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| 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. |
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| 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. Mutual fund issues units to the investors in
accordance with quantum of money invested by them. Investors
of mutual funds are known as unitholders. |
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| The profits or losses are shared by the investors
in proportion to their investments. 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 Securities
and Exchange Board of India (SEBI) which regulates
securities markets before it can collect funds from the
public. |
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| Unit Trust of India was the first mutual fund set
up in India in the year 1963. In early 1990s, Government
allowed public sector banks and institutions to set up
mutual funds. |
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| In the year 1992, Securities and exchange Board of
India (SEBI) Act was passed. The objectives of SEBI are – to
protect the interest of investors in securities and to
promote the development of and to regulate the securities
market. |
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| As far as mutual funds are concerned, SEBI
formulates policies and regulates the mutual funds to
protect the interest of the investors. SEBI notified
regulations for the mutual funds in 1993. Thereafter, mutual
funds sponsored by private sector entities were allowed to
enter the capital market. The regulations were fully revised
in 1996 and have been amended thereafter from time to time.
SEBI has also issued guidelines to the mutual funds from
time to time to protect the interests of investors. |
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| All mutual funds whether promoted by public sector
or private sector entities including those promoted by
foreign entities are governed by the same set of
Regulations. There is no distinction in regulatory
requirements for these mutual funds and all are subject to
monitoring and inspections by SEBI. The risks associated
with the schemes launched by the mutual funds sponsored by
these entities are of similar type. |
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| A mutual fund is set up in the form of a trust,
which has sponsor, trustees, asset management company (AMC)
and custodian. The trust is established by a sponsor or more
than one sponsor who is like promoter of a company. The
trustees of the mutual fund hold its property for the
benefit of the unitholders. Asset Management Company (AMC)
approved by SEBI manages the funds by making investments in
various types of securities. Custodian, 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. |
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SEBI Regulations require that at least two thirds of
the directors of trustee company or board of trustees must
be independent i.e. they should not be associated with the
sponsors. Also, 50% of the directors of AMC must be
independent. All mutual funds are required to be registered
with SEBI before they launch any scheme.
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| The performance of a particular scheme of a mutual
fund is denoted by Net Asset Value (NAV). |
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| Mutual funds invest the money collected from the
investors in securities markets. In simple words, Net Asset
Value is the market value of the securities held by the
scheme. 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 Rs 200 lakhs and the mutual fund has
issued 10 lakhs units of Rs. 10 each to the investors, then
the NAV per unit of the fund is Rs.20. NAV is required to be
disclosed by the mutual funds on a regular basis - daily or
weekly - depending on the type of scheme. |
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| Schemes according to Maturity
Period |
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| A mutual fund scheme can be classified into
open-ended scheme or close-ended scheme depending on its
maturity period. |
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| Open-ended Fund/ Scheme |
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| An open-ended fund or scheme is one that is
available for subscription and repurchase on a continuous
basis. These schemes do not have a fixed maturity period.
Investors can conveniently buy and sell units at Net Asset
Value (NAV) related prices which are declared on a daily
basis. The key feature of open-end schemes is liquidity. |
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| Close-ended Fund/ Scheme |
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| A close-ended fund or scheme has a stipulated
maturity period e.g. 5-7 years. The fund is open for
subscription only during a specified period at the time of
launch of the scheme. Investors can invest in the scheme at
the time of the initial public issue and thereafter they can
buy or sell the units of the scheme on the stock exchanges
where the units are listed. In order to provide an exit
route to the investors, some close-ended funds give an
option of selling back the units to the mutual fund through
periodic repurchase at NAV related prices. SEBI Regulations
stipulate that at least one of the two exit routes is
provided to the investor i.e. either repurchase facility or
through listing on stock exchanges. These mutual funds
schemes disclose NAV generally on weekly basis. |
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| Schemes according to Investment
Objective |
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| A scheme can also be classified as growth scheme,
income scheme, or balanced scheme considering its investment
objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified
mainly as follows: |
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| Growth / Equity Oriented Scheme |
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| The aim of growth funds is to provide capital
appreciation over the medium to long- term. Such schemes
normally invest a major part of their corpus in equities.
Such funds have comparatively high risks. These schemes
provide different options to the investors like dividend
option, capital appreciation, etc. and the investors may
choose an option depending on their preferences. The
investors must indicate the option in the application form.
The mutual funds also allow the investors to change the
options at a later date. Growth schemes are good for
investors having a long-term outlook seeking appreciation
over a period of time. |
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| Income / Debt Oriented Scheme |
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| The aim of income funds is to provide regular and
steady income to investors. Such schemes generally invest in
fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such
funds are less risky compared to equity schemes. These funds
are not affected because of fluctuations in equity markets.
