MUTUAL FUNDS

Introduction

 A mutual fund is a type of financial vehicle made up of a pool of

money collected from many investors to invest in securities such as
stocks, bonds, money market instruments, and other assets. Mutual
funds are operated by professional money managers who allocate the
fund's assets and attempt to produce capital gains or income for the
fund's investors.
 Mutual funds give small or individual investors access to professionally
managed portfolios of equities, bonds and other securities. Each
shareholder, therefore, participates proportionally in the gains or losses
of the fund.
 Fund Sponsor
 Any person or corporate body that establishes the Fund and
registers it with SEBI.

 Form a Trust and appoint a Board of Trustees.

 Appoints Custodian and Asset Management Company either

directly or through Trust, in accordance with SEBI regulations.

 SEBI regulations also define that a sponsor must contribute at least

40% to the net worth of the asset management company.
 Trustees
 Created through a document called the Trust Deed that is
executed by the Fund Sponsor and registered with SEBI.

 The Trust-the mutual fund may be managed by a Board of Trustees-

a body of individuals or a Trust Company- a corporate body.

 Protector of unit holders interests.

 2/3 of the trustees shall be independent persons and shall not be

associated with the sponsors.
Rights of Trustees:

 Approve each of the schemes floated by the AMC.

 The right to request any necessary information from the AMC.

 May take corrective action if they believe that the conduct of

the fund's business is not in accordance with SEBI Regulations.

 Have the right to dismiss the AMC,

 Ensure that, any shortfall in net worth of the AMC is made up.
 Asset Management Companies

Asset Management Companies are the third layer in the structure of

Mutual Funds. The asset management company acts as the fund
manager or as an investment manager for the trust. A small fee is
paid to the AMC for managing the fund. The AMC is responsible for
all the fund-related activities. It initiates various schemes and
launches the same. The AMC is bound to manage funds and provide
services to the investor.
 Custodian

A custodian is responsible for the safekeeping of the securities of the

Mutual Fund. They manage the investment account of the Mutual
Fund, ensure the delivery and transfer of the securities. They also
collect and track the dividends & interests received on the Mutual
Fund investment.
 Registrar and Transfer Agents (RTAS)

 These are the entities who provide services to Mutual Funds.

 RTAs are more like the operational arm of Mutual Funds. Since the
operations of all Mutual Fund companies are similar, it is economical
in scale and cost effective for all the 44 AMCs to seek the services of
RTAs.

 CAMS, Karvy, Sundaram, Principal, Templeton, etc are some of the

well-known RTAs in India.
 Brokers

 AMC uses the services of brokers to buy and sell securities on the
stock market. The three-tier structure of the Mutual Funds is in place
keeping the fiduciary nature of the Mutual Funds in mind. It ensures
that each element of the system works independently and efficiently.
This structure of Mutual Funds is in line with the international standards
and thus there is a proper separation of responsibilities and
functioning of each constituent of the structure.
 3 Limitations of Mutual Funds
Fees
 Mutual funds have a flat non-performance linked fee structure. You
pay for regardless of fund performance. It means whether your funds
are profit making or you bear a loss with it, regardless you must pay
the fees to the stock broker for the services they render.

 This often leads to a situation of loss if the appreciation in the scheme

is less than the service charges of the stock broker. In another
scenario, the short-term appreciations in a mutual fund schemes in a
mutual fund may get neutralized due to the fee you have to pay.
Thus, mutual funds are found to be profitable only in long term
investments.
Investment Decisions:

In a mutual fund, the portfolio of investment is managed by the fund

manager. As an investor, an individual cannot influence what
investments the broker makes regardless of the fact that the money
invested is actually their.
 Consequences if fund managers do not perform
well:

 The cost incurred in managing the scheme are shared by all

investors. Therefore, an individual investor has no control over the
costs. Additionally, if the fund managers make a fault in investing the
money of their investors, the consequences have to be faced by the
investors.
 SUGGETIONS

 INVESTMENT PORTFOLIO

So far, the portfolio for investment are not decided by the investors, it
is a suggestion that the investors should be provided proper
information and based on that they should be allowed to invest in the
specific portfolios.

It would provide customized services for mutual fund customers

 Performance based fees structure:

 Another recommended change is that the fees charged to the

customers should be based partly on the performance of the scheme
in which his or her money has been invested

 This would attract more investors to invest their money in mutual funds
and when volume of business increases, the loss would be
compensated