Lesson 12

Mutual Funds

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
Different investment avenues are available to
– Structure of a Mutual Fund investors, one of them being Mutual Fund. Mutual
– Overview of Mutual Fund Industry in India fund is a mechanism for pooling the resources by
issuing units to the investors and investing funds
– Schemes according to Investment Objective
in securities in accordance with objectives as
– Advantages of Mutual Funds disclosed in offer document.
– Risks involved in Mutual Funds Mutual funds offer good investment opportunities
to the investors. Like all investments, they also
– Key Players in Mutual Fund
carry certain risks. The investors should compare
– Net Asset Value the risks and expected yields after adjustment of
– Expense Ratio tax on various instruments while taking investment
decisions.
– Holding Period Return
The SEBI formulates policies and regulates
– Evaluating Performance of Mutual Fund the mutual funds to protect the interest of the
– SEBI (Mutual Fund) Regulations, 1996 investors. SEBI notified regulations for the mutual
funds in 1993. Thereafter, mutual funds sponsored
– SEBI (Listing Obligations & Disclosure
by private sector entities were allowed to enter the
Requirements) Regulations, 2015
capital market. The regulations were fully revised
– LESSON ROUND UP in 1996 and have been amended thereafter from
– GLOSSARY time to time.

– SELF TEST QUESTIONS Keeping the above in view this lesson is designed
to enable the students to understand the trend of
mutual funds in India over a period of time. Various
schemes of mutual funds, advantages and risk
involved in Mutual Fund and SEBI law governing
mutual fund pertaining the mutual fund operating
in India etc.
250 EP-SL&CM

INTRODUCTION
Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in
securities in accordance with objectives as disclosed in offer document. Investments in securities are spread
across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the
risk because all stocks may not move in the same direction in the same proportion at the same time. The mutual
funds normally come out with a number of schemes with different investment objectives which are launched
from time to time. A mutual fund is required to be registered with SEBI before it can collect funds from the public.

What is a mutual fund?

– A trust that raises money through sale of units
– Gives investors exposure to different segments of markets
– Investors get access to professional management
– Plays an active role in building wealth and generating income for investors
– A key participant in the capital market
– Source for corporates to raise money

Investors

Mutual Fund

Money Market
Equity Debt Instruments

Returns

List of all stakeholders in Indian mutual fund industry is as follows:

l RBI

l SEBI

l AMFI

l Ministry of Finance
l SROs (in general)
l Income Tax Regulations
l Investors‘ Associations

STRUCTURE OF A MUTUAL FUND

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (“AMC”)
and a custodian. The trust is established by a sponsor or more than one sponsor who is like a promoter of
a company. The trustees of the mutual fund hold its property for the benefit of the unit-holders. The AMC,
approved by SEBI, manages the funds by making investments in various types of securities. The custodian,
 Lesson 12 n Mutual Funds 251

who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are
vested with the general power of superintendence and direction over AMC. They monitor the performance and
compliance of SEBI Regulations by the mutual fund.
Mutual Fund Structure

Sponsor(s)

Mutual Fund Trust Asset

(Managed by Trustees) Management
Custodian
Company

Registrar &
Transfer
Agent

Mutual Fund Structure - Example

Description Entity
Mutual Fund Trust IDBI Mutual Fund
Sponsor IDBI Bank Limited
Trustee IDBI MF Trustee Company Limited
Asset Management Company IDBI Asset Management Limited
Registrar Karvy Computershare Private Limited
Custodian Stock Holding Corporation of India Limited
The Bank of Nova Scotia

OVERVIEW OF MUTUAL FUNDS INDUSTRY IN INDIA

– Started with the introduction of Unit Trust of India (UTI) – in 1963.
– Public sector companies started setting up mutual funds, beginning with SBI Mutual Fund in 1987. This
was followed by Canbank Mutual Fund, Punjab National Bank Mutual Fund, Bank of Baroda Mutual
Fund, etc.
– Private sector mutual funds started in 1993; Franklin Templeton (erstwhile Kothari Pioneer) was the first
of its kind.