However, opportunities of capital appreciation are also
limited in such funds. The NAVs of such funds are affected
because of change in interest rates in the country. If the
interest rates fall, NAVs of such funds are likely to
increase in the short run and vice versa. However, long term
investors may not bother about these fluctuations. |
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| Balanced Fund |
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| The aim of balanced funds is to provide both growth
and regular income as such schemes invest both in equities
and fixed income securities in the proportion indicated in
their offer documents. These are appropriate for investors
looking for moderate growth. They generally invest 40-60% in
equity and debt instruments. These funds are also affected
because of fluctuations in share prices in the stock
markets. However, NAVs of such funds are likely to be less
volatile compared to pure equity funds. |
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| Money Market or Liquid Fund |
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| These funds are also income funds and their aim is
to provide easy liquidity, preservation of capital and
moderate income. These schemes invest exclusively in safer
short-term instruments such as treasury bills, certificates
of deposit, commercial paper and inter-bank call money,
government securities, etc. Returns on these schemes
fluctuate much less compared to other funds. These funds are
appropriate for corporate and individual investors as a
means to park their surplus funds for short periods. |
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| Gilt Fund |
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| These funds invest exclusively in government
securities. Government securities have no default risk. NAVs
of these schemes also fluctuate due to change in interest
rates and other economic factors as is the case with income
or debt oriented schemes. |
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| Index Funds |
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| Index Funds replicate the portfolio of a particular
index such as the BSE Sensitive index, S&P NSE 50 index
(Nifty), etc These schemes invest in the securities in the
same weightage comprising of an index. NAVs of such schemes
would rise or fall in accordance with the rise or fall in
the index, though not exactly by the same percentage due to
some factors known as "tracking error" in
technical terms. Necessary disclosures in this regard are
made in the offer document of the mutual fund scheme. |
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| There are also exchange traded index funds launched
by the mutual funds which are traded on the stock exchanges. |
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| These are the funds/schemes which invest in the
securities of only those sectors or industries as specified
in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The
returns in these funds are dependent on the performance of
the respective sectors/industries. While these funds may
give higher returns, they are more risky compared to
diversified funds. Investors need to keep a watch on the
performance of those sectors/industries and must exit at an
appropriate time. They may also seek advice of an expert. |
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| These schemes offer tax rebates to the investors
under specific provisions of the Income Tax Act, 1961 as the
Government offers tax incentives for investment in specified
avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension
schemes launched by the mutual funds also offer tax
benefits. These schemes are growth oriented and invest
pre-dominantly in equities. Their growth opportunities and
risks associated are like any equity-oriented scheme. |
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| A scheme that invests primarily in other schemes of
the same mutual fund or other mutual funds is known as a FoF
scheme. An FoF scheme enables the investors to achieve
greater diversification through one scheme. It spreads risks
across a greater universe. |
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| A Load Fund is one that charges a percentage of NAV
for entry or exit. That is, each time one buys or sells
units in the fund, a charge will be payable. This charge is
used by the mutual fund for marketing and distribution
expenses. Suppose the NAV per unit is Rs.10. If the entry as
well as exit load charged is 1%, then the investors who buy
would be required to pay Rs.10.10 and those who offer their
units for repurchase to the mutual fund will get only
Rs.9.90 per unit. The investors should take the loads into
consideration while making investment as these affect their
yields/returns. However, the investors should also consider
the performance track record and service standards of the
mutual fund which are more important. Efficient funds may
give higher returns in spite of loads. |
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| A no-load fund is one that does not charge for
entry or exit. It means the investors can enter the
fund/scheme at NAV and no additional charges are payable on
purchase or sale of units. |
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| Mutual funds cannot increase the load beyond the
level mentioned in the offer document. Any change in the
load will be applicable only to prospective investments and
not to the original investments. In case of imposition of
fresh loads or increase in existing loads, the mutual funds
are required to amend their offer documents so that the new
investors are aware of loads at the time of investments. |
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| The price or NAV a unitholder is charged while
investing in an open-ended scheme is called sales price. It
may include sales load, if applicable. |
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| Repurchase or redemption price is the price or NAV
at which an open-ended scheme purchases or redeems its units
from the unitholders. It may include exit load, if
applicable. |
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| Assured return schemes are those schemes that
assure a specific return to the unitholders irrespective of
performance of the scheme. |
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| A scheme cannot promise returns unless such returns
are fully guaranteed by the sponsor or AMC and this is
required to be disclosed in the offer document. |
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| Investors should carefully read the offer document
whether return is assured for the entire period of the
scheme or only for a certain period. Some schemes assure
returns one year at a time and they review and change it at
the beginning of the next year. |
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| Considering the market trends, any prudent fund
managers can change the asset allocation i.e. he can invest
higher or lower percentage of the fund in equity or debt
instruments compared to what is disclosed in the offer
document. It can be done on a short term basis on defensive
considerations i.e. to protect the NAV. Hence the fund
managers are allowed certain flexibility in altering the
asset allocation considering the interest of the investors.
