Mutual funds have a special structure unlike a joint stock company or a partnership firm. All the mutual funds (except money market mutual funds, foreign financial institutions and the UTI) are regulated by the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, which is given as Appendix I1 (the annexure part is excluded). As per the regulations a mutual fund is comprised of four separateparticipants or constituents, namely the sponsor, the mutual fund trust, the asset management company (AMC) and the custodian. There are some more additional entities like depository participant, bankers, brokers and registrars or transfer agents. The structure of the UTI is quite unique where the activities of the trustee, the AMC and the custodian are combined.
Structure of Mutual fund
Asset management company
Sponsor:- The sponsor can be any person who, acting alone or in combination with another body corporate, establishes the mutual fund and gets it registered with SEBIIO. He must have a sound track record and genera3 reputation of fairness and integrity and is required to contribute at least 40% of the net worth of the asset management company.
Mutual fund:- The mutual fund shall be constituted in the forrn of a registered trust under the Indian Trusts Act, 1882. It is the Board of Trustees who manages the mutual fundll. The Boardof Trustees may be either a body of individual or a corporate body. Most of the funds in India are managed by Boards of Trustees. While Board of Trustees are governed by the provisions of the Indian Trusts Act, where the Trustee is a corporate body, it is required to comply with the provisions of the Companies Act, 1956.
Asset Management Company (AMC):- The Board or the Trustee Company protects the investors’ interests. Instead of managing by them, Trustees appoint an Asset Management Company (AMC) to manage the portfolio of securities as per the defmed objectives, Trust Deed and SEBI Regulations. AMC is required to be approved and registered with SEBI. Chapter IV of the SEBI (MF) Regulations, 1996 contains the regulations . regarding the appointment, obligations, and the related aspects of an AMC. The Trust is created by the execution of the Trust Deed. The sponsor does the execution of the deed in favour of the Trustees. The Trust Deed should be stamped and registered under the provisions of the Indian Registration Act and registered with the SEBI.Trust Deed contains clauses relating to the establishment of the trust, the appointment of Trustees, their powers, duties and obligations, etc.
Custodian:- The custodian is responsible for safe keeping of assets of the fund, which may mainly be in large volumes of securities. He has to get a certificate of registration to cany on the business of custodian of securities under the SEBI (Custodian of Securities) Regulations, 1996 . The Board of Trustees appoints the custodian and enters into a custodian agreement.
Depository Participant:- Instead of having physical certificates of securities they can be dematerialised with a depository. It is through a Depository Participant mutual funds hold its dematerialised securities.
Bankers:- Financial dealings of mutual hds like buying and selling units, paying for investments made, receiving the proceeds onsale of investments and paying the operational expenses are done through banks.
Brokers:- It is through brokers, agents and distributors the units of mutual funds are sold. A broker usually acts on behalf of several mutual funds sirnultaneously and may have several sub-brokers and agents under him.
Registrar/ transfer agent:- The registrar/ transfer agent’s duty is to handle the registry related work of the unit holders. They are responsible for issuing and redeeming units of mutual funds and other related services.
Once you’re ready to choose some mutual funds, there are ways to analyze them such as looking at each fund’s past performance history, management team, and expense ratios. You can also entertain different investment strategies that will drive your fund choices, such as diversifying your portfolio with international exposure, buying the market index , or rupee-cost-averaging your money into different funds
Goal: As an investor, you’ll have upwards of 10,000 mutual funds from a plethora of fund management companies to choose from, so it helps to set some goals to narrow the field. Ask yourself the following questions to gain some clarity on your investing goals:
Are you looking for current income or long-term appreciation (capital gains)?
Does the money need to fund a college education or accumulate for a far-off retirement?
In terms of risk tolerance, it’s important to decide where you sit on the risk continuum:
Can you tolerate a portfolio that may have extreme ups and downs?
Are you more comfortable with a conservative investment strategy?
Finally, think about the best time horizon for your investments, or how long you need to invest your funds:
Do you need your funds to be liquid in the near future?
Are you investing money that you can afford to have tucked away for many years?
If you invest in mutual funds that have sales charges, they can add up if you’re investing for the short term. An investing term of at least five years is ideal to offset these charges.
