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SEBI & MUTUALFUNDS

MBA-FA (SEM I)

INDIAN FINANCIALS YSTEM



INTRODUCTION• Mutual fund is a financial intermediary that

pools the savings of investors for collectiveinvestment in a diversified portfolio of securities.

• As per SEBI Regulations,1996,Mutual Fundscan be defined as “a fund established inform of a trust to raise money through thesale of units to public or a section of public

under one or more schemes for investing insecurities, including money marketinstruments.”



FURTHER..

§ The definition has been further extendedby allowing mutual funds to diversify theiractivities in the following areas.

§ Portfolio Management services§ Management of offshore services§ Providing advice to offshore funds§ Management of pension or provident funds§

Management of venture capital funds§ Management of money market funds



BENEFITS

• Professional Management• Portfolio Diversification• Reduction in Transaction Costs• Liquidity• Convenience• Flexibility• Tax Benefits• Transparency• Stability to stock market



INTERMEDIARIES

• There exists a wide range of intermediariessuch as institutional agents, distributioncompanies national brokers, banks, financecompanies, secondary market brokers and

post. There are various kinds of investorsand to cater to different type of investors,intermediaries offer following two level of services.



INTERMEDIARIES

Ø Value added services- includes productinformation and advice on financialplanning and investment strategies. Theadvice encompasses analyzing an

investor’s financial goals.

Ø Basic services- includes providing basicinformation on schemes launched and

assisting them in filing applications forms,submission of forms and cheques at therespective offices. They facilitate thepaperwork related to investment.



NET ASSET VALUE

• Net Asset value of a scheme reflectsthe performance of the scheme on aday to day basis.

•

It is the amount which theshareholders will collectively get if the fund is dissolved or liquidated.

• NAV of a unit is the NAV of a fund

divided by the number of outstanding units.



SEBI GUIDELINES FOR NAV

• Net Asset Value is the market value of theassets of the scheme minus its liabilities.

– According to SEBI (mutual funds, secondamendment) Regulations, 2000, a mutual fund

can invest up to 5% of its NAV in the unlistedequity shares or equity related instruments incase of open ended schemes; while in case of close ended schemes, mutual funds can nowinvest up to 10% of its NAV.

–

Mutual funds are required to declare their NAVand sale repurchase prices of all schemesupdated daily on a regular basis on the AMFIwebsite by 8:00 pm and declare NAVs of theirclose ended schemes every Wednesday.



TYPES OF MUTUAL FUNDS

• FUNCTIONAL CLASSIFICATION• PORTFOLIO CLASSIFICATION• GEOGRAPHICAL CLASSIFICATION• OTHERS



FUNCTIONALCLASSIFICATION• OPEN ENDED SCHEMES• Continuous sale and purchase of units at

NAV or NAV related values.•

No need of listing of these funds on stock exchange• Investor can enter and exit the scheme any

time during the life of the fund.• Eg. UTI’s US 64



CLOSE ENDED SCHEMES

• Open for subscription only for specifiedperiod and have a fixed corpus.

• It remains open for investment only for aperiod not exceeding 45 days.

• Units need to be listed on stock exchangeafter the initial subscription.

• Can be converted to open ended scheme bypassing a resolution by a majority of unit

holders.



INTERVAL SCHEMES

• Combines the features of Open and closeended schemes.

• Open for sale or redemption during pre-determined interval.



PORTFOLIOCLASSIFICATION• INCOME FUNDS

– Aims at safety of investment and regular incometo investors.

– Such schemes invest in income bearing

instruments like bonds, debentures, govt.securities and commercial papers.

• GROWTH FUNDS – Aims at capital appreciation over medium to long

term. – Major investment in equity shares. – No guarantee of return. – Usually close ended and listed on stock

exchange.



PORTFOLIOCLASSIFICATION• BALANCED FUNDS

– Aims to provide both capital appreciation andregular returns.

– Division of investments between equity shares

and fixed interest bearing instruments.

