In This Chapter
- Mutual Funds
- Parties to Mutual Funds
- Types of Mutual Fund Schemes
- NAV & AMFI
A mutual fund connects the investor and the securities market by mobilising savings from the investors and investing them in the securities market to generate returns.
According to the SEBI, a mutual fund is ”a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments or gold or gold instruments or real estate assets.”
Parties to Mutual Funds
Sponsor – The sponsor is the same as the promoter of a company as he gets the fund registered with SEBI. A mutual fund can be sponsored by a bank, financial institution, or companies, whether foreign or Indian or a joint venture between the two.
The SEBI registers the fund only when the sponsor has a sound track record of doing business in financial services for not less than five years with a positive net worth in all the immediately preceding five years and when the sponsor or any of the officers or principal officers to be employed by the mutual fund, should not have been found guilty of fraud or convicted of an offence of moral turpitude.
The sponsor forms a trust and appoints a board of trustees, AMC as fund manager and custodian. He is required to contribute at least 40% of the minimum net worth of the asset management company.
Boards of Trustees (BoT) – Mutual funds are managed by the board of trustees, which is an independent body and acts as a protector of the unit holders’ interest. At least two-thirds of the trustees shall be independent trustees who are not associated with subsidiaries or sponsors in any manner.
Asset Management Company (AMC) – The AMC is a company registered under the Companies Act 2013 to manage the affairs of the mutual fund and operate the schemes of such mutual funds. It acts as the investment manager of the trust under the supervision and direction of the trustees. The AMC of a mutual fund must have a net worth of at least Rupees 10 crore at all times, and this should be in the form of cash. At least 50% of the directors of a board of directors of AMC should not be associated with sponsors or trustees.
Custodian – A custodian is responsible for safe keeping of cash, securities, gold or gold-related instruments, or real estate mutual fund instruments. He is appointed by trustees and is independent of the sponsor. The custodian also participates in the clearing system through an approved depository and is responsible for the loss of or damage to the securities due to negligence on its part on the part of its approved agents.
Registrar and Transfer Agents – The registrar and transfer agent is a vital communication links between the unit holder and the mutual fund. They accept and process the investor’s application, manage communication with investors, dispatch account statements, and perform such other functions as agreed on an ongoing and charge fees for carrying out investor services.
Types of Mutual Funds Schemes
On the basis of functional classification
Open-ended schemes – Open-ended schemes are those schemes where investors can redeem and buy new units all throughout the year at their convenience at NAV or NAV-related prices. These schemes do not have fixed corpus and need not be listed on a stock exchange. These types of schemes increase liquidity to investors.
Close-ended schemes – Close-ended schemes are open for subscription only for a specified period and have a fixed corpus. The investors can buy units only from the market once initial subscriptions are over, and thereafter units are listed on an exchange where they can be bought and sold. The NAV of these schemes is disclosed on a weekly basis.
Interval Scheme – It combines the feature of open-ended and close-ended schemes. They are open for sale or redemption during predetermined intervals at NAV-related prices.
On the basis of Investment Classification
Equity Fund – If the funds of a particular scheme are invested in equity shares, then it is an equity fund. These funds are riskier than debt funds. Examples- Arbitrage funds, index funds, sector funds, and equity-linked saving schemes.
Debt Fund – If the funds of a particular scheme are invested in debt instruments, then it is a debt fund. These funds have low-risk and high liquidity. Debt funds investment is mostly made in government securities, bank fixed deposits, money market instruments, PSU bonds, etc.
Hybrid Funds – Combines the benefits of both equity and debt funds. Hybrid funds can be equity-oriented funds or debt-oriented funds. If the equity holding of the fund in domestic companies exceeds 65%, then it is equity oriented fund. Similarly, if the investment in debt securities exceeds 65%, then it is a debt fund. If the investment is made 50% in equity and 50% in debt, then it is a balanced fund.
On the basis of Portfolio Classification
Income Funds – The aim of income funds is to provide safety to investment and regular income to investors. Investment is mostly made in fixed-income-bearing instruments. The risk and return are lower in such funds.
Growth Funds – These funds provide capital appreciation to the investor and predominately invest in equity shares with significant growth potential and high returns in the long run. However, there is no guarantee of returns.
Balanced Funds – The aim of balanced funds is to provide both regular income and capital appreciation to investors. The investment is made in both equity and fixed-income-bearing instruments in such a proportion that the portfolio of the investor is balanced. The risk exposure is moderate, and a reasonable rate of return is offered.
On the basis of Geographical Classification
Domestic Funds – The fund that operates within a particular geographical locality is domestic funds. These funds have a limited market and can only be issued and traded in the domestic financial markets.
Offshore Funds – Offshore funds attract foreign capital for investment in the country of issuing company. Such mutual funds can invest in the securities of foreign companies. They open the domestic market to international investors. These funds increase the foreign exchange reserves by facilitating the cross-border fund flow.
Exchange Traded Funds – These funds are a hybrid of open-ended mutual funds and listed individual stocks. They are index funds listed on stock exchanges and trade like individual stocks.
Gold Exchange Traded Funds – A listed security backed by allocated gold held in the custody of a bank on behalf of investors. These funds allow investors to participate in the gold bullion market without taking physical delivery of gold.
NAV and AMFI
Net Asset Value (NAV)
The net asset value of a fund is the market value of the assets minus the liabilities on the day of valuation. It is the amount that the shareholders will collectively get if the fund is dissolved or liquidated. NAV of the scheme reflects the performance of the scheme on a day-to-day basis. It is the price at which an investor can buy or sell a unit of a mutual fund scheme.
NAV = Market Price of securities + other assets – Total liabilities/units outstanding as at the NAV date.
NAV per unit = Security Value + Dividend – Liabilities / No. of Units
The Association of Mutual Funds in India (AMFI)
Established in 1993 to address the issues that affect the mutual fund industry, the AMFI is dedicated to developing and enhancing the Indian mutual fund industry, maintaining high professional and ethical standards in all areas of operation of the mutual fund industry with a view to protect and promote the interest of mutual funds and their unit holders.