Benchmark:Each fund has a different approach and goal. That’s why it’s important to know what you should compare it against to know if your portfolio manager is doing a good job. For example, if you own a balanced fund that keeps 50 percent of its assets in stocks and 50 percent in bonds, you should be thrilled with a return of 10 percent even if the broader market did 16 percent. Adjusted for the risk you took with your capital, returns were stellar.
Expenses :it is the cost of owning the fund. Think of it as the amount a mutual fund has to earn just to break even before it can even begin to start growing your money.
All else being equal, you want to own funds that have the lowest possible expense ratio. If two funds have expense ratios of 0.50 percent and 1.5 percent, respectively, the latter has a much bigger hurdle to beat before money starts flowing into your pocketbook. Over time, these seemingly paltry percentages can result in a huge difference in how your wealth grows.
Diversification: What is considered good diversification? Here are some rough guidelines:
Don’t own funds that make heavy sector or industry bets. If you choose to despite this warning, make sure that you don’t have a huge portion of your funds invested in them.
Don’t keep all of your funds within the same fund family. By spreading your assets out at different companies, you can mitigate the risk of internal turmoil, ethics breaches, and other localized problems.
Don’t just think stocks. There are also real estate funds, international funds, fixed income funds, arbitrage funds, convertible funds, and much, much more. Although it is probably wise to have the core of your portfolio in domestic equities over long periods of time, there are other areas that can offer good returns.
Fund manager tenure and experience : Fund manager plays a very important role in the fund’s performance. Though it is a process oriented approach but still fund manager is the ultimate decision maker and his experience and view point counts a lot. You should know who is the fund manager of the scheme and what is his past track record. You should also look at the performance of other funds which he is managing. If the fund manager of the scheme has recently been changed, don’t panic. Just keep a watch on his performance by looking at alpha and quarter to quarter performance. If you find that due to change in the fund manager there is considerable effect on the fund’s performance which does not suit your risk appetite then you may make a decision to exit.
Scheme asset size : This parameter is different for debt and equity schemes. In equity the comfortable asset size in hundreds of crores, in debt it should be in thousands of crores as the investment value per investor is higher in debt funds. 90 percent of total assets under management (AUM) of the mutual fund industry are invested in debt funds, so your selected scheme assets should also have a considerable AUM. Less AUM in any scheme is very risky as you don’t know who the investors are and what quantum of investments they have in this particular scheme. Exit of any big investor out of any mutual fund may impact its overall performance very badly and the remaining investors in a scheme will have to bear the impact. In schemes with larger AUMs this risk gets minimised. You must have observed that all the above mentioned parameters are overlapping each other in some way or the other. A good fund manager will automatically result in better performance and thus improve the quartile ranking and would also generate good alpha. High scheme assets will help in reducing the total expense ratio of the scheme.
As per SEBI, mutual funds can be broadly classified into 3 categories – Equity Funds, Debt Funds and Hybrid Funds.
Equity Funds : An equity fund is a mutual fund which invests a maximum portion of of its assets in equity and equity related instruments. It can invest the balance in debt or money market securities. Equity funds are capable of giving relatively high returns as they primarily invest in stocks of companies which are responsive to changes in the stock market and the economy. Due to this reason, equity funds also come with a relatively higher risk quotient.
Debt Funds: A debt fund is a mutual fund which invests a maximum of its assets in debt and money market securities. Debt funds are preferred by investors mainly because they come with relatively lower levels of risk. Since they undertake lower risk, debt funds in India yield returns which though higher than returns offered by fixed return investments, tend to be lower than those provided by equity funds in the long term.
Hybrid Funds: a hybrid fund is a mutual fund which invests its assets in two or more asset classes including equities, debt, money market instruments, gold, overseas securities, etc. A hybrid fund generally invests in only two asset classes namely equity and debt. The blend of equity and debt enables a hybrid fund to give returns similar to those generated by equity funds while undertaking relatively lower risk levels like debt funds.
