What is a Mutual Fund? Depending upon the risk profile, one should look at investing some part of the savings or earnings in the stock market. But direct investing puts a person at great risk. So, the next best alternative is going to ‘mutual fund’. One can describe a mutual fund as a protector that pools in the savings or funds, from a large number of investors or public who have a basic financial goal. Mutual funds issue units to its investors, which represent equal rights in the assets of the mutual fund. Mutual fund by its nature is diversified i.e. its assets are invested in many different financial securities. Investments in the mutual funds may be in the form of stocks, bonds or money market securities or combination of these. These are professionally maintained on behalf of the shareholders and each, the investor holds a pro-rata share which we can call units in mutual funds of the portfolio entitled to any profits when the securities are sold, but subject to any losses as well. There are a number of schemes of Mutual Fund and all of them has different objective and character.
It is the skill of the investor to keep in view the objective and then take the decision where to invest. e.g. In the software sector, the Indian Mutual Fund launched various sector-specific schemes that involved only software stocks for that period of time. A lot of action is taking place in the Mutual Fund industry in India especially in the field of acquisitions and mergers.
The principal mutual fund has acquired the entire stake of their partner DBI in their AMC. On the other hand, it has also taken over the operation of Sun & F C another mutual fund. This comes on the back of the acquisition of Pioneer-IIT by Franklin Templeton. In March 2003, HDFC mutual fund has acquired Zurich mutual fund. It is believed that such mergers and acquisitions will continue in future too. There are at present 31 players in the field, out of which 6 players are marginal.
Regulators of the Mutual Fund
• STOCK EXCHANGE
• PUBLIC TRUSTEE OFFICE
Role of regulators SEBI
• Formed in 1991
• Apex body to regulate capital market activities
• All mutual funds have to be registered with them
• SEBI guidelines govern mutual fund operations, investments, income-expense accounting, and disclosures for investor protection
• Dual supervisory role in mutual fund regulation
• Bank owned mutual fund. RBI and SEBI both jointly regulate mutual funds
SEBI- market-related and investor-related
RBI – issues regarding ownership of AMC, fund mergers, capital adequacy for assured returns
• Money Market Mutual Fund guidelines were formulated in 1995. Bank institutions and private sector were allowed to set up the money market mutual fund.
Ministry of Finance
• Supervises both RBI and SEBI
• Plays the role of appellate authority for disputes in SEBI guidelines
Company Law Board, Department of Company Affairs, Registrar of Company
• CLB is the apex regulatory authority under Company’s Act. CLB is a body specially constituted by the Central Government for carrying out judicial proceedings with respect to company affairs. CLB has the legal standing of a civil court and may call for inspection of documents, enforce attendance.
• Overall responsibility for formulating and modifying to companies lies with the DCA.
• ROC ensures that AMC or the Trustee Company as in compliance with all Companies Act Provision. All records are filed with the ROC. He plays the
role of watchdog
Office of Public Trustee
• The Board of Trustees or the Trustee Company is accountable to the Office of Public Trustee.
• The Office reports to the charity commissioner.
Self-Regulatory Organisations (SRO)
• SROs are the organizations, which group market participants and have been granted some powers to regulate their own members e.g. Stock Exchange regulating its broker under overall supervisory by SEBI.
• SROs regulate admissions, set code of conduct, rules, and bylaws.
• Every Trade Associations is not necessarily an SRO.
• Investment Company plays the role of the industry association for mutual funds in the USA. AMFI is not an SRO as on date.
• Stock Exchange is an SRO supervised by SEBI.
Who can invest?
• Banks and Insurance companies
• Primary Dealers
• Provident Funds
• Mutual Funds
• Foreign Institutional Investors
• Corporates and NBFCs
• Retail Investors
• Non-Residents Indians
• Overseas Corporate Bodies
Foreign Institutional Investors registered fund with SEBI can invest in mutual fund. Here, the important thing to remember is foreign citizens are not allowed to invest in mutual funds.
Investor’s Rights and Obligations
• Right in beneficial ownership of the assets
• Right to get the dividend
• Right to get information from trustees
• Right to receive dividend warrants within 42 days
• 75% of the unit holders can terminate the AMC
• Right to inspect major documents
• Fundamental attributes of a closed-end fund can be changed by 75% consent
• Right to receive the financial statement, personal statement
Offer Document Financial Statement Due diligence Certificate from compliance officer
Advantages of mutual fund
- Normally mutual funds invest in the well-diversified portfolio. As each investor is a part owner of all fund’s assets, so he can invest in diversified portfolio even with a small amount.
- The investment management skills along with the needed research into available investment options ensure a much better return than what an investor can manage on his own.
- Diversification reduces the risk of loss as compared to investing directly in one or two shares or debentures or other instruments. When an investor invests directly then the risk of loss is his own. But if he invests in well-diversified securities then the loss is automatically shared with the other investors.
- A direct investor bears all the costs of investing such as brokerage or custody of securities, but if he goes through a fund he has the benefit of economies of scale, less cost due to large volume.
- An investor can liquidate the investment by selling the units to the fund if open-ended or selling them in the market if the fund is the closed end.
- Here investor can easily transfer his holdings from one scheme to the other and get updated information.