Mutual fund products and

features
Introduction :
Mutual fund is professionally managed type of collective investment
that pools the money from many investors and invest it in stocks, bonds,
short term money market instrument and other securities

It is done by fund manager

 While investing in assets classes an individual
would need to study the risk and reward closely
1) Performance of the company
2) Understanding the future business prospectus of the company
3) Track record of the promoters and the dividend, bonus issue history of the company
 SPONSER

TRUSTEE COMPANY AMC

TRUST

There is a Sponsor (the First tier), who thinks of starting a mutual fund.
The Sponsor approaches the Securities & Exchange Board of India (SEBI), which is the market
regulator and also the regulator for mutual funds.
The mutual fund industry is governed by the SEBI (mutual fund) Regulations, 1996 and such
other notifications that may be issued by the regulator from time to time.
The sponsor should have sound track record and general reputation of fairness and integrity in
all his business transactions. Sound track record shall mean the sponsor should
 An investor can utilize the professional expertise to achieve superior
returns
How mutual fund manager is useful for investors

The fund manager studies and analyze numerous stock before selection for inclusion in
the mutual fund
Mutual fund also offer diversification
Diversification helps to minimize the risk of portfolio
When AMC wants to launch new
scheme
1. The AMC have to submit a draft offer Document to SEBI
2. After getting approvals that that becomes offer document
3. And that will be legal document on which investors rely upon
4. The compliance officer need to sign the due diligence certificate in OD
5. IN ABSENCE OF COMPLIANCE OFFICER NEED IT IS TO BE SIGNED by CEO , chairman of
the AMC
 Who is custodian
the asset of the mutual fund
scheme held by custodian

Safe keeping of physical securities and

1) The also to see that the dividend, right,
custodian role
bonus issued by the company

Keeping only physical form of securities

Rights and obligation of investors
1) Mutual beneficial and proportional owner
2) Right to have dividend within 30 days
3) Redemption process if demanded need to be started by AMC within 10
working days otherwise 15% interest will be charged
4) Have right to get offer document audited annual reports to obtain
information
5) Can wind up scheme or terminate AMC if he is holder of 75% units by
passing resolution
6) Right to be informed about the changes in fundamental attributes
7) Lastly he can approach to investor relation officer for grievance
redressal . Otherwise he can approach to grievance cell of SEBI
 What is the role of AMC
• The AMC cannot deal with a single broker beyond a certain limit of transactions.
•
• The AMC cannot act as a Trustee for some other Mutual Fund.
•
• The responsibility of preparing the OD lies with the AMC.
•
• Appointments of intermediaries like independent financial advisors (IFAs), national and regional
distributors, banks, etc. is also done by the AMC.
•
• Finally, it is the AMC which is responsible for the acts of its employees and service providers
•
•
•
• The AMC charges a fee for providing its services. SEBI has prescribed limits for this. This fee is
borne by the investor as the fee is charged to the scheme, in fact, the fee is charged as a
percentage of the scheme‘s net assets
What is the NFO
• Once the 3 – tier structure is in place, the AMC launches new schemes, under the name of the Trust, after
getting approval from the Trustees and SEBI.

• The launch of a new scheme is known as a New Fund Offer (NFO).

• We see NFOs coming up in markets regularly. It is like an invitation to the investors to put their money into
the mutual fund scheme by subscribing to its units.

• When a scheme is launched, the distributors talk to potential investors and collect money from them by way
of cheques or demand drafts.

• Mutual funds cannot accept cash.

 What is the Procedure for investing in an NFO
1. KYC requirement

2. Once these formalities are complete, the investor has to fill a form, which is available with the distributor or online.
3. The investor must read the Offer Document (OD) before investing in a mutual fund scheme. In case the investor
does not read the OD, he must read the Key Information Memorandum (KIM), which is available with the
application form.

4. Investors have the right to ask for the KIM/ OD from the distributor.

5. The RTA after capturing all the information from the application form into the system, sends the form to a location
where all the forms are stored and the cheque is sent to the bank where the mutual fund has an account.

6. After the cheque is cleared, the RTA then creates units for the investor.

7. The same process is followed in case an investor intends to invest in a scheme, whose units are available for
subscription on an on-going basis, even after the NFO period is over.

8. In an online system, this entire process is carried out electronically from filling of forms to online payment to
allotment of units in the demat account of the investor.
What is the role of a Registrar and Transfer
Agents
• Registrars and Transfer Agents (RTAs) perform the important role of maintaining investor records.

• All the New Fund Offer (NFO) forms, redemption forms go to the RTA‘s office where the information is
converted from physical to electronic form.

