Mutual Funds(Part 2)

  STRUCTURE FRAMEWORK OF MUTUAL FUNDS

 1.Sponsor:It is a type of finance company,which establish Mutual fund and registred with SEBI.It also,appoint Trustees,the AMC(Asset mangement Company) and Custodian with the prior approval of SEBI and according with SEBI Regulations.

Sponsor shoild have 5year track record in Business related to Financial Market.Also,sponsor's company should have at least  3 year profit making from 5 years.It should contribute 40% of the net worth in AMC in which it is sponsering.Sponsor could be a Banks( SBI,PNB,ICICI ect) or Financial institutions or a Corporates(like Reliance.TATA ect).

2.Trustee:It is also a private ltd company(like Reliance cap Trustee co.ltd).It  protect investors money by playing a role of Gardian.Investors of these fund are the members of this Trustees.

3.Assets Management Company(AMC):It is a pvt ltd Company(like Reliance cap asset mgt company) formed by sopnsor.It's main role is to manage the fund pooled from the investors,it also play a key role of Marketing and Distribution of funds.AMC's have tie up with Banks for the direct credit facilities and other settelment systems.Also,have tie up with custodian(like Karvy) for keeping securities in D-MAT form.

Rights of Trustees:

1.Trustee appoint AMC(Asset Management Company) with the consultation with Sponsor and according to the SEBI Regulations.

2.All Mutual fund schemes launched or floated by the AMC have to be approved by Trustees.

3.Trustees must seek remedial actions fro AMC and in case disiss the AMC.

Obligation of the Trustees:

1.Trustees must ensure due deligence on part of AMC in the appointment od constitution and business associates.

2.Trustees must frunished a harlf yearly report on the activities of AMC  to the SEBI.

3.Trustees must compliance with SEBI Regulations.

4.According to the SEBI Regulations Trustees should organized meeting one  in every two month.

Regulatory Requirement for the AMC's:

1.Only SEBI registered AMC can appoint investor manager of Mutual funds.

2.AMC must have minimum Net Woth of  Rs10 crore at all time .

3.An AMC or Trustees can not be an Trustees or AMC of another Mutual fund.

4.AMC can not enggage in any other business other than Asset management.

5.At least half of the member of AMC ,have to an independent.

Appointment of AMC:

1.The Sponsor or Trustees,if authorized by trust deed appoint the AMC.

2.The AMC are the pvt ltd corporation ,in which the sponsors and their associates or JV partners are shareholders.

3.The AMC has to be a SEBI registered entity with a minimum Net Worth od Rs 10 crore.

The trustees sign an Investment management agreement with the AMC,which spells out the function of the AMC.

Roles of Registrar and Transfer Agents :

1.They are responsible for issuing and redeeming unit of Mutual fund.

2.There role is to process investors applications.

3.The keep details of all investors.

4.They send important informations to the investors.

5.They process Dividend payout.

6.They incorporate changes in investor information.

7.They helps in keeping investors information upto date.

Regulating agencies of Mutual funds:

1.Mutual funds are regulated by SEBI through Mutual fund regulations act 1996.SEBI regulate all funds except offshore funds(ie those scheme offered in foreign counties).

2.Bank sponsored mutual fund were jointly regulated by RBI and SEBI.

3.Liquide fund which invest money in money market instruments are not governed by SEBI alone.

4.If Bank sponsored Mutual fund offers guatrantees,it requires RBI permission.

5.SEBI also regulate Registrar,Custodian,Stock market ect.

Association of Mutual Fund India(AMFI)

AMFI is a Mutual fund industry association,incorporated in 1995.It can just issue guideline to members to enhance and maintain standard in all area.It helps in protecting and promoting the interest of mutual funds and there Unit holders.

Objectives of Mutual Funds:

 1.To promote the interest of Mutual fund and Unit holders.

2.To set ethics,Commercial and proffesional standard in the Industry.

3.To increase public awareness of Mutual fund industry.

4.To developea cadre of well trained distributors.

 

SEBI's Advertising Code for Mutual fund:

1.The dividend declared or paid shall be mentioned in Rs/unit along with the face value of each unit and prevailing NAV at the time of declaration of the dividend.

2.Only Compounded annualised yield can be advertised  if scheme has been existance for more than one year.

3.All performance calculations shall be based only on NAV and payout to the unit holders.