In case the mutual fund wants to change the asset allocation
on a permanent basis, they are required to inform the
unitholders and giving them option to exit the scheme at
prevailing NAV without any load. |
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| Mutual funds normally come out with an
advertisement in newspapers publishing the date of launch of
the new schemes. Investors can also contact the agents and
distributors of mutual funds who are spread all over the
country for necessary information and application forms.
Forms can be deposited with mutual funds through the agents
and distributors who provide such services. Now a days, the
post offices and banks also distribute the units of mutual
funds. However, the investors may please note that the
mutual funds schemes being marketed by banks and post
offices should not be taken as their own schemes and no
assurance of returns is given by them. The only role of
banks and post offices is to help in distribution of mutual
funds schemes to the investors. |
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| Investors should not be carried away by
commission/gifts given by agents/distributors for investing
in a particular scheme. On the other hand they must consider
the track record of the mutual fund and should take
objective decisions. |
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| Yes, non-resident Indians can also invest in mutual
funds. Necessary details in this respect are given in the
offer documents of the schemes. |
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| An investor should take into account his risk
taking capacity, age factor, financial position, etc. As
already mentioned, the schemes invest in different type of
securities as disclosed in the offer documents and offer
different returns and risks. Investors may also consult
financial experts before taking decisions. Agents and
distributors may also help in this regard. |
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| An investor must mention clearly his name, address,
number of units applied for and such other information as
required in the application form. He must give his bank
account number so as to avoid any fraudulent encashment of
any cheque/draft issued by the mutual fund at a later date
for the purpose of dividend or repurchase. Any changes in
the address, bank account number, etc at a later date should
be informed to the mutual fund immediately. |
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| An abridged offer document, which contains very
useful information, is required to be given to the
prospective investor by the mutual fund. The application
form for subscription to a scheme is an integral part of the
offer document. SEBI has prescribed minimum disclosures in
the offer document. An investor, before investing in a
scheme, should carefully read the offer document. Due care
must be given to portions relating to main features of the
scheme, risk factors, initial issue expenses and recurring
expenses to be charged to the scheme, entry or exit loads,
sponsor’s track record, educational qualification and work
experience of key personnel including fund managers,
performance of other schemes launched by the mutual fund in
the past, pending litigations and penalties imposed, etc. |
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| Mutual funds are required to despatch certificates
or statements of accounts within six weeks from the date of
closure of the initial subscription of the scheme. In case
of close-ended schemes, the investors would get either a
demat account statement or unit certificates as these are
traded in the stock exchanges. In case of open-ended
schemes, a statement of account is issued by the mutual fund
within 30 days from the date of closure of initial public
offer of the scheme. The procedure of repurchase is
mentioned in the offer document. |
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| According to SEBI Regulations, transfer of units is
required to be done within thirty days from the date of
lodgment of certificates with the mutual fund. |
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| A mutual fund is required to despatch to the
unitholders the dividend warrants within 30 days of the
declaration of the dividend and the redemption or repurchase
proceeds within 10 working days from the date of redemption
or repurchase request made by the unitholder. |
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| In case of failures to despatch the
redemption/repurchase proceeds within the stipulated time
period, Asset Management Company is liable to pay interest
as specified by SEBI from time to time (15% at present). |
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| Yes. However, no change in the nature or terms of
the scheme, known as fundamental attributes of the scheme
e.g.structure, investment pattern, etc. can be carried out
unless a written communication is sent to each unitholder
and an advertisement is given in one English daily having
nationwide circulation and in a newspaper published in the
language of the region where the head office of the mutual
fund is situated. The unitholders have the right to exit the
scheme at the prevailing NAV without any exit load if they
do not want to continue with the scheme. The mutual funds
are also required to follow similar procedure while
converting the scheme form close-ended to open-ended scheme
and in case of change in sponsor. |
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| There may be changes from time to time in a mutual
fund. The mutual funds are required to inform any material
changes to their unitholders. Apart from it, many mutual
funds send quarterly newsletters to their investors. |
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| At present, offer documents are required to be
revised and updated at least once in two years. In the
meantime, new investors are informed about the material
