FACILITIES AVAILABLE TO INVESTORS
Mutual funds provide following facilities to the investors :
(i) Repurchase Facilities
The units of closed ended schemes must be compulsorily listed in recognized stock exchanges. Such units can be sold or bought at market prices. But, units of open ended schemes are not at all listed and hence they have to be bought only from the fund. So, the fund reserves the right to buy back the units from its members. This process of buying back the units from the investors by the fund is called repurchase facility. This is available in both schemes so as to provide liquidity to investors. The price fixed for this purpose is called repurchase price.
(ii) Reissue Facilities
In the case of open ended schemes, units can be bought only from the fund and not in the open market. The units bought from the investors are again reissued to those who are interested in purchasing them. The price fixed for this purpose is called re-issue price.
(iii) Roll Over Facilities
At the time of redemption, the investor is given an option to reinvest his entire investment once again for another term. An investor can overcome an adverse market condition prevailing at the time of redemption by resorting to this roll over facility. This is applicable in the case of close-ended funds.
(iv) Lateral Shifting Facilities
Some mutual funds permit the investors to shift from one scheme to another on the basis of the Net Asset Value with a view to providing total flexibility in their operation. This is done without any discount on the fund and without any additional charges. This is a great privilege given to the investors. This shifting is called ‘lateral shifting’.
NET ASSET VALUE
The repurchase price is always linked to the Net Asset Value(NAV). The NAV is nothing but the market price of each unit of a particular scheme in relation to all the assets of the scheme. It can otherwise be called “the intrinsic value” of each unit. This value is a true indicator of the performance of the fund. If the NAV is more than the face value of the unit, it clearly indicates that the money invested on that unit has appreciated and the fund has performed well.
Illustration
For instance, Fortune Mutual Fund has introduced a scheme called Millionaire Scheme. The scheme size is Rs.100 crores. The value of each units is Rs.10/-. It has invested all the funds in shares and debentures and the market value of the investment comes to Rs.200 crores.
Now NAV = 200 crores
--------------- x value of each unit
100 crores : 21 :
= 2 x 10 = 20
Thus, the value of each unit of Rs.10/- is worth Rs.20.
Hence the NAV = Rs. 20.
This NAV forms the basis for fixing the repurchase price and reissue price.
The investor can call up the fund any time to find out the NAV. Some MFs publish the NAV weekly in two or three leading daily newspapers.
INVESTORS RIGHTS
The SEBI (MF) Regulations, 1993 contains specific provisions with regard to investor servicing. Certain rights have been guaranteed to the investors as per these regulations. They are as follows :
(i) Unit Certificates
An investor has a right to receive his unit certificates on allotment within a period of 10 weeks from the date of closure of subscription lists in the case of a close ended scheme and 6 weeks from the date of closure of the initial offer in the case of an open ended scheme.
(ii) Transfer of Units
An investor is entitled to get the unit certificates transferred within a period of 30 days from the date of lodgement of the certificates along with the relevant transfer forms.
(iii) Refund of Application Money
If a mutual fund is not able to collect the statutory minimum amount it has to return the application money as refund within a period of 6 weeks from the date of closure of subscription lists. If the refund is delayed beyond this period, each applicant is entitled to get the refund with interest at the rate of 15% p.a. for the period of delay.
(iv) Audited Annual Report
Every mutual fund is under an obligation to its investors to publish the audited annual report and unaudited half yearly report through prominent newspapers in respect of each of its schemes within 6 months and 3 months respectively of the date of closure of accounts.
GENERAL GUIDELINES
For proper functioning of mutual funds and for ensuring investor protection, the following important guidelines have been framed by the Government of India:
(A) General
(i) Money market mutual funds would be regulated by the RBI while other mutual funds would be regulated by the Securities and Exchange Board of India (SEBI)
(ii) Mutual Fund shall be established in the form of Trusts under the Indian Trust Act and be authorized for business by the SEBI.
(iii) Mutual Funds shall be operated only by separately established Asset Management Companies (AMCs).
(iv) At least 50% of the Board of AMC must be independent directors who have no connections with the sponsoring organization. The directors must have professional experience of at least 10 years in the relevant fields such as portfolio management, financial administration, etc.
(v) The AMC should have a minimum net worth of Rs.5 crores at all times.
(vi) The SEBI is given the power to withdraw the authorization given to any AMC if it is found to be not serving the best interest of investors as well as the capital market. It is not applicable to bank sponsored AMCs.
(B) Business Activities
(i) Both AMCs and trustees should be treated as two separate legal entitles.
