Retail Banking
MUTUAL FUND - CONCEPT, STRUCTURE AND TYPES
Mutual Fund is an investment plan wherein MF pools investors
money to invest in pre-determined goals for capital appreciation.
Benefits of Mutual Funds:
✅· It's safe
✅· No need to
stay updated with market movements
✅· Experts
manages the investments
✅· Tax saving
under section 80(c)
✅· Investors can
invest in any investment option.
➡Structure of a Mutual Fund:
i) Sponsor (Promoter)
ii)Trustees
iii) Asset Management Company
iv) Custodian
v) R & T Agent
vi) Distributors
i) Sponsor:
➡Sponsor is the promoter of mutual
fund and get MF registered with SEBI. Sponsor forms a trust and appoints board
of trustees.
➡Pre-requisites of a sponsor:
✅· Minimum 40%
shareholding in AMC (Asset Management Company)
✅· Must have
positive net worth in last 5 years
✅· Should be in
financial services sector during past years from the date of registration
➡ii) Trust:
Trust is the owner of mutual fund. It protects the investors
money. Trust acts as a watchdog and keeps an eye on investors money. There
should be at least 4 trustees and 2/3 of the trustees should be independent.
Trust signs trust deed with Sponsor
➡iii) Asset Management Company:
ASM pools and invests investor money in pre-stated objective for
capital appreciation. In India AMC should be a private limited company. Net
worth should be at least 10cr at all times At least 50% directors should be
independent.
➡iv) Custodian:
Custodian is appointed by Trust and it has the custody of assets
of Mutual Fund. Sponsor and custodian can never be same Custodian should be
registered with SEBI.
➡v) Registrar and Transfer agents
(RTA):
Maintains investors records and handles investors documents.
It's not compulsory to appoint an RTA.
Broad Categories of Mutual Funds Open Ended Funds
These funds have no fixed corpus and period. Such fund
continuously offer units for sale and is ready to buy back the units
surrendered.
In other words, investors are free to buy from, or sell to, the
trust any number of units at any point of time at prices which are linked to
the net asset value (NAV) of the units.
➡Close Ended Funds:
In case of these funds, subscriptions from the investors are
collected during a specified time period and have a fixed corpus. Not a cannot
redeem their units till the specified maturity date. However, to provide
liquidity these are listed on the stock exchange and the investors can purchase
and sell through the brokers at the market price without any difficulty. It may
be noted that Unit Trust of India was the first mutual fund started in India as
early as 1964. Later, LIC, GIC and some nationalised banks also launched their
mutual funds with high degree of success. However, during post liberalisation
era, many private sector mutual funds have entered the fray. To mention a few.
these are: Birla Sun life, HDFC, HSBC, ICICI prudential, DSP Merrill Lynch, DBS
chola mutual Fund.
Major Types of Funds:
➡1) Equity Funds:
Equity Funds are considered to be the more risky funds as
compared to other fund types, but they also provide higher returns than other
funds. It is advisable that an investor looking to invest in an equity fund
should invest for long term i.e. for 3 years or more. There are different types
of Equity funds each falling into different risk bracket.
➡2) Debt/Income Funds :
Funds that invest in medium to long -term debt instruments
issued by private companies, banks , financial institution, government and
other entities belonging to various sector ( like infrastructure companies
etc.) are known as Debt /Income Funds. Debt funds are low risk profile funds
that seek to generate fixed current income (and not capital appreciation) to
investors. In order to ensure regular income to investors, Debt (or income)
funds distribute large fraction of their surplus to investors. Although debt
securities are generally less risky than equates, they are subject to credit
risk (risk to default) by the issuer at the time or interest or principal
payment. To minimize the risk of default, debt funds usually invest in
securities from issuers who are rated by credit rating agencies and are
considered to be of "Investment Grade ". Debt funds that target high
return are more risky.
➡3) Gilt Funds:
Also known as Government Securities in India, Gilt Funds invest
in government papers (named dated securities) having medium to long term
maturity period, issued by the Government of India , these investments have
little credit risk (risk of default) and provide safety of principal to the
investors
. However, like all debt funds, gilt funds too are exposed to
interest rate risk. Interest rates and prices of debt securities are inversely
related and any change in the interest rates results in a change in the NAV of
debt/ gilt funds in an opposite direction.
➡4) Money Market/Liquid Funds:
Money market /liquid funds invest in short -term (maturing
within one year) interest bearing debt instrument. These securities are highly
liquid and provide safety of investment, thus making investment option when
compared with other mutual /liquid funds are exposed to the interest rate risk.