Regulator & Industry Body

Regulator: Securities and Exchange Board of India (SEBI)
– Regulates mutual funds, custodians and registrars & transfer agents
252 EP-SL&CM

– The applicable guidelines for mutual funds are set out in SEBI (Mutual Funds) Regulations, 1996;
updated periodically
Industry Body: Association of Mutual Funds in India (AMFI)
– All 44 AMCs are members of AMFI (Source : www.amfiindia.com)
– Recommends and promotes best business practices and code of conduct
– Disseminates information and carries out studies/research on mutual fund industry
Types of Mutual Funds

Mutual Fund
Schemes

Open-ended Closed-ended

Open Ended Close Ended

– Can be purchased on any transaction day – Can be purchased only during NFO
– Can be redeemed on any transaction day – Can be redeemed only at maturity
(Except when units are locked-in in the case of
ELSS funds)
– High liquidity – Low on liquidity
Types of Mutual Fund Plans

Mutual Fund
Plans

Regular Direct

Regular Plans Direct Plans

– Sold through a distributor – Sold directly by the AMC
– Higher Expense Ratio – Lower Expense Ratio
(Due to commissions paid to distributor) (No commission paid to distributor)

– Potentially lower returns to the investor – Potentially higher returns

(Due to higher expenses) (Due to lower expenses)
 Lesson 12 n Mutual Funds 253

Categories of Mutual Funds

Mutual Funds

Equity Hybrid Debt Commodity

Large-cap Balanced Liquid

Ultra Short-
Diversified / term
Multicap MIP
Short-term
Small &
Mid-cap CPOF Income
Sectoral &
Thematic
Gilt
ELSS

Fixed
Index & Maturity
ETFs Plans

SCHEMES ACCORDING TO INVESTMENT OBJECTIVE

•
Besides these, there are other types of mutual funds also to meet the investment needs of several groups of
investors. Some of them include the following:
(a) Income Oriented Schemes: The fund primarily offer fixed income to investors. Naturally enough, the
main securities in which investments are made by such funds are the fixed income yielding ones like
bonds, corporate debentures, Government securities and money market instruments, etc.
(b) Growth Oriented Schemes: These funds offer growth potentialities associated with investment in
capital market namely: (i) high source of income by way of dividend and (ii) rapid capital appreciation,
both from holding of good quality scrips. These funds, with a view to satisfying the growth needs
of investors, primarily concentrate on the low risk and high yielding spectrum of equity scrips of the
corporate sector.
(c) Hybrid Schemes: These funds cater to both the investment needs of the prospective investors –
namely fixed income as well as growth orientation. Therefore, investment targets of these mutual funds
are judicious mix of both the fixed income securities like bonds and debentures and also sound equity
scrips. In fact, these funds utilise the concept of balanced investment management. These funds are,
thus, also known as “balanced funds”.
(d) High Growth Schemes: As the nomenclature depicts, these funds primarily invest in high risk and
high return volatile securities in the market and induce the investors with a high degree of capital
appreciation.
(e) Capital Protection Oriented Scheme: It is a scheme which protects the capital invested in the mutual
fund through suitable orientation of is portfolio structure.
(f) Tax Saving Schemes: These schemes offer tax rebates to the investors under tax laws as prescribed
from time to time. This is made possible because the Government offers tax incentive for investment in
specified avenues. For example, Equity Linked Saving Schemes (ELSS) and pensions schemes.
254 EP-SL&CM

(g) Special Schemes: This category includes index schemes that attempt to replicate the performance
of particular index such as the BSE, Sensex or the NSE-50 or industry specific schemes (which invest
in specific industries) or sectoral schemes (which invest exclusively in segment such as ‘A’ Group
or initial public offering). Index fund schemes are ideal for investors who are satisfied with a return
approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already
decided to invest in particular sector or segment.
(h) Real Estate Funds: These are close ended mutual funds which invest predominantly in real estate and
properties.
(i) Off-shore Funds: Such funds invest in securities of foreign companies with RBI permission.
(j) Leverage Funds: Such funds, also known as borrowed funds, increase the size and value of portfolio
and offer benefits to members from out of the excess of gains over cost of borrowed funds. They tend
to indulge in speculative trading and risky investments.
(k) Hedge Funds: They employ their funds for speculative trading, i.e. for buying shares whose prices are
likely to rise and for selling shares whose prices are likely to fall.
(l) Fund of Funds: They invest only in units of other mutual funds. Such funds do not operate at present
in India.
(m) New Direction Funds: They invest in companies engaged in scientific and technological research
such as birth control, anti-pollution, oceanography etc.
(n) Exchange Trade Funds (ETFs) are a new variety of mutual funds that first introduced in 1993. ETFs
are sometimes described as mere “tax efficient” than traditional equity mutual funds, since in recent
years, some large ETFs have made smaller distribution of realized and taxable capital gains than most
mutual funds.
(o) Money Market Mutual Funds: These funds invest in short- term debt securities in the money market
like certificates of deposits, commercial papers, government treasury bills etc. Owing to their large size,
the funds normally get a higher yield on such short term investments than an individual investor.
(p) Infrastructure Debt Fund: They invest primarily in the debt securities or securitized debt investment
of infrastructure companies.

ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a mutual fund are:
1. Professional Management: Investors avail the services of experienced and skilled professionals who
are backed by a dedicated investment research team which analyses the performance and prospects
of companies and selects suitable investments to achieve the objectives of the scheme.
2. Diversification: Mutual funds invest in a number of companies across a broad cross-section of
industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the
same time and in the same proportion. Investors achieve this diversification through a Mutual Fund with
far less money than one can do on his own.
3. Convenient Administration: Investing in a mutual fund reduces paper work and helps investors
to avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with
brokers and companies. Mutual funds save investors time and make investing easy and convenient.
4. Return Potential: Over a medium to long term, Mutual funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
 Lesson 12 n Mutual Funds 255

5. Low Costs: Mutual funds are a relatively less expensive way to invest compared to directly investing in
the capital markets because the benefits of scale in brokerage, custodial and other fees translate into
lower costs for investors.
6. Liquidity: In open ended schemes, investors can get their money back promptly at net asset value
related prices from the mutual fund itself. With close ended schemes, investors can sell their units on
a stock exchange at the prevailing market price or avail of the facility of direct repurchase at net asset
value (NAV) related prices which some close ended and interval schemes offer periodically or offer it
for redemption to the fund on the date of maturity.
7. Transparency: Investors get regular information on the value of their investment in addition to disclosure
on the specific investments made by scheme, the proportion invested in each class of assets and the
fund manager’s investment strategy and outlook.

RISKS INVOLVED IN MUTUAL FUNDS

Mutual funds may face the following risks, leading to non-satisfactory performance:
1. Excessive diversification of portfolio, losing focus on the securities of the key segments.
2. Too much concentration on blue-chip securities.
3. Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage
and commission.
4. Poor planning of investment returns.
5. Unresearched forecast on income, profits and Government policies.
6. Fund managers being unaccountable for poor results.
7. Failure to identify clearly the risk of the scheme as distinct from risk of the market.
8. Under performance in comparison to peers.

KEY PLAYERS IN MUTUAL FUND

A mutual fund is a professionally-managed investment scheme, usually run by an asset management company
that brings together a group of people and invests their money in stocks, bonds and other securities. It is formed
by trust body.
There are five principal constituents and three market intermediaries in the formation and functioning of mutual
fund:

Five principal constituents

l Sponsor
A sponsor is an influential investor who creates demand for a security because of their positive
outlook on it. The sponsor brings in capital and creates a mutual fund trust and sets up the AMC. The
sponsor makes an application for registration of the mutual fund and contributes at least 40% of the net
worth of the AMC.
l Asset Management Company
An asset management company (AMC) is a company that invests its clients’ pooled funds into
securities that match declared financial objectives. Asset management companies provide investors
with more diversification and investing options than they would have themselves. AMCs manage
mutual funds, hedge funds and pension plans, these companies earn income by charging service fees
or commissions to their clients.
256 EP-SL&CM

Sponsor

Asset Management
Company

5 principal
Trustee
constituents

Unit Holders

Key Players of MF Mutual fund

Custodian

3 market
Transfer Agents
intermediaries

l Trustee
Depository
A trustee is a person or firm that holds and administers property or assets for the benefit of a third
party. A trustee may be appointed for a wide variety of purposes, such as in case of bankruptcy, for a
charity, for a trust fund or for certain types of retirement plans or pensions.
l Unit Holders
A unitholder is an investor who owns the units issued by a trust, like a real estate investment trust or
a master limited partnership (MLP). The securities issued by trusts/MF are called units, and investors
in units are called unitholders. The unit in turn reflect share of the investor in the Net Assets of the fund.
l Mutual fund
A mutual fund established under the Indian Trust Act to raise money through, the sale of units to
the public for investing in the capital market. The funds thus collected as per the directions of asset
management company for invested. The mutual fund has to be SEBI registered.