Apart from above, there are many other Mutual Fund based on different requirements. These are given below…
Based on Structure
Mutual funds are also categorised based on different attributes (like risk profile, asset class, etc.). The structural classification – open-ended funds, close-ended funds, and interval funds – is quite broad, and the differentiation primarily depends on the flexibility to purchase and sell the individual mutual fund units.
a. Open-Ended Funds
Open-ended funds do not have any particular constraint such as a specific period or the number of units which can be traded. These funds allow investors to trade funds at their convenience and exit when required at the prevailing NAV (Net Asset Value).
b. Closed-Ended Funds
In closed-ended funds, the unit capital to invest is pre-defined. Meaning the fund company cannot sell more than the pre-agreed number of units. Some funds also come with a New Fund Offer (NFO) period; wherein there is a deadline to buy units. NFOs comes with a pre-defined maturity tenure with fund managers open to any fund size. Hence, SEBI has mandated that investors be given the option to either repurchase option or list the funds on stock exchanges to exit the schemes.
Based on Investment
a. Growth Funds
Growth funds usually allocate a considerable portion in shares and growth sectors, suitable for investors who have a surplus of idle money to be distributed in riskier plans or are positive about the scheme.
b. Income Funds
Income funds belong to the family of debt mutual funds that distribute their money in a mix of bonds, certificate of deposits and securities among others. Helmed by skilled fund managers who keep the portfolio in tandem with the rate fluctuations without compromising on the portfolio’s creditworthiness, income funds have historically earned investors better returns than deposits. They are best suited for risk-averse investors with a 2-3 years perspective.
c. Liquid Funds
Like income funds, liquid funds also belong to the debt fund category as they invest in debt instruments and money market with a tenure of up to 91 days. The maximum sum allowed to invest is Rs 10 lakh. A highlighting feature that differentiates liquid funds from other debt funds is the way the Net Asset Value is calculated. The NAV of liquid funds is calculated for 365 days while for others, only business days are considered.
d. Tax-Saving Funds
ELSS or Equity Linked Saving Scheme, over the years, have climbed up the ranks among all categories of investors. Not only do they offer the benefit of wealth maximisation while allowing you to save on taxes, but they also come with the lowest lock-in period of only three years. Investing predominantly in equity (and related products), they are known to generate non-taxed returns in the range 14-16%. These funds are best-suited for salaried investors with a long-term investment horizon.
e. Aggressive Growth Funds
Slightly on the riskier side when choosing where to invest in, the Aggressive Growth Fund is designed to make steep monetary gains. Though susceptible to market volatility, one can decide on the fund as per the beta (the tool to gauge the fund’s movement in comparison with the market). Example, if the market shows a beta of 1, an aggressive growth fund will reflect a higher beta.
f. Capital Protection Funds
If protecting the principal is the priority, Capital Protection Funds serves the purpose while earning relatively smaller returns (12% at best). The fund manager invests a portion of the money in bonds or Certificates of Deposits and the rest towards equities. Though the probability of incurring any loss is quite low, it is advised to stay invested for at least three years (closed-ended) to safeguard your money, and also the returns are taxable.
g. Pension Funds
Putting away a portion of your income in a chosen pension fund to accrue over a long period to secure you and your family’s financial future after retiring from regular employment can take care of most contingencies (like a medical emergency or children’s wedding). Relying solely on savings to get through your golden years is not recommended as savings (no matter how big) get used up. EPF is an example, but there are many lucrative schemes offered by banks, insurance firms etc.
a. Very Low-Risk Funds
Liquid funds and ultra-short-term funds (one month to one year) are known for its low risk, and understandably their returns are also low . Investors choose this to fulfil their short-term financial goals and to keep their money safe through these funds.
b. Low-Risk Funds
In the event of rupee depreciation or unexpected national crisis, investors are unsure about investing in riskier funds. In such cases, fund managers recommend putting money in either one or a combination of liquid, ultra short-term or arbitrage funds.
c. Medium-risk Funds
Here, the risk factor is of medium level as the fund manager invests a portion in debt and the rest in equity funds. The NAV is not that volatile, and the average returns could be 9-12%.
d. High-Risk Funds
Suitable for investors with no risk aversion and aiming for huge returns in the form of interest and dividends, high-risk mutual funds need active fund management. Regular performance reviews are mandatory as they are susceptible to market volatility. You can expect 15% returns, though most high-risk funds generally provide up to 20% returns.
