CONCEPT AND ROLE OF MUTUAL FUND

WHAT IS MUTUAL FUND?

COMMON POOL OF MONEY JOINT OR “MUTUAL” OWNERSHIP HENCE…LIKE SHARES OF THE

JOINT STOCK COMPANY UNITS ARE THE REPRESENTATION

OF OWNERSHIP

ADVANTAGES OF MUTUAL FUNDS

PORTFOLIO DIVERSIFICATION PROFESSIONAL MANAGEMENT REDUCTION/DIVERSIFICATION OF

RISK REDUCTION OF TRANSACTION COSTS LIQUIDITY CONVENIANCE AND FLEXIBILITY

DISADVANTAGES OF INVESTING THROUGH MF

NO CONTROL OVER COST NO TAILOR-MADE PORTFOLIO MANAGING A PORTFOLIO OF FUND

HISTORY OF MF IN HISTORY OF MF IN INDIAINDIA

MF INDUSTRY STARTED IN INDIA IN 1963 WITH FORMATION OF UTI

DIFFERENT PAHSES : • PHASE -1(UTI)

• PHASE-2 (ENTRY OF PUBLIC SECTOR MFs)

• PAHSE-3 (ENTRY OF PRIVATE MFs)

• PHASE-4 (UNDER SEBI REGULATION)

PHASE-1 ESTABLISHMENT OF UTI IN 1963 LAUNCH OF FIRST SCHEME US-64 FOLLOWED BY ULIP IN 1971, CRTS(1981),

CGS(1983), CGGF(1986), MASTERSHARE(1987) UTI THE ONLY PLAYER IN THE MARKET WITH

MONOPOLY POWER

HUGE MOBILIZATION OF FUNDS

PHASE-2

ESTABLISHMENT OF SBI-MF---THE FIRST NON-UTI MF

FOLLOWED BY CANBANK-MF, LIC-MF,BOI-MF CHANGE IN THE MIND SET OF THE INVESTORS

PHASE-3

ENTRY OF THE PRIVATE SECTOR FUND IN 1993 JV OF FOREIGN FUND MANANGEMENT

COMPANIES WITH INDIAN PROMOTERS MORE COMPETITIVE PRODUCT INNOVATION,

INVESTMENT MANAGEMENT TECHNIQUES, INVESTORS SERVICING TECHNIQUES

INVESTORS STARTED BECOME SELECTIVE

PHASE-4

SEBI- THE REGULATORY AUTHORITY UTI CAME UNDER SEBI REGULATION

VOLUNTARILY GOVT.’S STEPS FOR INVESTORS’ PROTECTION

TYPES OF FUNDS

CLOSE END/ OPEN END LOAD / NO-LOAD TAX EXEMPT/NON-TAX EXEMPT

OPEN END FUND:• UNITS AVAILABLE FOR SALE AND REPURCHASE AT

ALL TIMES

• INVESTORS CAN BUY OR REDEEM ON NAV

• Ex: ETSP”.

• UNIT CAPITAL - VARIABLE

CLOSE END FUND:• DON’T ALLOW INVESTORS TO BUY/ REDEEM UNITS

DIRECTLY FROM FUNDS

• GET LISTED ON STOCK EXCHANGE TO PROVIDE LIQUIDITY. EX: MEP

• “Units may be traded at a discount or premium to NAV based on investor’s perception on future performance and market factors”

LOAD FUND:• LOAD CHARGE TO COVER THE EXPENSES

• ENTRY/FRONT LOAD AND EXIT/ BACK LOAD

• DEFFERED LOAD - CHARGED OVER A PERIOD OF TIME

• EXIT LOAD PREFFERED OVER ENTRY LOAD FOR BENEFIT OF COMPOUNDING

• CONTINGENT DEFFERED SALES CHARGE- EXIT LOAD CHARGED DEPENDING ON THE PERIOD. EX:BOND FUND

• EVEN CLOSE END FUNDS MAY HAVE LOADS

NO LOAD FUND:• THERE IS NO LOAD- NO SALES EXPENSE CHARGE

• NAV CALCULATED AFTER ACCOUNTING FOR OTHER EXPENSES

MUTUAL FUND TYPES

BY NATURE OF INVESTMENTS• EQUITY, BOND, MONEY MARKET FUNDS

BY INVESTMENT OBJECTIVE• INCOME, GROWTH, VALUE FUNDS

BY RISK PROFILE• HIGH, LOW, MODERATE RISK FUNDS

MONEY MARKET FUND LOWEST RISK INVESTMENT IN THE SECURITY OF LESS THAN

ONE YEAR MATURITY INVESTMENT IN TREASURY BILLS, CD, COM.