Three market intermediaries are:

l Custodian
A custodian is a person who carries on the business of providing custodial services to the client. The
custodian keeps the custody of the securities of the client. The custodian also provides incidental
services such as maintaining the accounts of securities of the client, collecting the benefits or rights
accruing to the client in respect of securities.
 Lesson 12 n Mutual Funds 257

Every custodian should have adequate facilities, sufficient capital and financial strength to manage
the custodial services. The SEBI (Custodian of Securities) Regulations, 1996 prescribe the roles and
responsibilities of the custodians.
According to the SEBI the roles and responsibilities of the custodians are to Administrate and protect
the assets of the clients; Open a separate custody account and deposit account in the name of each
client; Record assets; and Conduct registration of securities.
l Transfer Agents
A transfer agent is a person who has been granted a Certificate of Registration to conduct the business
of transfer agent under the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations,
1993. Transfer agents’ services include issue and redemption of mutual fund units, preparation of
transfer documents and maintenance of updated investment records. They also record transfer of units
between investors where depository does not function. They also facilitate investors to get customized
reports.
l Depository
A depository facilitates the smooth flow of trading and ensure the investor`s about their investment in
securities.

Mutual Fund Terminology

A. Offer Document
– AMC raises money in new schemes through New Fund Offer (NFO)
– Offer document contains key details about the NFO – open and close dates, scheme objective, nature
of the scheme, etc.
– Filed with SEBI
Two parts:
1. Scheme Information Document (SID) - A document that contains the details of the scheme. SID has
to be updated every year
Key Contents:
– Scheme name on the cover page, along with scheme structure (open / closed-ended) and
expected scheme nature (equity / debt / balanced / liquid / ETF)
– Highlights of the scheme
– Risk factors
o Standard
o Scheme specific
– Due diligence certificate issued by the AMC
– Fees and expenses
– Rights of unit holders
– Penalties, litigations, etc.
2. Statement of Additional Information - A document that contains statutory information about the fund
house offering the scheme. SAI has to be updated the end of every quarter
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Key Contents:

– Information about sponsor, mutual fund, trustees, custodian and registrar & transfer agents

– Condensed financial information for schemes launched in the last three financial years

– Information on how to apply

– Rights of unit holders

– Details of the fund managers

– Tax, legal and other general information

B. Key Information Memorandum (KIM)

– Essentially a summary of SID & SAI

– As per SEBI regulations, every application form should be accompanied by the KIM

– The KIM has to be updated at least once a year

Contents

– Name of the AMC, Mutual Fund Trust, Trustee, Fund Manager(s) and Scheme details

– Open and close dates of the issue

– Issue price of the scheme

– Plans and options available in the scheme

– Risk profile of the scheme

– Benchmark

– Dividend policy

– Performance of the scheme and benchmark over last 1, 3, 5 years and since inception

– Loads and expenses

– Contact information and registrars

C. Fact Sheets

Usually provided on a monthly basis by AMCs

Contains the following:

– NAV and AUM

– Expense ratio, exit loads, average maturity, YTM, modified duration

– Benchmark & Fund manager details

– Past performance

– Scheme’s allocation & portfolios

– Style box

– Other scheme attributes – like risk category, minimum investment amount, scheme objective, etc.
 Lesson 12 n Mutual Funds 259

D. Assets under Management (AUM)

What is AUM?

It is the total market value of the assets managed by a mutual fund scheme as on a particular date

Periodic AUM Available

– Month-end

– Quarterly average

E. Know Your Client (KYC)

What is KYC?

– A one-time process made mandatory to invest in mutual funds

– Key details required: PAN, Address proof, contact details, occupation and income details

Where can it be done?

– CDSL Ventures Limited KRA

– CAMS KRA

– Karvy KRA

– NDML KRA (wholly owned subsidiary of NSDL)

– DOTEX KRA (wholly owned subsidiary of NSE)

F. Foreign Account Tax Compliance Act (FATCA)

What is FATCA?