• MONEY MARKET MUTUAL FUNDS – Aims to provide liquidity with low rate of return. –

Major investment in short term money marketinstruments like treasury bills and certificates of deposit.



GEOGRAPHICALCLASSIFICATION• DOMESTIC FUNDS

– These funds mobilize resources fromparticular geographical locality.

–

Market is limited and confined toboundaries of the nation in which fundoperates.

•

OFFSHORE FUNDS – They open domestic capital market for

foreign investment. – Eg :India fund was launched in July 1986

by UTI in collaboration with US’ MerrillLynch.



OTHERS

• SECTORAL FUNDS – Investment in specific core sectors like

energy, telecom, IT, construction,transportation.

• TAX SAVING SCHEMES – These are close ended schemes with

investments made for 10 years althoughinvestors can avail encashment facilitiesafter 3 years.



RISKS IN MUTUAL FUNDS

• Mutual Fund investments are notfree from risk. Equity-orientedmutual fund schemes are risky as

their returns are market-linked.• There are wide variety of Equity

schemes such as diversified• Equity schemes• Index funds• Sectoral schemes• Equity-linked savings schemes



DISADVANTAGES

• Fluctuating Returns• Diversification / Diworsification• Cash, Cash and More Cash• Costs• Misleading Advertisements• Evaluating Funds



INVESTORS

• Resident Indian individual• Indian companies• Indian trust/charitable institution• Banks• Non banking finance corporation• Insurance companies•

Provident funds• Non resident & Foreign entities



SPONSER TO ASSETMANAGEMENT CO.• Sponsor , mutual fund trust and AMC

are involved in setting up of mutualfunds.

•

They are assisted by independentadministrative entities like banks,registrars, transfer agents &custodians.

•

Sponsor means any person whoacting alone or with other corporatebody establishes a mutual funds. Hegets the fund registered with SEBI.



SEBI GUIDELINES FOR SPONSOR TO ANASSET MANAGEMENT COMPANY

• The sponsor should have asoundtrack record.

• Sponsor should have been doing

business in financial services for notless than 5 years with positive networth in all the immediatelypreceding 5 years.

•

Sponsors, director or any principalofficer should not have been foundguilty of fraud or convicted of anoffence involving moral & economic

turpitude.



MUTUAL FUND AS TRUSTS

• Mutual fund in India is constituted inthe form of a public trust createdunder the Indian trust act of 1882.

•

Sponsor forms the trust andregisters it with SEBI and contributesto its initial capital and appointstrustees.

•

Investors are invited to contributetheir money in the common pool bysubscribing to “units”.



SEBI GUIDELINES FORTRUSTEES OF A MUTUAL

FUND• According to new SEBI regulations,at least two thirds of the trustees, onBoard of Trustees must be

independent meaning that theyshould not be associated with thesponsors.

• He/she can not be trustee of any

other mutual fund.• The trustees appoint the AMC with

the prior approval of the SEBI.



ASSET MANAGEMENTCOMPANY

• AMC is a company formed andregistered under the companies’ act,1956, to manage the affairs of

mutual fund and operate theschemes of mutual funds.



OBLIGATIONS OF AN AMC

• The AMC shall take all thereasonable steps and exercises….

• The AMC shall exercise due diligence

and care in all investments….• An AMC shall submit to the trustees

quarterly reports….• The trustees at the request of an

AMC can terminate the assignmentsof the AMC…

• An AMC shall not deal in securitiesthrough any broker….

•



SEBI (MUTUAL FUND)REGULATIONS, 1996• All the schemes to be launched by

the AMC need to be approved by thetrustees…

•

The offer documents shall containadequate disclosures to enable….• Advertisements in respect of

schemes should be in conformity

with the SEBI…• The listing of close ended schemes is

mandatory and every close endedscheme…

• Units of a close ended scheme can be



• Units of close ended scheme can alsobe converted in open ended….