• How many units will the investor get, at what price, what is the applicable NAV, how much money will
he get in case of redemption, exit loads, folio number, etc. is all taken care of by the RTA
 What are open ended and Close Ended Funds
• Equity Funds can either be open ended or close ended.

• An open ended scheme allows the investor to enter and exit at his convenience, anytime, whereas a close ended scheme
restricts the freedom of entry and exit.

• Whenever a new fund is launched by an AMC, it is known as New Fund Offer (NFO). Units are offered to investors at the par
value of Rs. 10/ unit.

• In case of open ended schemes, investors can buy the units even after the NFO period is over. Thus, when the fund sells units,
the investor buys the units from the fund and when the investor wishes to redeem the units, the fund repurchases the units
from the investor. This can be done even after the NFO has closed.

• The buy / sell of units takes place at the Net Asset Value (NAV) declared by the fund.

• The freedom to invest after the NFO period is over is not there in close ended schemes.

• Investors have to invest only during the NFO period; i.e. as long as the NFO is on or the scheme is open for subscription.

• Once the NFO closes, new investors cannot enter, nor can existing investors exit, till the term of the scheme comes to an end.

• However, in order to provide entry and exit option, close ended mutual funds list their schemes on stock [Link] This is
done through a stock broker.
What are the equity funds
Equity fund accounts for 30% of the total AUM
managed by mutual fund

These schemes might have an investment object to

invest largely in equity or equity related investment

They are carrying higher amount of risk and depends

upon the market fluctuation and international scenario
Equity fund definition
Section 115 of income tax act 1961 that equity fund means such fund where
the investable funds are invested in the form of equity shares in domestic
companies , more than 65% of the total proceeds

Safer type of equity fund is index fund and diversified

large cap funds while the riskier fund are the sector fund
 What is the index fund
The funds are invested in stock comprising indices such as Nifty 50

• The fund manager invest in the securities without indulge in research and stock
selection
• The objective of a typical Index Fund states –This Fund will invest in stocks comprising
the Nifty 50 and in the same proportion as in the index‘.
• Due to this, index funds are known as passively managed funds.
• Such passive approach also translates into lower costs as well as returns which closely
tracks the benchmark index return (i.e. Nifty 50 for an index fund based on Nifty.
• Index funds never attempt to beat the index returns
 Tracking Error
• Tracking Error is the Standard Deviation of the difference between daily returns of the index and the
NAV of the scheme
• In simple terms it is the difference between the returns delivered by the underlying index and
those delivered by the scheme.

This difference may arise on account of any of the following reasons.

1. The fund manager may buy/ sell securities anytime during the day, whereas the underlying
index will be calculated on the basis of closing prices of the Nifty 50 stocks.
2. Cash position in the scheme • If the index‘s portfolio composition changes, it will require some
time for the fund manager to exit the earlier stock and replace it with the new entrant in the
index.
3. Dividend accrued but not distributed
4. Accrued expenses A lower tracking error is desirable.
Diversified large caps MARKET CAPITALISATION REFERS TO
AGGREGATE VALUATION OF THE
Caps refers to market COMPANY BASED ON THE CURRENT
MARKET PRICE AND THE NUMBER OF
capitalization SHARES ISSUED

COMPANIES ARE CLASSIFIED INTO

1) LARGE CAP COMPANIES (typically the top 100 to 200 stocks which feature in
Nifty 50)
2) MID CAP COMPANIES (stock below large cap)
3) SMALL CAP (having market capitalization of less than 5000cr)

Any fund that are other than index funds are active fund
 What are mid caps funds
1) Mid cap invest in stocks belonging to mid cap segment of the market
2) There can actively managed or passively managed mid cap fund
3) CNX Midcap index which track the midcap segment of the markets

Sectoral funds
1. Fund that invest in stocks from single sector or related sectors are called sect oral funds .
2. we cannot invest more than 10% of the NAV of the company as per the regulation
3. This regulation is being relaxed for sect oral funds

Example of Sectoral funds are

• Banking funds
• IT funds
• Pharma funds
• Infrastructure funds
 Other Equity schemes
1. Arbitrage Funds :-These invest simultaneously in the cash and the derivatives market and take
advantage of the price differential of a stock in the cash and derivative segment by taking opposite
positions in the two markets (for e.g. cash and stock futures).

2. Multi cap Funds:- These funds can, theoretically, have a small cap portfolio today and a large cap portfolio
tomorrow. The fund manager has total freedom to invest in any stock from any sector.

