Role of SEBI in Mutual fund industry
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund.
Schemes according to maturity period
A mutual fund scheme can be classified into open-ended scheme or close-ended. Scheme based on the maturity period.
Open-ended fund scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended fund scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV on weekly basis.
Investment- orientation of mutual fund schemes
Mutual funds invest in the three broad categories of financial assets.
Equity schemes
Equity schemes invest the bulk of their corpus- 85% to 90% or even more in equity shares or equity linked instruments and balance in cash. Equity schemes offered by mutual funds in
Diversified equity schemes
These schemes invest in a broadly diversified portfolio of equity stocks. Typically, such schemes have 20- 50% or even more equity stocks from a wide range of industries.
Example: HDFC equity schemes.
Index schemes
An index scheme is an equity scheme that invests its corpus in a basket of equity stocks that comprise a given stock market index such as Nifty Index or the Sensex, with each stock being assigned a weight age equal to what it has in the index. Thus, an index scheme appreciates or depreciates (subject to tracking error) the same way as the index.
The principal objective of an index scheme is to give a return in line with the index.
Example: UTI Master Index and Franklin India index NSE Nifty.
Sectoral schemes
A sectoral scheme invests its corpus in the equity stocks of a given sector such as pharmaceuticals, information technology, telecommunications, power, and so on. These schemes appeal to investors interested in taking a bet on specific sectors.
Example: UTI Petro and Franklin InfoTech.
Tax Planning Schemes
Tax planning schemes or equity linked savings schemes (ELSS) are open to only individuals and HUFs. Subject to such conditions and limitations, as prescribed before under section 80C of the Income Tax Act, subscriptions to such schemes can be deducted before computing the taxable income.
Example: Franklin India Tax shield and HDFC Tax plan 2000 are examples of such schemes.
Hybrid schemes
Hybrid schemes also refer to as balanced schemes; invest in a mix of equity and debt instruments. A hybrid scheme may be equity – oriented or debt – oriented or has a variable asset allocation.
Equity-oriented schemes
An equity- oriented hybrid scheme is titled in favor of equities which may account for about 60% of the portfolio, the balance being invested in debt instruments (bond and cash).
Examples: HDFC Prudence and Unit Scheme 95.
Debt- oriented schemes
A debt-oriented hybrid scheme is titled in favor of debt instruments. The most popular debt-oriented schemes in
Example: Birla MIP and FT India MIP.
Variable Asset Allocation schemes
A variable asset allocation scheme is one wherein the proportions of equity and debt are varied, often on the basis of some objective criterion.
Example: In November 2002, UTI introduced an Index Linked Plan (ILP), a plan under UTI variable debt and equity under different market conditions. The allocation to equity (debt) increases (decreases) when the market falls but decreases (increases) when the market rises.
Debt schemes
Debt schemes invest in debt instruments namely bonds and cash. The debt schemes are sub categorized as,
Gilt schemes
A gilt schemes or a government securities scheme invests only in government bonds and cash. Gilt schemes may vary in maturities: long-term, medium terms, and short terms.
Example: Tata GSF
Mixed debt schemes
Mixed debt schemes invest in government bonds, corporate bonds, and cash. Example: HDFC income bond
Floating rate debt schemes
It is invested in a portfolio comprising substantially of floating rate debt bonds, fixed rate bonds swapped for floating rate returns and cash. Example: Prudential ICICI floating rate schemes.
Cash schemes
Cash schemes, also called liquid schemes, invest primarily in money market instruments and deposits in bank. Example: HDFC liquid treasury.
Advantages of Mutual funds
The advantages of investing in a Mutual Fund are:
Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated
Selecting a mutual fund
Picking a mutual fund from among the thousands offered is not easy. Following are some guidelines:
1. Prior to investing in a tax-exempt or tax-managed fund, it is best to determine if the tax savings will offset the possibly lower returns.
2. Investors should match the term of the investment to the time period they expect to keep the investment.
3. Fund expenses degrade investment performance, especially over the long term. Accordingly, all other things being equal, the lower the expenses, the better.
4. Several sector funds often make the "best fund" lists each year. However, the "best" sector varies from year to year. Most sectors are vulnerable to industry-wide events that can have a significant negative effect on performance. It is generally best to avoid making these a large part of one's portfolio.