changes by way of addendum to the offer document till the
time offer document is revised and reprinted. |
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| The performance of a scheme is reflected in its net
asset value (NAV) which is disclosed on daily basis in case
of open-ended schemes and on weekly basis in case of
close-ended schemes. The NAVs of mutual funds are required
to be published in newspapers. The NAVs are also available
on the web sites of mutual funds. All mutual funds are also
required to put their NAVs on the web site of Association of
Mutual Funds in India (AMFI) www.amfiindia.com and thus the
investors can access NAVs of all mutual funds at one place. |
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| The mutual funds are also required to publish their
performance in the form of half-yearly results which also
include their returns/yields over a period of time i.e. last
six months, 1 year, 3 years, 5 years and since inception of
schemes. Investors can also look into other details like
percentage of expenses of total assets as these have an
affect on the yield and other useful information in the same
half-yearly format. |
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| The mutual funds are also required to send annual
report or abridged annual report to the unitholders at the
end of the year. |
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| Various studies on mutual fund schemes including
yields of different schemes are being published by the
financial newspapers on a weekly basis. Apart from these,
many research agencies also publish research reports on
performance of mutual funds including the ranking of various
schemes in terms of their performance. Investors should
study these reports and keep themselves informed about the
performance of various schemes of different mutual funds. |
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| Investors can compare the performance of their
schemes with those of other mutual funds under the same
category. They can also compare the performance of equity
oriented schemes with the benchmarks like BSE Sensitive
Index, S&P CNX Nifty, etc. |
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| On the basis of performance of the mutual funds,
the investors should decide when to enter or exit from a
mutual fund scheme. |
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| The mutual funds are required to disclose full
portfolios of all of their schemes on half-yearly basis
which are published in the newspapers. Some mutual funds
send the portfolios to their unitholders. |
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| The scheme portfolio shows investment made in each
security i.e. equity, debentures, money market instruments,
government securities, etc. and their quantity, market value
and % to NAV. These portfolio statements also required to
disclose illiquid securities in the portfolio, investment
made in rated and unrated debt securities, non-performing
assets (NPAs), etc. |
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| Some of the mutual funds send newsletters to the
unitholders on quarterly basis which also contain portfolios
of the schemes. |
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| Yes, there is a difference. IPOs of companies may
open at lower or higher price than the issue price depending
on market sentiment and perception of investors. However, in
the case of mutual funds, the par value of the units may not
rise or fall immediately after allotment. A mutual fund
scheme takes some time to make investment in securities. NAV
of the scheme depends on the value of securities in which
the funds have been deployed. |
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| Some of the investors have the tendency to prefer a
scheme that is available at lower NAV compared to the one
available at higher NAV. Sometimes, they prefer a new scheme
which is issuing units at Rs. 10 whereas the existing
schemes in the same category are available at much higher
NAVs. Investors may please note that in case of mutual funds
schemes, lower or higher NAVs of similar type schemes of
different mutual funds have no relevance. On the other hand,
investors should choose a scheme based on its merit
considering performance track record of the mutual fund,
service standards, professional management, etc. This is
explained in an example given below. |
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| Suppose scheme A is available at a NAV of Rs.15 and
another scheme B at Rs.90. Both schemes are diversified
equity oriented schemes. Investor has put Rs. 9,000 in each
of the two schemes. He would get 600 units (9000/15) in
scheme A and 100 units (9000/90) in scheme B. Assuming that
the markets go up by 10 per cent and both the schemes
perform equally good and it is reflected in their NAVs. NAV
of scheme A would go up to Rs. 16.50 and that of scheme B to
Rs. 99. Thus, the market value of investments would be Rs.
9,900 (600* 16.50) in scheme A and it would be the same
amount of Rs. 9900 in scheme B (100*99). The investor would
get the same return of 10% on his investment in each of the
schemes. Thus, lower or higher NAV of the schemes and
allotment of higher or lower number of units within the
amount an investor is willing to invest, should not be the
factors for making investment decision. Likewise, if a new
equity oriented scheme is being offered at Rs.10 and an
existing scheme is available for Rs. 90, should not be a
factor for decision making by the investor. Similar is the
case with income or debt-oriented schemes. |
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| On the other hand, it is likely that the better
managed scheme with higher NAV may give higher returns
compared to a scheme which is available at lower NAV but is
not managed efficiently. Similar is the case of fall in
NAVs. Efficiently managed scheme at higher NAV may not fall
as much as inefficiently managed scheme with lower NAV.