PAPERS, CALL MONEY STRENGTH: LIQUIDITY AND SAFETY OF

PRINCIPAL

GILT FUND LOW RISK BUT HIGHER THAN THAT OF MMF MEDIUM TO LONG TERM MATURITY (MORE

THAN 1 YEAR) LITTLE DEFAULT RISK, HIGH INTEREST RISK IT’S PRICES FALLS IF INTEREST RATE

INCREASES AND VICE VERSA

DEBT/INCOME FUND RISK HIGHER THAN G-SEC FUND MORE EMPHASIS ON INCOME DISTRIBUTION

THAN CAPITAL APPRECIATION TYPES

• DIVERSIFIED

• FOCUSED

• HIGH YEILD (Investment in lower rate)

• ASSURED RETURN

TYPES OF EQUITY FUNDS

AGGRESSIVE GROWTH FUNDS:Investment in less researched or speculative/non-blue chip stocks

GROWTH FUNDS: Investment in stocks with above average growth prospects over 3-5 years.Ex:Tech Stock

SPECIALITY FUNDS: Sector, Offshore, Small-cap equity, Option income funds

DIVERSIFIED EQUITY FUNDS: ELSS. Ex: ETSP EQUITY INDEX FUNDS VALUE FUNDS: Invest in fundamentally sound

companies with low P/E ratio. EQUITY INCOME FUND:Invest in sectors where low

fluctuation in stock price and high dividend is expected.

TYPES OF HYBRID FUNDS

BALANCED FUNDS: More or less equal proportion GROWTH -INCOME FUNDS: Mix between good

dividend paying records and with potential of capital appreciation.

ASSET ALLOCATION FUNDS:Asset allocation between equity,debt or money market and asset allocation policy may be pre-determined or flexible.

OTHER FUNDS COMODITY FUNDS REAL ESTATE FUNDS

FUND STRUCTURE AND CONSTITUENTS

LEGAL STRUCTURE ROLE OF DIFFERENT OPERATING

BODIES FUND MERGERS AND SCHEME

TAKEOVERS

LEGAL STRUCTURE

IN INDIA

• ISSUE OF OPEN AND CLOSE END FUNDS IN SAME LEGAL STRUCTURE

• FOLLOW THE SEBI REGULATION

• TRUST FORM SPONSOR: ESTABLISHES THE MUTUAL FUND

• Must contribute 40% of the net worth of the AMC

• Need to have sound financial track record

• Appoint trustees

LEGAL STRUCTURE TRUSTEES:Manages the Mutual Fund and look after the operations of

the appointed AMC. The investments are held by the Trustee. The beneficiaries from the assets are the unit holders. The trustees have a fiduciary responsibility. Trustees approve each MF scheme floated by AMC. Trustees receive fees for their services. Trusts are formed through “Trust Deed” “Furnish report to SEBI on half yearly basis on AMC and Fund

functioning” Amc:acts as investment manager of the trust under the board supervision

and direction of the trustees “AMC Submit report to Trustees on quarterly basis, mentioning activity

and compliance factor.

LEGAL STRUCTURE AMC: Acts as investment manager of the trust under the board

supervision and direction of the trustees. AMC is the fund manager AMC floats the different MF schemes.

AMC is responsible to the trustees.

AMC fees have a ceiling decided by SEBI

– Initial issue expenses not exceeding 6%

– Recurring expenses such as trustee fees, audit fees, etc.

– When net assets do no exceed Rs.100 crores, asset management fee is

maximum 1.25% of average weekly net assets.

– When assets exceed Rs.100 crores, an additional asset management

fee of maximum 1% of additional net assets.

– If the scheme is a no-load scheme, further fee of maximum 1% of

average weekly net assets.

LEGAL STRUCTURE

The Sponsor

A sponsor appoints the asset management company. Sometimes, this power is given by the sponsor to the trustees

through the trust deed. At least 50% of directors on the board of asset management

company should be independent of the sponsor. Asset management company shall not deal with any broker/firm

associated with sponsor beyond 5% of daily gross business of the MF.