• Units of close ended scheme may be

rolled over by passing…• No scheme other than the unit linked

scheme can be opened…• The AMC must specify in the offer

document about the minimum….• The AMC must refund the

application…•

Guaranteed returns can be provided

MUTUAL FUNDS IN



MUTUAL FUNDS INPRIMARY & CAPITAL

MARKET• First mutual funds in India were setup in 1964 as UNIT TRUST OF INDIAunder an act of parliament. In 1987,

•

During 1987-92, seven new mutualfunds mere established in the publicsector.

• A change in govt. policy in 1993 led

to entry of private corporate andforeign institutional investors intomutual fund segment, taking thetally of mutual funds to 37 by end-

march 2004.



• Currently, the worldwide value of allmutual funds totals more than $26trillion

•

Union budget for 1999-2000announced several tax incentives formutual fund investors. The taxconcessions were offered in the

equity oriented schemes• The Indian capital market is getting

institutionalized as investors afterincurring losses by directly investing

in the primary market are preferring



SEBI GUIDELINES RELATEDTO MUTUAL FUND• Disclosure of their entire portfolio on

a half-yearly basis should be doneaccording to a prescribed format

along with this, mutual fund schemesare required to disclose the varioustypes of instruments and percentageof investment in each scrip.

•

Mutual funds have been directed tofully revise and update offerdocument and memorandum at leastonce in two years.



• Mutual funds are also requested tocarry out the following:

– Bring uniformity in disclosures of

various categories of advertisement. – Reduce initial offer period from a

maximum of 45 days to 30 days.

•

Dispatch statement of account oncethe minimum subscription amountspecified in the offer document isreceived even before the closure of

the issue.



• All the mutual fund schemes shall belaunched within six months from thedate of the letter containing

observations from SEBI on thescheme offer document.Otherwise, a fresh offer document

along with filing fees shall be filed

with SEBI.• Mutual funds care requested to

disclose large unit holdings in thescheme, which are 25 percent of the

NAV.



SEBI(MUTUAL FUND)AMENDMENT REG., 2003• CEO are required to ensure mutual

fund compliance as per theregulations and the fund managers

are required to ensure investment asper the objective of the scheme andinterest of unit holders.

• The time validity of transactions by

employees of AMCs and Mutual fundtrust companies has been cut downto one week and the time limit forpurchase and sale has been reduced

to 30 days.



• Norms to check the abuse of mutualfund vehicle by large corporateinvestors for tax benefits were

issued in November 2003. the newnorms stipulate that each mutualfund scheme should have at least 20investors and no single investor

should hold more than 25 % of thetotal corpus of the scheme.• SEBI is working on a proposal making

it mandaotory for mutual funds to

allocate units to investors on NAVs at



RETURNS FROM MUTUAL FUNDS

• Dividends – Tax free in hands of investors

• Capital appreciation – Equity oriented schemes:

• Holding period less than 12 months- shortterm capital gains tax of 10%.

• Holding period more than 12 months- no longterm capital gains tax but security transactiontax.

– Debt-oriented schemes:• Short term capital gains added to total income

and taxed at the appreciable rate of tax forthe individual..

•

In case of long term capital gains, the investorhas a choice of selecting the rate of 10% flat



CONCLUSION

• Extreme potential of growth of mutual funds India.

• The assets under management rose

to Rs 3,26,388 crore in March 2007from Rs 80,000 crore in march 2007• Almost 30 AMCs are competing for

space in mutual fund industry here

assets under• Management (AUM) are over Rs. 3.3

lakh crore.• Mutual funds need to develop a wide

distribution network to increase its



• Industry has to bring innovativeconcepts like high yielding bonds,principal protected funds, long short

funds, arbitrate funds, dynamicfunds and precious metal funds.• There is a need to educate investors

about risk adjusted return and total

port folio return to enable them tomake an informed decision.

• When you buy any investment, it'simportant to understand both the

good and bad points. If the



Thank You

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