– Requires that all financial institutions (including Indian mutual funds) need to report financial transactions
of US persons and entities in which US persons hold a substantial ownership.

– Enacted to prevent tax evasion through foreign investments.

– Key details required: Country of birth, Country of citizenship, country of tax residence, TIN from such
country.

– Currently made mandatory for all investors (existing and new) in Indian mutual funds.

– For non-individual investors, Ultimate Beneficial Ownership (UBO) details have to be provided.
G. Modes of Holding
– Single
– Either or Survivor
o Signature of any of the applicants is sufficient for making transactions
– Joint
o Signature of all the applicants is required for making transactions
H. Nomination
– Up to 3 nominees can be registered for a folio
260 EP-SL&CM

– Units get transferred to the nominees (in the proportion specified) in case of the investor’s demise

– Nomination can be updated as and when required by the investor

– A minor can also be nominated, provided the guardian is specified

– If nomination is not registered, in case of death of the investor, the legal heir has to produce documents
such as Will, Legal Heir Certificate, No-Objection Certificate from other legal heirs, etc.

NET ASSET VALUE

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). In simple words,
NAV is the market value of the securities held by the scheme.

Mutual funds invest the money collected from investors in securities markets. 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 INR 200 lakh and the mutual fund has
issued 10 lakh units of INR 10 each to the investors, then the NAV per unit of the fund is INR 20 (i.e.200 lakh/10
lakh). NAV is required to be disclosed by the mutual funds on a daily basis.

Unlike stocks (where the price is driven by the market and changes from minute-to-minute), mutual funds don’t
declare NAVs through the day. Instead, NAVs of all mutual fund schemes are declared at the end of the trading
day after markets are closed, in accordance with SEBI Mutual Fund Regulations. Further, as per SEBI Mutual
Fund Regulations, for all mutual fund schemes, other than liquid fund schemes, the mutual fund Units are
allotted only at prospective NAV, i.e., the NAV that would be declared at the end of the day, based on the closing
market value of the securities held in the respective schemes.

How is it calculated?

Net Asset of the Scheme

Net Asset Value =
Number of units outstanding

Net Asset of the Scheme = Market value of investments + Receivables+ other accrued income+ other assets –
Accrued Expenses- Other Payables- Other Liabilities
Net Asset Value (NAV) – Cut-off Timeline

Type of Transaction Before/ Cut-off Applicable NAV

After Time
Equity-oriented & Debt funds (except liquid funds)
Purchase & Switch-in (value < 3 pm Before Same day NAV
Rs.2 lakhs)
After Next business day NAV
Purchase & Switch-in (value > 3 pm Before NAV of the business day on which funds are available
Rs.2 lakhs) for utilization
After
Redemption & Switch-out 3 pm Before Same day NAV
After Next business day NAV
Liquid Funds
 Lesson 12 n Mutual Funds 261

Purchase & Switch-in 2 pm Before Previous day NAV if funds are realized
After NAV of the day previous to the funds realized
Redemption & Switch-out 3 pm Before NAV of the day immediately preceding the next
business day
NAV of the day preceding the second business day
After
from submission

EXPENSE RATIO
– The fees charged by the scheme to manage investors’ money.

What does it contain?

– Fees paid to service providers like trustees, Registrar & Transfer Agents, Custodian, Auditor, etc.

– Asset management expenses

– Commissions paid to distributors

– Other selling expenses including advertising expenses

– Expenses on investor communication, account statements, dividend / redemption cheques / warrants

– Listing fees and Depository fees

– Service tax

Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to incur / charge certain operating
expenses for managing a mutual fund scheme – such as sales & marketing / advertising expenses, administrative
expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a
percentage of the fund’s daily net assets.

This is commonly referred to as ‘Expense Ratio’. In short, Expense ratio is the cost of running and managing
a mutual fund which is charged to the scheme. All expenses incurred by a Mutual Fund, AMC will have to be
managed within the limits specified under Regulation 52(6) & (6A) of the SEBI Mutual Funds Regulations.

The expense ratio is calculated as a percentage of the Scheme’s average Net Asset Value (NAV). The daily
NAV of a mutual fund is disclosed after deducting the expenses. Thus, the TER has a direct bearing on a
scheme’s NAV – the lower the expense ratio of a scheme, the higher the NAV.

