

Bad loans are essentially of two types: bad loans generated out of theusual banking operations or bad lending, and bad loans which emanate outof a systematic banking crisis.

It is in the latter case that banking regulators or governments try to bail outthe banking system of a systematic accumulation of bad loans which actsas a drag on their liquidity, balance sheets and generally the health ofbanking. So, the idea of AMCs or ARCs is not to bail out banks, but to bailout the banking system itself.

There are essentially two approaches to taking care of these systematicbail out efforts: one, leave the banks to manage their own bad loans bygiving them incentives, legislative powers, or special accounting or fiscaladvantages. The second approach is to do the same thing on a concerted,

central level, through a centralized agency or agencies. The former approach is called the decentralized approach and the latter

approach is called centralized approach. AMCs arise out of the secondapproach - that is, a centralized agency for resolving bad loans created outof a systematic crisis.


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Which Approach is better?

Each approach has its own advantages and disadvantages andthere is no clear evidence of any of the two being better over theother. Various countries have tried either of the two approacheswith success stories and failures in either case.

What are the advantages of an AMC approach?

Centralization of bad loans in one or a few hands and thereforeobviously more clout

It is possible to give special legislative powers to a few AMCsrather than to each bank

Banks are left with cleaner balance sheets and do not have to dealwith problem clients. Regular banking relations with the group arenot affected.

Because it deals with a larger portfolio, it can mix up good assetswith bad ones and make a sale which is palatable to buyers.

It is easier to do a capital-market based funding for an AMC thanfor the banks themselves.


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Classification ofMutual Fund Schemes

Classification 1, Schemes according to Maturity Period (a) Open ended Scheme

(b) Close Ended Scheme

2. Schemes according to Investment Objective (a) Growth / Equity

Oriented (b) Income / Debt Oriented ( C ) Balanced Fund (d) Money Market / Liquid Fund (e) Gilt Fund (f) Index Fund

3. Tax Saving Schemes

4. Fund of Fund Scheme

5. Assured return Schemes


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Thank You

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3.MUTUAL FUNDS and AMCs-Unit 2