The typical investment option for liquid funds include Treasury Bills (issued
by government), commercial papers (issued by companies) and certificates of
deposit (issued by banks).
➡5) Hybrid Funds:
As the name suggests, hybrid funds are those funds whose
portfolio includes a blend of equities, debts and money market securities.
Hybrid funds have an equal proportion of debt and equity in their portfolio.
➡6) Commodity Funds:
Those funds that focus on investing in different commodities
(like metals, food grains. crude oil etc.) or commodity companies or commodity
futures commodity are termed as commodity funds. A commodity fund that invests
in a single commodity or a group of commodities is a specialized commodity fund
and a commodity fund that invests in all available commodities is a diversified
commodity fund and bears less risk than a specialized commodity fund. “Precious
Metals Fund” and Gold Funds (that invest in gold, gold futures or shares of
gold mines) are common example of commodity funds.
➡7) Real Estate Funds:
Funds that invest directly in real estate or lend to real estate
developers or invest in shares /securitized assets of housing finance
companies, are known as specialized Real Estate funds. The objective of these funds
may be generate regular income or investors or capital appreciation.
➡8) Exchange Traded Funds (ETF):
Exchange traded funds provided investors with combined benefits
of a closed -end and an open -end mutual fund. Exchange traded funds follow
stock market indices and are traded on stock exchange like a single stock at
index linked prices. The biggest advantage offered by these funds is that they
offer diversification, flexibility of holding a single share (tradable at index
linked prices) at the same time. Recently introduced in India, these funds are
quite popular abroad.
➡9) Fund of funds:
Mutual funds that do not invest in financial or physical, but do
invest in other mutual fund schemes offered by different AMCs, are known as
fund of funds. Fund of Funds maintain a portfolio comprising of units of other
mutual fund scheme, just like conventional mutual funds maintain a portfolio
comprising of equity /debt money market instrument or non-financial assets.
Fund of Funds provide investor with an added advantage of diversifying into
different mutual fund schemes with even a small amount of investment, which
further helps in diversifying of risks. However, the expenses of fund of funds
are quite high on account of compounding expenses of investments into different
mutual fund schemes
GKD*
MUTUAL FUND - CONCEPT, STRUCTURE AND TYPES
Mutual Fund is an investment plan wherein MF pools investors
money to invest in pre-determined goals for capital appreciation.
Benefits of Mutual Funds:
✅· It's safe
✅· No need to
stay updated with market movements
✅· Experts
manages the investments
✅· Tax saving
under section 80(c)
✅· Investors can
invest in any investment option.
➡Structure of a Mutual Fund:
i) Sponsor (Promoter)
ii)Trustees
iii) Asset Management Company
iv) Custodian
v) R & T Agent
vi) Distributors
i) Sponsor:
➡Sponsor is the promoter of mutual
fund and get MF registered with SEBI. Sponsor forms a trust and appoints board
of trustees.
➡Pre-requisites of a sponsor:
✅· Minimum 40%
shareholding in AMC (Asset Management Company)
✅· Must have
positive net worth in last 5 years
✅· Should be in
financial services sector during past years from the date of registration
➡ii) Trust:
Trust is the owner of mutual fund. It protects the investors
money. Trust acts as a watchdog and keeps an eye on investors money. There
should be at least 4 trustees and 2/3 of the trustees should be independent.
Trust signs trust deed with Sponsor
➡iii) Asset Management Company:
ASM pools and invests investor money in pre-stated objective for
capital appreciation. In India AMC should be a private limited company. Net
worth should be at least 10cr at all times At least 50% directors should be
independent.
➡iv) Custodian:
Custodian is appointed by Trust and it has the custody of assets
of Mutual Fund. Sponsor and custodian can never be same Custodian should be
registered with SEBI.
➡v) Registrar and Transfer agents
(RTA):
Maintains investors records and handles investors documents.
It's not compulsory to appoint an RTA.
Broad Categories of Mutual Funds Open Ended Funds
These funds have no fixed corpus and period. Such fund
continuously offer units for sale and is ready to buy back the units
surrendered.
In other words, investors are free to buy from, or sell to, the
trust any number of units at any point of time at prices which are linked to
the net asset value (NAV) of the units.