In terms of Regulation 52(1) of SEBI (Mutual Funds) Regulations, 1996, all scheme related expenses including
commission paid to distributors, by whatever name it may be called and in whatever manner it may be paid,
shall necessarily be paid from the scheme only within the regulatory limits and not from the books of the Asset
Management Companies (AMC), its associate, sponsor, trustee or any other entity through any route. Any
expenditure in excess of the limits specified in these regulations shall be borne by the asset management
company or by the trustee or sponsors.

HOLDING PERIOD RETURN

Holding period return is the total return received from holding an asset or portfolio of assets over a period of
time, generally expressed as a percentage. Holding period return is calculated on the basis of total returns from
the asset or portfolio – i.e. income plus changes in value. It is particularly useful for comparing returns between
investments held for different periods of time.
262 EP-SL&CM

Calculation of HPR
HPR = (Income + (end of period value- original value) x 100
Original Value

EVALUATING PERFORMANCE OF MUTUAL FUND

While looking at a mutual fund scheme’s performance, one must not be led by the scheme’s return in isolation.
A scheme may have generated 10% annualised return in the last couple of years. But then, even the market
indices would have gone up in similar way during the same period. Under-performance in a falling market, i.e.
when the NAV of the scheme falls more than its benchmark (or the market), is the time when one must review
his/her investment.
One must compare the scheme’s return as against its benchmark return. It is better to be rid of investment in
a scheme that consistently under-performs as compared to its benchmark over a period of time, from one’s
portfolio. It is important to identify under-performers over the longer time horizon (as also out-performers).
In addition, one may also consider evaluating the ‘category average returns’ as well. Even if a scheme has
outperformed its benchmark by a decent margin, there could be better performers in the peer group. The
category average returns will reveal how good (or bad) is one’s investment is against its peers which help in
deciding whether it is time shift the investment to better performers.
One may be holding a too little or too much-diversified portfolio. Even the expense ratio of some of the schemes
that one could be holding may be high compared to others within the same category.

SEBI (MUTUAL FUND) REGULATIONS, 1996

SEBI (Mutual Fund) Regulations, 1996 has been notified on December 09, 1996 with objective to improve the
working and regulation of the mutual fund industry, so that mutual funds could provide a better performance and
service to all categories of investors and offer a range of innovative products in a competitive manner to match
investor needs and preferences across various investor segments. SEBI (Mutual Funds) Regulations, 1996
deals with 10 Chapters and 12 schedules.
The key provisions of the SEBI Regulations, 1996 include:
l All the schemes to be launched by the AMC needs to be approved by the Board of Trustees and copies
of offer documents of such schemes are to be filed with SEBI.
l The offer documents shall contain adequate disclosures to enable the investors to make informed
decisions.
l The listing of close-ended schemes is mandatory and they should be listed on a recognised stock
exchange within six months from the closure of subscription. However, the listing is not mandatory in
case:
a) if the scheme provides for monthly income or caters to senior citizens, women, children and
physically handicapped;
b) if the scheme discloses details of repurchase in the offer document; or
c) if the scheme opens for repurchase within six months of closure of subscription.
d) if the scheme is a capital protection oriented scheme.
l Units of a close-ended scheme can be opened for sale or redemption at a predetermined fixed interval
if the minimum and maximum amount of sale, redemption and periodicity is disclosed in the offer
document.
 Lesson 12 n Mutual Funds 263