All security transactions of the asset management company with its associates should be disclosed.

Contingent Deferred Sales Charge

For no-load schemes Redemption during the first four years after purchase

First year maximum 4% Second year maximum 3% Third year maximum 2% Fourth year maximum 1%

Ceiling on Expenses

Excepting initial and redemption expenses, the total of

all other expenses should be a maximum of Average weekly Fees as % of net assets (Rs.Crores) average weekly net assets 0-100 2.5% next 300 2.25% next 300 2.0% balance 1.75%

LEGAL STRUCTURE CUSTODIAN:

• APPOINTED BY BOARD OF TRUSTEES FORSAFEKEEPING OF SECURITIES.

• IT’S AN ENTITY INDEPENDENT OF SPONSORS

BANKERS TRANSFER AGENTS

• ISSUE AND REDEEM OF UNITS AND OTHER RELATED SERVICE

DISTRIBUTORS• APPOINTED BY AMC• MAY ACT ON BEHALF OF DIFFERENT FUNDS• AGENTS - AS INDIVIDUAL

FUND MERGER & TAKEOVERS

CONSTITUTION CAN CHANGE IN MANY POSSIBLE WAYS

• AMC TAKEN OVER BY ANOTHER SPONSOR

• MERGER OF TWO AMCs

• DECISION OF TRUSTEE TO CHANGE AMC

• CHANGE OF TRUSTEES

• MERGER OF TWO SCHEMES WITH SAME AMC/TRUSTEES

MERGER OF TWO AMCs• NEEDS TO FOLLOW INDIAN CO. ACT• SEBI APPROVAL REQUIRED• CONSENT OF UNIT HOLDERS WITH 75% VOTING RIGHTS

AMC TAKEOVER BY NEW SPONSORS• HIGH COUT APPROVAL NOT REQUIRED BUT SEBI

CLEARANCE REQUIRED

SCHEME TAKE OVER• AMC CANNOT WITHDRAW OR TRANSFER THE

MANAGEMENT OF SCHEME TO ANOTHER AMC WITHOUT UNIT HOLDERS CONSENT

• TRUSTEES CANNOT EFFECT THE CHANGES IN AMC WITHOUT UNITHOLDERS CONSENT

“ANY AMMENDMENTS IN SCHEME REQUIRECONSENT OF UNIT HOLDERS IN CASE OF ONLY CLOSE END FUND. OEN END FUND NEEDS TO JUST INFORM”

Legal and Regulatory Environment

Regulators in India SEBI

– SEBI regulates MFs– All MFs have to be registered with SEBI

RBI– Bank-owned MFs are under RBI and SEBI

• Ownership of AMC by the bank• Guarantees issued by the bank as sponsor• Fund mergers of bank-sponsored MFs

– Permission to access inter-bank call money market

Regulators in India…

Ministry of Finance Company Law Board

– Department of Company Affairs• Registrar of Companies

Stock Exchanges Charity Commissioner

– Office of the public trustee• Board of trustees of MFs

Self-regulatory Organization

An organization specially empowered to regulate activities of its members

AMFI is not a self-regulatory organization

AMFI

Promote the interests of the mutual funds and unit-holders

Set ethical, commercial, and professional standards in the industry

Increase the public awareness of MF industry

Investors Rights and Obligations

Right of Proportionate “beneficial Ownership”

Right to Timely Service Right to Information Right to Approve changes in

Fundamental Attributes Right to Wind Up a Scheme Right to Terminate the AMC

Legal Limitations to Investors Rights

Investors cannot Sue the Trust. Investors can initiate legal proceedings

against the trustees Sponsors of a MF have no obligation to

meet the shortfall in non- assured schemes

Only if the OD has specifically provided such guarantee by a named sponsor the investors have a right to sue the sponsors

Prospective Investors cannot sue the Trust / the AMC or any other constituent.

Investors Obligations / Complaint Redressal

Investors should: Read Offer Document Understand Risk factors Monitor Investments Ask for information

required

“Monitoring is entirely his/ her own responsibility”

SEBI intervention For issue of due diligence

certificate for new scheme by compliance officer

Companies Act cannot protect investors as fund investors are neither shareholders in the AMC nor depositors

Fund DistributionFund Distribution & &

Sales Practices Sales Practices

Investor CommunityInvestor Community

Institutional

Investors

Individual Investors

HNIs

Retail

Who can invest in Mutual Funds Who can invest in Mutual Funds in India?in India?