3. Quant Funds :-In case of these funds quantitative models are used for stock selection and allocation of weights
based on company‘s size, financial performance and liquidity.
International equities fund
This is type of fund which invest in stock of companies outside India
This can be fund of fund
Which act as feeder for some other fund

Growth scheme

Mutual fund which aims is to achieve capital appreciation by

investing in growth stocks
They focus on companies that are experiencing significant earning
or revenue growth rather than high dividend payouts
These are in growth phase (5-10 years )
 What are expenses incurred in relation to a
scheme
There are two types of expenses incurred by a scheme
1. Initial issue expenses – these expenses are incurred when the NFO is made. These need to be borne by the AMC.
2. Recurring expenses – These expenses are incurred regularly. These include :-

• fees paid to trustees, custodians, auditor, registrar and transfer agents o

• selling and commission expenses of listing fees and depository fees o
• expenses related to investor communication o
• service tax SEBI has clearly laid down limits for expenses that can be charged to the scheme.

The expense limits (including management fees) for index schemes (including Exchange Traded Funds) is 1.5% of
average net assets.
In case of a fund of funds scheme, the total expenses of the scheme including weighted average of charges
levied by the underlying schemes shall not exceed 2.50 per cent of the average daily net assets of the scheme
Ratio
 In addition to the limits specified, the following costs or expenses may be charged to the scheme, namely

1. brokerage and transaction costs which are incurred for the purpose of execution of trade and is included in the
cost of investment, not exceeding 0.12% in case of cash market transactions and 0.05% in case of derivatives
transactions.

2. Expenses not exceeding of 0.30% of daily net assets, if the new inflows from such cities as specified by the Board from
time to time are at least –

• 30 per cent of gross new inflows in 83 the scheme,

• 15 per cent of the average assets under management (year to date) of the scheme, whichever is higher:
Provided that if inflows from such cities is less than the higher of sub-clause (I) or sub- clause (ii), such expenses
on daily net assets of the scheme shall be charged on proportionate basis
3. Additional expenses not exceeding 0.20 per cent of daily net assets of the scheme

4. Any expenditure in excess of the limits specified above shall be borne by the asset management company or by the
trustee or sponsors. Mutual funds/AMCs shall launch new schemes under a single plan and ensure that all new
investors are subject to single expense structure. Investors, who have already invested as per earlier expense
structures based on amount of investment, will be subject to single expense structure for all fresh subscription.
ELSS (EQUITY LINKED SAVING SCHEME)
GETTING THE BENEFIT OF 1.5 LACS UNDER SECTION 80C OF INCOME TAX
THEY ARE OPEN ENDED SCHEME BUT LOCKED FOR THE PERIOD OF 3 YEARS

FUND OF FUNDS
THESE ARE FUND WHICH DO NOT DIRECTLY INVEST IN STOCK OR SHARES BUT INVEST IN UNITS OF OTHER
MUTUAL FUND
MAY BE BECAUSE OF HIGH RETURN
ALMOST ALL MUTUAL FUND OFFER FUND OF FUND SHEMES
 What is the expense ratio
1. Expense Ratio is defined as the ratio of expenses incurred by a scheme to its Average Weekly
Net Assets. It means how much of investors‘ money is going for expenses and how much is
getting invested. This ratio should be as low as possible.

2. It is not enough to compare a scheme‘s expense ratio with peers. The scheme‘s expense ratio
must be tracked over different time periods.
What is Portfolio Turnover

• Portfolio Turnover is the ratio which helps us to find how aggressively the portfolio is being churned.
• While churning increases the costs, it does not have any impact on the Expense Ratio, as transaction costs are not
considered while calculating expense ratio.
• Transaction costs are included in the buying & selling price of the scrip by way of brokerage, STT, cess, etc.
• Thus the portfolio value is computed net of these expenses and hence considering them while calculating Expense
Ratio as well would mean recording them twice – which would be incorrect.
WHAT IS IMPORTANCE OF BASIC OFFER
DOCU
MNET
1. Prior to investing (read all the document it will make aware you about basic
objectives ,philosophy of the scheme
2. Fundamental features of the fund cannot be changed without the approval of
investor

Two types of document are offered

1. Scheme information document (DETAILS OF THE SCHEME)
2. Statement of additional document (STATUTORY INFORMATION ABOUT
FUND)
 WHAT IS KEY INFORMATION DOCUMENT

1. Name of the AMC ,mutual fund, trustee, fund manager, and scheme
2. Dates of issue opening, closing , reopening for sale as repurchase
3. Plans and option of the scheme
4. Risk profile of the scheme
5. Benchmark
6. Dividend policy
7. Performance of scheme and benchmark over last 1 year, 3years , 5 years
from inception
8. Loads and expenses
9. Contact information of registrar for taking up investor grievance