5. Closed-end funds often sell at a discount to the value of their holdings.
6. Mutual funds often make taxable distributions near the end of the year (semi-annual and quarterly distributions are also fairly common). If an investor plans to invest in a taxable fund, he or she should check the fund company's website to see when the fund plans to distribute dividends and capital gains.
Rating of Mutual Fund schemes
Mutual fund schemes are periodically evaluated by independent institutions. CRISIL, value Research
CRISIL
Credit Rating and Information Services of India Limited (CRISIL) carries out Composite Performance Rankings that covers all open – ended schemes and it ranks Equity schemes, Debt schemes, Gilt schemes, Balanced schemes, and Liquid schemes.
Its ranking is based on the four criteria namely return of the scheme NAV, diversification of the portfolio, liquidity, and asset size. The weights vary from category to category. With in each category, the top 10 percent are considered very good, the next top 20 percent good, the next 40 percent average, the next 20 percent below average and the last 10 percent poor.
Value Research
Value Research
Economic Times Lipper
The Economic Times powered by Lipper, evaluates mutual fund schemes using a return – risk ratio which is defined as average return divided by standard deviation of return. The Economic Times periodically reports the return – risk ratio for top performing schemes along with a few other parameters.
Industry Profile
A mutual fund represents a vehicle for collective investment. Till 1986, the Unit Trust of India was the only mutual fund in
In 1992, the mutual fund industry was opened to the private sector, and a number of private sector mutual funds such as Birla Mutual Fund, DSP Merrill Lynch Mutual Fund, Kotak Mahindra Mutual Fund, Morgan Stanley Mutual fund, Tata Mutual Fund, Prudential ICICI Mutual Fund, Reliance Mutual Fund, Standard Chartered Mutual Fund, Templeton Mutual Fund, IDBI- Principal Mutual Fund have been set up. The process of consolidation began in recent years.
At present, there are about 30 mutual funds managing nearly 1000 schemes. While the mutual fund industry in
History of the Indian Mutual Fund Industry
The mutual fund industry in
First Phase – 1964-87
Unit Trust of
Second Phase – 1987-1993 (Entry of Public Sector Funds)
The year 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.1, 53,108 crores under 421 schemes.
Concept
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:
Organization of a Mutual fund
There are many entities involved in the mutual fund and the diagram below illustrates the organizational set up of a mutual fund: In India the following entities are involved in a mutual fund operation:
Sponsor
The sponsor of the mutual fund is like a promoter of a company. The sponsor may be a bank, a financial institution, or a financial services company. It may be Indian or foreign.
The sponsor has to obtain a license from SEBI for which it has to satisfy several conditions relating to capital, profits, track record, default free dealings, and so on.
The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is the settler of the mutual fund trust.
The Mutual Fund
The mutual fund is constituted as a trust under the Indian Trust Act, 1881, and registered with SEBI. The beneficiaries of the trust are the investors who invest in various schemes of the mutual fund.
Trustees
A trust is a notional entity that cannot contract in its own name. So the trust enters in to contracts in the name of the trustees. He is appointed by the sponsor; the trustees can be either individuals or a corporate body (a trustee company). To ensure that the trustees are fair and impartial, SEBI rules mandate that at least two thirds of the trustees are independent- this means that they have no association with the sponsor.
The trustees appoint the asset management company (AMC), secure necessary approvals, periodically monitor how the AMC functions, and hold the properties of the various schemes in trust for the benefit of investors. Trustees can be held accountable for the financial irregularities of the mutual fund.
Asset Management Company
The asset management company also referred to as the Investment Manager, is a separate company appointed by the trustees to run the mutual fund.
The AMC handles all operational matters such as designing the schemes, launching the schemes, managing investments and interacting with investors.
Custodian
The custodian handles the investment back office operations of a mutual fund. Inter alia, it looks after the delivery of securities, collection of income, distribution of dividends, and segregation of assets between schemes.
The sponsor of a mutual fund cannot act as a custodian. This condition is meant to ensure that the assets of the mutual fund are not in the hands of its sponsor.
Registrars and Transfer Agents
The registrars and transfer agents handle investor-related-services such as issuing units, redeeming units, sending fact sheets and annual reports and so on. Some funds handle such functions in-house, while others outsource it to SEBI-approved registrars and transfer agents like Karvy and CAMS.
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