Residents :

Resident Individuals

Indian Companies

Indian Trusts/ Charitable Institutions

Banks / NBFCs

Insurance Companies

Provident funds

Who can invest in Mutual Funds Who can invest in Mutual Funds in India?in India?

Non Residents :

NRIs

OCBs

Foreign Entities:

FIIs registered with SEBI

Role of the Distribution ChannelsRole of the Distribution Channels

“MFs are primarily vehicles for large collective

investments , based on the principle of pooling the funds

from a large number of investors”

Hence,

“Majority of schemes are targeted at the retail level,

from where a substantial portion of investment takes

place”

So,

“Distribution network becomes critical

in view of the spread of investor community”

Types of Distribution Types of Distribution Channels:Channels:

1.Individual Agents

2. Distribution Companies

3. Banks / NBFCs

4. Direct Marketing ( By the Sales Officers)

5.Current Distribution patterns - Non UTI funds rely on the 2&3 above.

Sales Practices in MF Sales Practices in MF Market Market

•Commission can be paid upfront or trail commission.

• Market Practice: 1-1.5% (Equity funds)

0.6-0.8% (Debt Funds)

• Higher commission paid for Tax-benefit schemes as there is a lock-in period.

Agents’ CommissionAgents’ Commission

•The initial issue expense cap of 6% includes brokerage as well.

•All SEBI regulated open ended funds are authorized to charge exit /entry loads to cover the funds’ distribution expenses.

• A no load fund includes these expenses as a part of the regular management & marketing expenses.

• SEBI prescribes a cap on all the total expenses

that can be charged to a scheme each year. Any

additional expense will have to be borne by the AMC

Agents’ CommissionAgents’ Commission

• Know the important characteristics of the scheme.

• Know your client profile (age, risk

tolerance,income levels)

• Understand clients’ needs (investment

objective,return expectation, cash flow requirement)

• Assistance in making the right choice of

investment

• Encourage regular investment and seek

commitment from the client to invest.

• Personalized post sales service.

Effective Selling of MF Effective Selling of MF SchemesSchemes

SEBI's Advertising Code• The code protects from misleading investors.• Past performance is not a guarantee• Dividends declared/paid shall be mentioned in

Rs.per unit• Only compound and annualized yield can be

advertised for schemes for more than one year.• Annualised yield must be shown for at least one,

three fine and since launch.• For less than one year performance may be

shown in terms of total returns should not be annualized.

• Appropriate benchmark should be chosen. And once chosen it should be consistent.

• Where any ranking has been made should be explained.

Appointment of AgentsAppointment of Agents

The key terms of agreement are as follows:

• The agent will provide a copy of the abridged OD to the customer and will make available for inspection a copy of the OD and sell at price currently in effect.

• The agent will execute all the transactions on behalf of the customer who will not have any recourse to the agent in case of an errors/problems/quality of investment.

• The agent must make the customer know that the funds’ units are not endorsed by him and do not constitute his obligation.

•Agent responsible at his expense to ensure compliance with applicable regulation in each jurisdiction.

•Fund not responsible for any losses claims or damages.

Key terms of Agreement………….2Key terms of Agreement………….2

• The agent will offer/sell/purchase unit at the current

public offering price.

• All orders become effective only upon acceptance

and confirmation by the fund.

• The agent is responsible to ensure compliance with

the applicable regulations in each transaction he

deals in and the fund is not responsible for any

breach by agent in this regard.

AMFI Code of EthicsAMFI Code of EthicsAMFI has recommended a code of practices with

respect to overall fund operation including

distribution and selling.

1. Management of fund should be in the interest of

unit holders.

2. High standards of service are expected from funds

3. Adequate disclosure standards

4. Professional Selling practices.

5. Fund Management in accordance to stated

investment objective.

6. Avoid conflict of interest in its dealing with its

employees.

7. Refrain from unethical market Practices.

Fund broking practices in US

Cap on sales/distribution expenses. Broker is not allowed to describe a fund as no load

fund if it has front-end or default load. Broker prohibited from recommending that purchase

of units before ex-dividend may be advantageous. Prohibited from using commission as a basis for

recommending a fund. Preferred pricing to specific investors prohibited.

BEST OF LUCK

Thank You