Therefore, the investor should give more weightage to the
professional management of a scheme instead of lower NAV of
any scheme. He may get much higher number of units at lower
NAV, but the scheme may not give higher returns if it is not
managed efficiently. |
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| As already mentioned, the investors must read the
offer document of the mutual fund scheme very carefully.
They may also look into the past track record of performance
of the scheme or other schemes of the same mutual fund. They
may also compare the performance with other schemes having
similar investment objectives. Though past performance of a
scheme is not an indicator of its future performance and
good performance in the past may or may not be sustained in
the future, this is one of the important factors for making
investment decision. In case of debt oriented schemes, apart
from looking into past returns, the investors should also
see the quality of debt instruments which is reflected in
their rating. A scheme with lower rate of return but having
investments in better rated instruments may be safer.
Similarly, in equities schemes also, investors may look for
quality of portfolio. They may also seek advice of experts. |
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| Investors should not assume some companies having
the name "mutual benefit" as mutual funds. These
companies do not come under the purview of SEBI. On the
other hand, mutual funds can mobilise funds from the
investors by launching schemes only after getting registered
with SEBI as mutual funds. |
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| In the offer document of any mutual fund scheme,
financial performance including the net worth of the sponsor
for a period of three years is required to be given. The
only purpose is that the investors should know the track
record of the company which has sponsored the mutual fund.
However, higher net worth of the sponsor does not mean that
the scheme would give better returns or the sponsor would
compensate in case the NAV falls. |
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| Almost all the mutual funds have their own web
sites. Investors can also access the NAVs, half-yearly
results and portfolios of all mutual funds at the web site
of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also
published useful literature for the investors. |
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| Investors can log on to the web site of SEBI www.sebi.gov.in and go to
"Mutual Funds" section for information on SEBI
regulations and guidelines, data on mutual funds, draft
offer documents filed by mutual funds, addresses of mutual
funds, etc. Also, in the annual reports of SEBI available on
the web site, a lot of information on mutual funds is given.
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| There are a number of other web sites which give a
lot of information of various schemes of mutual funds
including yields over a period of time. Many newspapers also
publish useful information on mutual funds on daily and
weekly basis. Investors may approach their agents and
distributors to guide them in this regard. |
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| Yes. The nomination can be made by individuals
applying for / holding units on their own behalf singly or
jointly. Non-individuals including society, trust, body
corporate, partnership firm, Karta of Hindu Undivided
Family, holder of Power of Attorney cannot nominate. |
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| In case of winding up of a scheme, the mutual funds
pay a sum based on prevailing NAV after adjustment of
expenses. Unitholders are entitled to receive a report on
winding up from the mutual funds which gives all necessary
details. |
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| Investors would find the name of contact person in
the offer document of the mutual fund scheme whom they may
approach in case of any query, complaints or grievances.
Trustees of a mutual fund monitor the activities of the
mutual fund. The names of the directors of asset management
company and trustees are also given in the offer documents.
Investors should approach the concerned Mutual Fund /
Investor Service Centre of the Mutual Fund with their
complaints. |
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| If the complaints remain unresolved, the investors
may approach SEBI for facilitating redressal of their
complaints. On receipt of complaints, SEBI takes up the
matter with the concerned mutual fund and follows up with it
regularly. Investors may send their complaints to: |
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Securities and Exchange Board of India
Office of Investor Assistance and Education (OIAE)
Exchange Plaza, “G” Block, 4th Floor,
Bandra-Kurla Complex,
Bandra (E), Mumbai – 400 051.
Phone: 26598510-13 |
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| An applicant proposing to sponsor a mutual fund in
India must submit an application in Form A along with a fee
of Rs.25,000. The application is examined and once the
sponsor satisfies certain conditions such as being in the
financial services business and possessing positive net
worth for the last five years, having net profit in three
out of the last five years and possessing the general
reputation of fairness and integrity in all business
transactions, it is required to complete the remaining
formalities for setting up a mutual fund. These include
inter alia, executing the trust deed and investment
management agreement, setting up a trustee company/board of
trustees comprising two- thirds independent trustees,
incorporating the asset management company (AMC),
contributing to at least 40% of the net worth of the AMC and
appointing a custodian. Upon satisfying these conditions,
the registration certificate is issued subject to the
payment of registration fees of Rs.25.00 lacs For details,
see the SEBI (Mutual Funds) Regulations, 1996. |
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Source: Securities and Exchange
Board of India (SEBI).
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