4.Annualised yield should be shown for 1,3,5 years and since launch of the scheme.For the fund with less than 1 year performance can be termed as total returns.

5.Appropriate benchmark and identical time period must be used while comparing.Once choosen the benchmark should be used consistently overtime.

6.Where any ranking is used such ranking be appropriatly mentionaed.

AMFI code of Ethics:

1.Mutual funds have to manage fund for the interest of the unit holders.Investors interest is the periority for the Mutual funds.

2.AMFI expect high standards of services from the fund.

3.Adequate disclosure of fund ought to made to the Unit holders and Trustees.

4.Funds are urge to adopt the use of professional selling practices.

5.Management of funds collected has to be in accordance with stated investment objectives.

6.Funds should avoid conflict of interest in dealing by directors,officers and employees.

7.Funds have to be refrain from unethical market practices.

SIP vs VAP:

1.SIP(Systematic investment Plan):SIP is a process of investing a fixed sum periodically in a diciplined manner for long term.It give benifit of Rupee cost averaging.

2.VAP(Voluntary Investment Plan):It is a revised version of SIP.It allow investors flexibility with respect to the amount and frequency of investment.

INVESTMENT PLANS:

Broadly there are two types of plan:

1.Growth Option:In this types of plan dividend reciev by any scheme should be reinvested.It's main objective is to give huge return to the scheme holders(investors).

2.Dividend Option:In this types of schemes,dividend recieved is not reinvested but distribute to the scheme holder.

Other Plans:

1.SIP:It is known as Systematic investment plan.In this scheme,a fixed amount is invested periodically at regular interval.

2.SWP:It is known as Systematic Withdrawal Plan.In this scheme,investor get back his principle amount in the form of income regularly.

3.STP:It is known as Systematic transfer Plan.It's main aim is to transfer the periodic amount from one scheme into another within the same fund family.

 FUND PERFORMANCE MEASUREMENT:

1.Change in NAV = (NAV at the end - NAV at the begining)*100/NAV at the begining

2.Portfolio Turnover rate:It measure the amount of buying and selling  of security done by the fund.It is calculated by dividing difference of asset purchase and sold by the fund's net assets.

A 100% Portfolio turnover implies that manager replace his entire portfolio during the period in question.200% shown that portfolio change in 6 in a month.

A liquid funds have highest portfolio turnover.

3.Expense Ratio:It is a Ratio of Total expense to average net asset of the fund.Fund with small corpus size will have a higher expense ratio affecting investor return.It measure the fund efficiency and cost effectiveness.

Evaluating the Risk of a Mutual Funds by following tools:

1.Standard Deviation:It meaure the Fluctuation of fund return around a mean level.It give the idea of how volatile the earning are.It measure total risk.It's disadvantage is that it is based on past returns.

2.Beta Coefficient:Beta compare the funds return with market index and measure the sensitivity of fund's return to change in market index.A beta of 1 means fund moves with market and beta of -1 means fund is less volatile than market.It also based on past return.

3.R-Squared:It shows how much is fund's fluctuate with the overall market movement from 0-100%.An index fund will have R-Squared nearly 100%.

4.Alpha:It shown the risk adjusted performance.It compare the fund actual result with what would have been expected from fund's beta and market index performance.

5.Sharpe ratio:It also shown risk adjusted performance.It is calculated by dividing difference between fund's return and Risk free rate of return by Standard deviation.

6.Treynor ratio:It is calculated by dividing differnce between fund's return and Risk free rate of return by Beta.

INITIAL ISSUE EXPENSES:

Expenses which is incurred during the launching of the schemes are known as initial issue expenses.The SEBI impose ceilingof 6% in this case.If any fund is launch without any initial issue expenses than such funds are known as no load funds,but they charge 1% of investment management fees.

Initial issue expenses are the followings:

1.The cost of registration and fund formation.

2.Legal and advisory expenses.

3.Cost of launching of schemes.

4.Advertisement and Promotion expenses.

5.Distribution Cost.

6.Commisions to Selling expenses.

EXPENSES INCURRED BY MUTUAL FUNDS:

1.Investment management fees to AMC

2.Custodian fees

3.Trustee fees

4.Registrar and transfer agent fees

5.Marketing and Distribution expenses

6.Operating expense

7.Audit fees

8.Legal expenses

9.Cost of mandatory Advertisement and Communication to the investors.