l Units of a close-ended scheme can be converted into an open-ended scheme with the consent of a
majority of the unit-holders and disclosure is made in the offer document about the option and period of
conversion.
l Units of close-ended scheme may be rolled over by passing a resolution by a majority of the shareholders.
l No scheme other than equity-linked saving scheme can be opened for subscription for more than
15 days. Further, the minimum subscription and the extent of over subscription that is intended to
be retained should be specified in the offer document. In the case of over-subscription, all applicants
applying up to 5,000 units must be given full allotment subject to over subscription.
l The AMC is required to refund the application money if minimum subscription is not received, and also
the excess over subscription within five working days of closure of subscription.
l A close-ended scheme shall be wound up on redemption date, unless it is rolled over, or if 75% of
the unit-holders of a scheme pass a resolution for winding up of the scheme; if the trustees on the
happening of any event require the scheme to be wound up; or if SEBI, so directs in the interest of
investors.
In addition, the SEBI took various measures and issued guidelines to facilitate operations of mutual funds. As
part of these measures, mutual funds were allowed to invest in foreign debt securities in the countries with full
convertible currencies and with highest foreign currency credit rating by accredited credit rating agencies.
They were also allowed to invest in government securities where the countries are AAA rated. Moreover,
guidelines were issued for valuation of unlisted equity shares in order to bring about uniformity in the calculation
of NAVs of mutual fund schemes.
In order to allow mutual funds to invest in both gold and gold related instruments, the SEBI amended its regulation
in 2006. The amended regulation, Securities and Exchange Board of India (Mutual Funds) (Amendment)
Regulation, 2006 permits introduction of Gold Exchange Traded Fund (GETF) Schemes by mutual fund. The
new mutual fund scheme can invest primarily in gold and gold related instruments, subject to certain investment
restrictions.

SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015

The provisions of chapter IX of the SEBI LODR Regulations, 2015 applies to the asset management company
managing the mutual fund scheme whose units are listed on the recognised stock exchange(s).
Notwithstanding anything contained in this chapter, the provisions of the Securities and Exchange Board of
India (Mutual Funds) Regulations, 1996 and directions issued thereunder shall apply on the listed entity and to
the schemes whose units are listed on the recognised stock exchange(s).

Submission of Documents
The listed entity shall intimate to the recognised stock exchange(s), the information relating to daily Net Asset
Value, monthly portfolio, half yearly portfolio of those schemes whose units are listed on the recognised stock
exchange(s) in the format as specified under SEBI (Mutual Funds) Regulations, 1996 and directions issued
there under.
The listed entity shall intimate to the recognised stock exchange(s) in the manner specified by the recognized
stock exchange(s) of:
(a) movement in unit capital of those schemes whose units are listed on the recognised stock exchange(s);
(b) rating of the scheme whose units are listed on the recognised stock exchange(s) and any changes in
the rating thereof (wherever applicable);
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(c) imposition of penalties and material litigations against the listed entity and Mutual Fund; and
(d) any prohibitory orders restraining the listed entity from transferring units registered in the name of the
unit holders.

Dissemination on the website of stock exchange(s)

The listed entity shall submit such information and documents, which are required to be disseminated on the
listed entity’s website in terms of SEBI (Mutual Funds) Regulations, 1996 and directions issued thereunder, to
the recognized stock exchange for dissemination.

LESSON ROUNDUP
– Mutual fund is a trust that collects money from a number of investors who share a common investment
objective and invests the same in equities, bonds, money market instruments and/or other securities.
– Mutual funds are regulated by the SEBI (Mutual Fund) Regulations, 1996.
– Mutual Fund schemes could be ‘open ended’ or close-ended’ and actively managed or passively
managed.
– There are five principal constituents and three market intermediaries in the formation and functioning
of mutual fund.
– The NAVs of all Mutual Fund schemes are declared at the end of the trading day after markets are
closed, in accordance with SEBI Mutual Fund Regulations.
– Holding period return is calculated on the basis of total returns from the asset or portfolio – i.e. income
plus changes in value.
– The SEBI LODR Regulations, 2015 is applicable to the AMC managing the mutual fund scheme
whose units are listed on the recognised stock exchange.

GLOSSARY
Annual Return The change in percentage in the Net Asset Value (NAV) of a fund over one year
based on the assumption that distributions such as dividend payment and bonuses
have been reinvested.
Diversification The process of investing across different asset classes (equity, debt, property, etc.)
and across different investments within each asset class (for instance, investing
across equity shares of various companies in case of equity) to reduce risk.
Investment Every mutual fund scheme has an investment objective according to which the fund
objective manager has to make investments for the scheme. For example, in case of an equity
fund, the investment objective may be to invest in large cap companies across a
range of sectors in order to give investors capital appreciation.
Maturity Some investments such as close-ended funds have a maturity date, which is the date
on which the investor is paid back his principal amount as well as all income due to
him on that investment.
Repurchase/ When a mutual fund investor wants to exit from his mutual fund investment, he can
Redemption sell back the units to the mutual fund and receive cash. The mutual fund ‘repurchases’
his units and the investor is said to ‘redeem’ his units.