Mutual Fund as an Investment

MUTUAL FUNDS :

Regulations and operations. A Mutual fund is a special type of investment institution that acts as an investment conduit With the emergence of the capital market at the center stage of the Indian financial system ,from its marginal role a decade earlier, the Indian capital market also witnessed, during the same period, a significant institutional development in the form of a diversified structure of mutual funds. It pools the savings, particularly of the relatively small investors and invests them in a well diversified portfolio of sound investment .Mutual funds issue securities [ known as units]to the investors[ known as unit holders] in accordance with the quantum of money invested by them .The profits [or losses] are shared by investors in proportion to their investments .A mutual fund is set up in the form of a trust ,the trust is established by a sponsor[s] who is like promoter of a company .The assert management company[AMC ] manages the funds by making investments in various types of securities. As an investment intermediary, they offer a variety of services/ advantages to the relatively small investors who on their own ,cannot successfully construct and manage an investment portfolio mainly due to the small size of their funds, lack of expertise and experience and so on.

Different types of Mutual fund scheme

Mutual fund can be classified under three head i.e.

1.Open-end vs closed-end funds
2.Load fund and no load funds
3.Tax exempt or non tax exempt funds.

1.Open-end scheme means a scheme which offer units for sales without specifying any duration of redemption. Thus the investors can buy or sell units on daily basis for any numbers at prices that are linked to the NAV of the units. So the investor can invest or disinvest any amount any time after a short initial lock in period.
An close ended scheme is one in which the subscription period remains open only for a specific period, called the redemption period after which the entire corpus is disinvest and the proceeds distributed to the unit holders .

2.A mutual fund can recover the initial marketing expenses in any of the following ways:
a. By deducting front end or entry load
b. By deducting deferred load
c. By deducting back end or exit load

If the load is charged at the time of its entry in to the fund it is called as front end or entry load. Back end is charged at the time of its exit. The load amount charged to the scheme over a specific period is called as deferred load. SEBI has fixed the maximum amount of load that could be charged by the fund manager. Some of the fund existing in India charged front end while others charged back end. There are some no load fund also. It only means that the fund will not charged any sales expenses. However they still charged management fees and other recurring expenses. The investors in a no load fund enters or exits at the net NAV of the fund.

3. Tax exempt vs non tax exempt fund

If a fund is invest in a non tax fund .In India dividend income from mutual fund are tax free but any capital gain arising out of sales is taxable.

Broadly mutual fund are distinguish on the following basis:
1 Open ended and close ended scheme
2.According to investment objectives i,e Growth fund, Income fund, Balanced fund and tax savings fund.
3.According to investment type i,e, money market fund(equity fund ,gift fund and debt fund),
INVESTORS RIGHTS AND OBLIGATIONS IN MUTUAL FUND SCHEME.

One of the important aspect of the mutual fund regulations and operations is the investors protection and discloser norms. It serves the very purpose of the mutual fund guidelines.

Steps to be taken by mutual fund for improving disclosers and compliance standard

1.All mutual fund should disclosed full portfolio of their scheme in the annual report with in one month of the close of each financial year.

2.The Asset Management company must prepared of compliance manual and design internal audit system including audit system before the launch of any scheme.The trustees are also required to constitute an audit committee of the trustees which will review the internal audit system and the recommendation of the internal and statutory audit report ensure that the rectifications are suggested by internal and external auditors abr acted upon.
3.The AMC shall constitute an in house valuation committee consisting of senior executives including personnel from accounts, fund management and compliance deptt.
The committee would on a regular basis review the system and practices of valuation of securities.

4.Trustee shall review all transactions of the mutual fund with the associates on a regular basis.

INVESTORS RIGHT

The offer documents of a scheme lays down the investors right. The important rights of the unit holders are as below:

1.Unit holders have a proportionate right in beneficial ownership of the scheme assets as well as any dividend or income declared under the scheme .

2.They have the right to information regarding any adverse happening.

3.They are entitled to received dividend warrant with in 42 days of the date of dividend declaration.

4.AMC can be terminate by 75%of the unit holders of the scheme present and voting at a special meeting.

5.The holders have the right to inspect major documents of the fund i.e. material contract, the investment management agreement, the custodian services agreement, registrar and transfer agencies agreement, memorandum and articles of association of the AMC , recent audited financial statements and the offer documents of the scheme.

6.With the consent of 75% of the unit holders they have the right to approve any changes in the close ended scheme.

7.Every unit holder have the right to received a copy of the annual statement and periodic statement regarding his transactions.

LIMITATION TO THE INVESTORS

1.Unit holders can not sue the trust but they can initiate proceedings against the trustees, if they feel that they are being cheated.

2.Except in certain circumstances AMC can not assure a specified level of return to the investors. AMC can not be sued to make good any shortfall in such scheme.

OBLIGATIONS OF THE INVESTORS

1.An investor should carefully study the risk factors and other information provided in the offer documents .Failure to study will not entitled him for any rights thereafter.

2.It is the responsibility of the investor to monitor his scheme by studying the reports and other financial statement of the fund.

So before investing everybody should take necessary action to familiar with the scheme.
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