Other Mutual Funds
a. Sector Funds
Sector funds invest solely in one specific sector, theme-based mutual funds. As these funds invest only in specific sectors with only a few stocks, the risk factor is on the higher side. Investors are advised to keep track of the various sector-related trends. Sector funds also deliver great returns. Some areas of banking, IT and pharma have witnessed huge and consistent growth in the recent past and are predicted to be promising in future as well.
b. Index Funds
Suited best for passive investors, index funds put money in an index. A fund manager does not manage it. An index fund identifies stocks and their corresponding ratio in the market index and put the money in similar proportion in similar stocks. Even if they cannot outdo the market (which is the reason why they are not popular in India), they play it safe by mimicking the index performance.
c. Funds of Funds
A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’ also known as multi-manager mutual funds are made to exploit this to the tilt – by putting their money in diverse fund categories. In short, buying one fund that invests in many funds rather than investing in several achieves diversification while keeping the cost down at the same time.
d. Emerging market Funds
To invest in developing markets is considered a risky bet, and it has undergone negative returns too. India, in itself, is a dynamic and emerging market where investors earn high returns from the domestic stock market. Like all markets, they are also prone to market fluctuations. Also, from a longer-term perspective, emerging economies are expected to contribute to the majority of global growth in the following decades.
e. Foreign Funds
Favoured by investors looking to spread their investment to other countries, foreign mutual funds can get investors good returns even when the Indian Stock Markets perform well. An investor can employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a feeder approach (getting local funds to place them in foreign stocks) or a theme-based allocation (e.g., gold mining).
f. Global Funds
Aside from the same lexical meaning, global funds are quite different from International Funds. While a global fund chiefly invests in markets worldwide, it also includes investment in your home country. The International Funds concentrate solely on foreign markets. Diverse and universal in approach, global funds can be quite risky to owing to different policies, market and currency variations, though it does work as a break against inflation and long-term returns have been historically high.
g. Real Estate Funds
Despite the real estate boom in India, many investors are still hesitant to invest in such projects due to its multiple risks. Real estate fund can be a perfect alternative as the investor will be an indirect participant by putting their money in established real estate companies/trusts rather than projects. A long-term investment negates risks and legal hassles when it comes to purchasing a property as well as provide liquidity to some extent.
h. Commodity-focused Stock Funds
These funds are ideal for investors with sufficient risk-appetite and looking to diversify their portfolio. Commodity-focused stock funds give a chance to dabble in multiple and diverse trades. Returns, however, may not be periodic and are either based on the performance of the stock company or the commodity itself. Gold is the only commodity in which mutual funds can invest directly in India. The rest purchase fund units or shares from commodity businesses.
i. Market Neutral Funds
For investors seeking protection from unfavourable market tendencies while sustaining good returns, market-neutral funds meet the purpose (like a hedge fund). With better risk-adaptability, these funds give high returns where even small investors can outstrip the market without stretching the portfolio limits.
j. Leveraged Funds
While a regular index fund moves in tandem with the benchmark index, the returns of an inverse index fund shift in the opposite direction. It is nothing but selling your shares when the stock goes down, only to repurchase them at an even lesser cost.
k. Asset Allocation Funds
Combining debt, equity and even gold in an optimum ratio, this is a greatly flexible fund. Based on a pre-set formula or fund manager’s inferences based on the current market trends, asset allocation funds can regulate the equity-debt distribution. It is almost like hybrid funds but requires great expertise in choosing and allocation of the bonds and stocks from the fund manager.
l. Exchange-traded Funds
It belongs to the index funds family and is bought and sold on exchanges. Exchange-traded Funds have unlocked a new world of investment prospects, enabling investors to gain extensive exposure to stock markets abroad as well as specialised sectors. An ETF is like a mutual fund that can be traded in real-time at a price that may rise or fall many times in a day.
If you’re the one who is interested in investment but have no idea how to invest and where to put your hard money for better return than Bank FD’s and other traditional way of investing then Mutual fund (MF) is the best alternative available to you to meet your financial goals.
A mutual fund is a money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional called as fund managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Basic features of mutual fund
Available in units so even a small investor can benefit from its investment strategy.
The fund managers who identify opportunities for your investments to flourish.
Buying and selling funds is easy with automatic fund transfer
The benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
The sector is regulated to safeguard the investor’s interests.
So Investing in Mutual Funds is the easiest way to grow your wealth. The fund manager’s expertise is an important factor to consider while choosing the fund. All Mutual Funds are registered with the Securities Exchange and Board of India (SEBI) and hence, your investment is safe.