Transfer Agents

The transfer agent is a company responsible for maintaining the back office operations for a mutual fund. Transfer Agent Company interfaces with the customers, issue a funds units, help investors while redeeming units. Provides balance statements and fund performance fact sheets to the investors.

Functions of the Transfer Agent

Provide quarterly statements to investors Send annual tax documents to investors Maintain detailed records of account holders Send interest payments and dividends to investors Issue new shares when a stock splits its shares Runs the customer service department for the fund Investigate lost or stolen stock and bond certificates

Types of mutual funds

By Structure / Scheme of operation / Maturity period Open Ended Schemes/ funds Close Ended Schemes / funds Interval Schemes / funds By Investment Objectives / Portfolio Growth / Equity oriented Scheme/Funds Income / Debt oriented Scheme /Funds Balanced or Conservative funds Money Market / Liquid Funds Specialized / Sector specific Funds Taxation Funds Gilt Funds Index Funds

Types of Mutual Funds Contd.

By Nature
Equity Funds Debt Funds Balanced Funds

By ownership Public sector mutual funds Private sector mutual funds Location Domestic Funds Off-Shore Funds Other Schemes Load or No Load Schemes Hub and Spoke Funds / Fund of Funds (FOF) Leveraged funds

Open ended funds

Available for subscription and repurchase on a continuous basis. No 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 is liquidity. Not listed in Stock exchange Traded as permitted lot

Advantages of Open ended Funds

Diversification, Professional money management, Liquidity Convenience

Disadvantages of Open ended Funds

Since open-end funds are constantly under redemption pressure, they always have to keep a certain amount of money in cash, which they otherwise would have invested. This lowers the potential returns.

Close Ended Funds

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 closeended 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 generally on weekly basis.

Interval Funds
Kept open for a specific interval and after that it operates as a close ended scheme Traded in stock exchanges

Growth / Equity oriented Scheme/Funds

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a longterm outlook seeking appreciation over a period of time.

Income / Debt oriented Scheme /Funds

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes. However, opportunities of capital appreciation are limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa

Balanced or Conservative funds

Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These are appropriate for investors looking for moderate growth. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50 or 40: 60). These funds are also affected because of fluctuations in share prices in the stock market

Money Market / Liquid Funds

Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

Specialized / Sector specific Funds

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.

Taxation/Tax saving Funds

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate. These schemes are growth oriented and invest pre-dominantly in equities.

Index Funds
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

Gilt Funds
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Hub and Spoke Funds / Fund of Funds (FOF) A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme.

Load Funds
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit

No Load Funds
A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Classification of Equity Funds

The Equity Funds are sub-classified depending upon their investment objective, as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS)

Classification of Debt funds

Gilt Funds Income Funds MIPs (Monthly Income Plans): Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes. Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures. Liquid Funds:

Types of returns from mutual funds

Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution. If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. The investor can then sell his mutual fund shares for a profit. Funds will also usually give the investor a choice either to receive a cheque for distributions or to reinvest the earnings and get more shares.

Advantages of Mutual Funds

Channelizing savings for investment Provide better yields Provide research service Professional Management Diversification Economies of Scale Liquidity Simplified record keeping Flexibility Tax Advantage Transparency Choice of schemes Well regulated Supports capital market Promotes industrial development Keeping money market active Participation in IPOs

Disadvantages/Risks of Mutual Funds

Not so dynamic management Costs - Load Market risks Scheme risks Investment risks Business risks Political risks

Facilities available to investors

Repurchase facilities Reissue facilities Rollover facilities Lateral shifting facilities shift from one scheme to another, generally subject to completion of lock in period Dividend Sweep facility unit holder is given an option to sweep or invest the dividend earned in a scheme in to any other open ended scheme

 Systematic withdrawal plan - A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. The money withdrawn through a systematic withdrawal plan can be reinvested in another fund or retained by the investor in cash. Trigger facility - Trigger facility is an add-on, optional feature provided in mutual fund schemes, which enables investors to book profit automatically at a pre-defined time or value. In another words, it is an event in which the fund will declare dividend, redeem and/or switch the units automatically on behalf of the investor on the date of the happening of the event.

Frequently Used Terms

Net Asset Value (NAV)

Net Asset Value is the market value of the securities held by mutual funds. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. (200 / 10) NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

 Sale Price Is the price an investor pays when he invests in a scheme. Also called Offer Price. It may include a sales load Repurchase Price Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.

 Redemption Price Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load Is a charge collected by a scheme when it sells the units. Also called, Front-end load. Repurchase or Back-end Load Is a charge collected by a scheme when it buys back the units from the unit holders.

General guidelines
Money market mutual funds are regulated by RBI while other mutual funds by SEBI They shall be established in the form of trusts under the Indian Trust Act Can be operated only by AMCs The net worth of the AMCs should be at least Rs.5 crore. AMCs and Trustees of a MF should be two separate and distinct legal entities. The AMC or any of its companies cannot act as managers for any other fund. AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. All MF schemes should be registered with SEBI. MFs should distribute minimum of 90% of their profits among the investors.

History of the Indian Mutual Fund Industry

First Phase 1964-87:

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase 1987-1993 (Entry of Public Sector Funds

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)

In 1993 ,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 India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.

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 US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, 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.

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.

References
http://www.amfiindia.com/showhtml.aspx?page=mfconce pt#TOP http://www.mutualfundsindia.com/mfbasic.asp http://www.authorstream.com/Presentation/Olivia-56019 http://www.investopedia.com http://www.fool.com/investing/mutual-fund www.kotakmutual.com/kmw/mf_school/BegiBasic.ppt Management of Financial Services By Shashi K Gupta & Nisha Aggarwal Financial services by Gordan & Natarajan