PERFORMANCE

ANALYSIS OF MUTUAL
FUND SCHEME
Frist Week Report On Mutual Fund Overview

Submitted By:
Gaurav Khatri

Pgfa1918
What is a Mutual Funds?
Mutual fund is a type of financial services that is provided by various vendors to the customer.
Mutual Funds are basically a pool/collection of funds that is collected from various individuals
who want to invest their money in stock market. Through mutual fund they can invest their
money in the stock market without doing anything. The funds collected in Mutual funds are then
invested by different fund manager of the mutual fund company to earn a capital gain for the
investors. The funds collected from investors are invested in stocks, government bonds,
commodities and foreign currencies. And these funds are invested according to the objective of
Mutual fund.

Investment in Mutual fund is different than investment in share of a company. When you invest
in a share of a company you get a voting right in the company but in case of mutual fund you do
not get voting right in the company. A share of mutual fund represent investment in various
share and not only in one share.

Different type of Mutual fund Scheme:

Schemes according to the maturity period:

A mutual fund scheme can be classified into Open ended scheme and Close ended scheme
depending on the maturity period
 Mutual
Funds

Open Ended Close Ended

Schemes Schemes
 Open Ended Schemes:
An open ended mutual fund scheme is a type of scheme where an investor can enter and exit
from the mutual fund scheme at any point of time. An investor can conveniently buy or sell units
of scheme according to the Net Asset Value (NAV) per unit which is declared every day. And
the Open Ended Scheme have no fixed maturity date. The Key feature of Open Ended Scheme is
Liquidity.

 Close Ended Scheme:

A close ended mutual fund scheme is s type of scheme where there is a maturity date of the
scheme which is usually a period of 3-5 years. A person can buy a close ended scheme only on a
specific period at the time of launch. An individual can buy units of the schemes at the opening
time and can buy or sell units when the scheme units are listed on the stock exchange.

Schemes according to the Investment objective:

 Mutual Funds

Open Ended Close Ended

Funds Funds

Growth Income
Hybrid Funds Liquid Scheme Gilt Scheme Index Fund
Oriented Funds Oriented Funds

Schemes according to the Investment objective can be classified such as growth scheme, income
scheme or balanced scheme considering its investment objective.

These Schemes can be Open-Ended or Close-Ended Scheme as well.

These schemes are mainly classified as below:

 Growth Oriented Scheme

These type of schemes are one of the most popular type of mutual fund schemes. As they allow
investors to invest in stock market. These type of schemes have comparatively higher risk than
others but these type of schemes also have high return potential in long run. Such type of
schemes usually invest a major part of their investment in equities. These schemes provide
different options to the investors like dividend option, growth, etc.

 Income/Debt Oriented Scheme

The main aim of these type of schemes is to provide a steady income to the investors. Such
schemes generally invest in a majority of investment in fixed income securities like government
securities, bonds, debentures, etc. These type of schemes have a low risk compared to the equity
oriented schemes and these type of schemes are idle for the individual who are looking to invest
in low risk funds to generate a steady income.

 Balanced/Hybrid Scheme
The aim of these type of balanced scheme is to provide a steady income and growth as such
schemes invest in both equity and fixed income securities in a proportion that is indicated in the
offer document. The fund manager usually invest 40-60% in equity and debt instrument. These
type of schemes have a low risk low growth outlook and are appropriate for investors looking for
moderate growth with a little risk.

 Money Market or Liquid Schemes

Liquid schemes are somewhat similar to income scheme but the proportion of equity is lesser
compared to the income scheme. The aim of these schemes is to provide easy liquidity,
prevention of capital and moderate income.

 Gilt Funds
These schemes mostly invest in government securities as government securities have a very low
risk. These type of schemes are preferred by investors who want no credit risk associated with
their investment. But these type of schemes are subject to high interest rate risk.

 Index Funds
Index funds are idle for those investors who want to invest in equity mutual funds but don not
want to depend on the fund manager of mutual fund. As index fund replicate the portfolio of a
particular index such as Nifty 50 index or BSE index. This scheme invest in equity in the same
weightage comprising of an index.

Organization of Mutual Fund:

The organization structure of Mutual funds in India is a Three-tier one model. There are three
distinct entities involved in this three-tier one model and those entities are as follows – the
Sponsor (the one who create mutual funds), trustees and the asset management company (which
oversee the fund management). This three-tier one model came into existence due to SEBI
mutual fund regulation act 1996.

Structure of Mutual Fund:

  Sponsor/Promotor
The sponsor or the promotor of mutual fund is the first layer of three-tier on model. A sponsor is
the person who think and plan to make a mutual fund. SEBI regulations says that any person can
become a sponsor and can setup a mutual fund to earn money through fund management. A
sponsor can also be seen as a promotor for the mutual fund.

To open a mutual fund a sponsor has to take permission from SEBI to set-up mutual fund. The
eligibility criteria by SEBI for a sponsor to open a mutual fund are:

 The sponsor must have experience of 5 years in financial services.

 They must be a profit making company for 3 out of 5 years.

 Last 5 years net worth of the company must be positive.