➡Close Ended Funds:
In case of these funds, subscriptions from the investors are
collected during a specified time period and have a fixed corpus. Not a cannot
redeem their units till the specified maturity date. However, to provide
liquidity these are listed on the stock exchange and the investors can purchase
and sell through the brokers at the market price without any difficulty. It may
be noted that Unit Trust of India was the first mutual fund started in India as
early as 1964. Later, LIC, GIC and some nationalised banks also launched their
mutual funds with high degree of success. However, during post liberalisation
era, many private sector mutual funds have entered the fray. To mention a few.
these are: Birla Sun life, HDFC, HSBC, ICICI prudential, DSP Merrill Lynch, DBS
chola mutual Fund.
Major Types of Funds:
➡1) Equity Funds:
Equity Funds are considered to be the more risky funds as
compared to other fund types, but they also provide higher returns than other
funds. It is advisable that an investor looking to invest in an equity fund
should invest for long term i.e. for 3 years or more. There are different types
of Equity funds each falling into different risk bracket.
➡2) Debt/Income Funds :
Funds that invest in medium to long -term debt instruments
issued by private companies, banks , financial institution, government and
other entities belonging to various sector ( like infrastructure companies
etc.) are known as Debt /Income Funds. Debt funds are low risk profile funds
that seek to generate fixed current income (and not capital appreciation) to
investors. In order to ensure regular income to investors, Debt (or income)
funds distribute large fraction of their surplus to investors. Although debt
securities are generally less risky than equates, they are subject to credit
risk (risk to default) by the issuer at the time or interest or principal
payment. To minimize the risk of default, debt funds usually invest in
securities from issuers who are rated by credit rating agencies and are
considered to be of "Investment Grade ". Debt funds that target high
return are more risky.
➡3) Gilt Funds:
Also known as Government Securities in India, Gilt Funds invest
in government papers (named dated securities) having medium to long term
maturity period, issued by the Government of India , these investments have
little credit risk (risk of default) and provide safety of principal to the
investors
. However, like all debt funds, gilt funds too are exposed to
interest rate risk. Interest rates and prices of debt securities are inversely
related and any change in the interest rates results in a change in the NAV of
debt/ gilt funds in an opposite direction.
➡4) Money Market/Liquid Funds:
Money market /liquid funds invest in short -term (maturing
within one year) interest bearing debt instrument. These securities are highly
liquid and provide safety of investment, thus making investment option when
compared with other mutual /liquid funds are exposed to the interest rate risk.
The typical investment option for liquid funds include Treasury Bills (issued
by government), commercial papers (issued by companies) and certificates of
deposit (issued by banks).
➡5) Hybrid Funds:
As the name suggests, hybrid funds are those funds whose
portfolio includes a blend of equities, debts and money market securities.
Hybrid funds have an equal proportion of debt and equity in their portfolio.
➡6) Commodity Funds:
Those funds that focus on investing in different commodities
(like metals, food grains. crude oil etc.) or commodity companies or commodity
futures commodity are termed as commodity funds. A commodity fund that invests
in a single commodity or a group of commodities is a specialized commodity fund
and a commodity fund that invests in all available commodities is a diversified
commodity fund and bears less risk than a specialized commodity fund. “Precious
Metals Fund” and Gold Funds (that invest in gold, gold futures or shares of
gold mines) are common example of commodity funds.
➡7) Real Estate Funds:
Funds that invest directly in real estate or lend to real estate
developers or invest in shares /securitized assets of housing finance
companies, are known as specialized Real Estate funds. The objective of these funds
may be generate regular income or investors or capital appreciation.
➡8) Exchange Traded Funds (ETF):
Exchange traded funds provided investors with combined benefits
of a closed -end and an open -end mutual fund. Exchange traded funds follow
stock market indices and are traded on stock exchange like a single stock at
index linked prices. The biggest advantage offered by these funds is that they
offer diversification, flexibility of holding a single share (tradable at index
linked prices) at the same time. Recently introduced in India, these funds are
quite popular abroad.
➡9) Fund of funds:
Mutual funds that do not invest in financial or physical, but do
invest in other mutual fund schemes offered by different AMCs, are known as
fund of funds. Fund of Funds maintain a portfolio comprising of units of other
mutual fund scheme, just like conventional mutual funds maintain a portfolio
comprising of equity /debt money market instrument or non-financial assets.
Fund of Funds provide investor with an added advantage of diversifying into
different mutual fund schemes with even a small amount of investment, which
further helps in diversifying of risks. However, the expenses of fund of funds
are quite high on account of compounding expenses of investments into different
mutual fund schemes
GKD*