 The Sponsor must have at least 40% share in the asset management company.

After fulfilling these criteria once SEBI agrees to the inception, a public trust is formed under
India Trust Act 1882 and is registered under SEBI.

 Trust and Trustees

Trust and trustee is the second layer of the structure. A trust is created by the fund sponsor
through a document called a trust deed. The trust is managed by the trustee and these trustee are
also answerable to the investors. Trustee can be formed in two ways – a Trustee Company or a
Board of Trustees can be formed. In case of Board of Trustee the minimum strength of Directors
should be 4 and about 50% of the directors should be independent directors. The Trustee work to
monitor the activities of mutual fund and check its compliance with SEBI regulations.

 Asset Management Companies

Asset Management Company is the Third layer of the structure of mutual funds in India. The
Asset management company is a company formed under the companies’ act 1956.

 The AMC act as a fund manager for the trust.

 A small fees is paid to the ACM for all the activities it performed for the trust.
 The AMC is bound to manage funds and provide services to the investors.

Other Components in the Structure of Mutual Funds:

 Custodian
A custodian is responsible for the safekeeping of the securities of the mutual fund. It is their
responsibility to hold all financial assets safely in its custody.

 Registrar and Transfer Agents (RTAS)

The RTAS are entitled to provide services to mutual funds. Since operation of all the mutual
funds are same, it is economic in scale and cost effective for all the AMCs to seek services of
RTAs.
 Association of Mutual Fund

 Established on August 22, 1995.

 Body that regulates all the mutual funds in India
 A Non-profit organization
 45 AMC registered with SEBI are AMFI’s members

 Objectives:
 To secure MF investor rights
 Represents on all the matters of mutual funds
 Promote proper understanding of mutual funds in India
 Maintaining legal practices
 To abide by the rules and guidelines famed by SEBI
 To interact with SEBI and to represent SEBI in the matters related to mutual funds
 To protect interest of investors

Regulatory guidelines on Mutual Funds.

Mutual Funds in India are regulated by SEBI. Mutual Fund Regulation was formed in 1986 and
it was formulated by SEBI.SEBI under the regulation provides guidelines on mutual Funds in
India. Below guidelines that has to be followed.

Registration of mutual fund:

 Sponsor need to submit in “Form A” for the registration of mutual fund with various
other details to obtain Certificate of Registration.
 Requirements of Registration:
 Has been carrying on business for past year in financial services
 Net worth of the sponsor should be positive all previous 5 years.
 Sponsor has to contribute minimum of “40% of the Net Worth of AMC”
 Trustees to be appointed to manage mutual fund
 AMC to be appointed to manage the schemes
  Custodians to be appointed
 Below are the certain other details that has to be provided with SEBI
 Name of the any other associate entities registered with SEBI with their net capacity.
 If they registered on any stock exchange
 Details of entity that is registered or is required to be registered with RBI
 Any disciplinary action taken by any regulators and required details.
SEBI after examining the form and other details so submitted will inform about eligibility status
and provide Certificate of Registration.

Registration of Trust Deed: Trust Deed has to be registered under the Registration Act, 1908,
as mutual funds have to be instituted in form of trusts.

Appointment of Trustee: A trustee or board of the trustee has to be appointed under the
regulation to manage with the approval of the SEBI. And all the obligations have be too carried
out the trustee with utmost good faith mentioned under the regulation.

Registration of AMC: AMC has to be appointed by the sponsor and trustee - to be approved by
the SEBI after submitting Form D for approval.

Below are the certain important criteria that has to be considered while appointing AMC:

 Net worth should be not less than 50 Crore.

 Chairman so appointed should be a trustee
 50% of board of director should not have be associated with of the subsidies of the
sponsor.
 Existing AMC managing the new fund should have proper record and should have no
discrepancies in carrying on to the previous job and should be appointed by the
approval of board.
 Obligations/Restrictions of AMC:
*ACM should not act trustee of mutual funds
* meets capital adequacy needs
* No conflicts of interest
* should appoint separate fund manager for every fund that’s needs to be managed
unless other under certain requirements
*Has to submit quarterly reports to trustees
*Can request to terminate any assignment of asset management providing with proper
reasons
*Should not purchase or sell any securities from brokers (5% of funds in all scheme)
*have authority to appoint registrars and agents registered with Board
*have no authority to invest in any of their schemes
Investment Norms and Valuation
Investment

 Mutual funds should only be held in shares, capital market, and debentures, money
market, real estate.
 Mutual funds can only borrow fund to meet temporary requirements
 Shall not borrow more than 20% of net asset of the scheme
 Money so collected under money market should be utilized under money market
instruments
 May enter into underwriting if only they have obtained “Certificate of Registration” from
SEBI (Underwriters).
Valuation:

 Valuation of investment should be done under investment valuation norms specified

under 8th schedule
 NVP – it is market value per unit of all securities. It is calculated by dividing the total net
assets by the total number of units issued. It is computed on daily basis
NAV = Net Asset Value/Number of outstanding units.
Net Asset Value – Market Value of investments + accrued income-accrued expense-
other liabilities-other payables.