(ii) AMCs shuld not be permitted to undertake any other business activity except mutual funds.
(iii) One AMC cannot act as the AMC for another mutual fund.
(C) Schemes
(i) Each scheme of a mutual fund must be compulsorily registered with the SEBI before it is floated in the market.
(ii) The minimum size of the fund should be Rs.20 crores in the case of each closed-end scheme and it is Rs.50 crores for each open-end scheme.
(iii) Closed-end schemes should not be kept opened for subscription for more than 45 days. For open-end scheme, the first 45 days should be considered for determining the target figure or the minimum size.
(iv) If the minimum amount or 60 per cent of the targeted amount, whichever is higher, is not raised, then, the entire subscription has to be refunded to the investors.
(v) To provide continuous liquidity, closed-end schemes should be listed on stock exchanges. In the case of open-end schemes, mutual funds shall sell and re-purchase units at pre-determined prices based on the Net Asset Value and such prices should be published at least once in a week.
(vi) For each scheme, there should be a separate and responsible fund manager.
(D) Investment Norms
(i) Mutual funds should invest only in transferable securities either in the capital market or money market or securitised debt. It cannot exceed 10 per cent in the case of growth funds and 40 per cent in the case of income funds.
(ii) The mutual fund should not invest more than 5% of its corpus of any scheme in any one company’s shares.
(iii) This list of 5 % can be extended to10 % if all the schemes of a mutual fund are taken together.
(iv) No scheme should invest if any other scheme under the same AMC.
(v) No mutual fund under all its schemes take together can invest more than 15 per cent of the funds in the shares and debentures of any specific industry, except in the case of those schemes which are specifically floated for investment in one or more specified industries.
(E) Expenses
(i) The AMC may charge the mutual fund with investment management and advisory fees. Such fees should have been disclose in the prospectus.
(ii) The initial issue expenses should not exceed 6% of the funds raised under each scheme.
(iii) Excepting the initial issue expenses, all other expenses to be charged to the fund should not exceed 3% of the weekly average net assets outstanding during the current year. It must be disclosed through advertisements, accounts etc.
(F) Income Distribution
All mutual funds must distribute a minimum of 90% of their profits in any given year.
(G) Disclosure and Reporting
(i) The SEBI is given wide powers to call for any information regarding the operation of mutual funds and any of its schemes from the mutual fund or any person associated with it like the AMC, Trustee, Sponsor etc. : (ii) Every mutual fund is required to send its copies of duly audited annual statements of accounts, six monthly unaudited accounts, quarterly statements of movements in net assets for each of its schemes to the SEBI.
(iii) The SEBI, can lay down the accounting policies, the format and contents of financial statements and other reports.
(iv) The SEBI shall also lay down a common advertising code for all mutual funds to comply with.
Accounting Norm
(i) All mutual funds should segregate their earnings as current income, short term capital gains and long term capital gains.
(ii) Accounting for all the schemes must be done for the same year-ending
(I) Winding Up
(i) Each closed-end scheme should be wound up or extended with the permission of the SEBI as soon as the predetermined period is over.
(ii) An open-end scheme shall be wound up, if the total number of units outstanding after repurchases at a point of time falls below 50% of the originally issued number of units.
(J) Violation of Guidelines
The SEBI can, after due investigation, impose penalties on mutual funds for violating the guidelines as may be necessary.
6.12 MUTUAL FUNDS 2000
During April 1996, the Mutual Funds Department of SEBI has released an exhaustive study on the mutual fund industry called “Mutual Funds 2000”. The study has suggested several reforms as given hereunder
(i) It has been proposed that mutual funds should broaden their areas of investment. Accordingly, there is a proposal to set up mutual funds to invest in quilt edged securities or real estate.
(ii) There is a proposal to do away with the restriction of a maximum industry exposure of 15% for a mutual fund scheme. Earlier this restriction applied to all Mutual Fund Schemes except those which are designed to invest in a particular industry.
(iii) At present, a mutual fund can hold at a maximum of only 5% of the equity of a company. It has been proposed that this limit be increased to 10%.
(iv) Similarly, it is proposed to remove the existing maximum limit of 10% of a mutual fund investment (both equity and debt) in a single company.
(v) All closed-end mutual funds should get used within 6 months from the date of allotment unless they offer a continuous repurchase facility to their clients.
(vi) It has been proposed that closed-end mutual fund schemes which offer monthly income or schemes which are targeted at any certain categories of investors like women need not get listed.
(vii) The existing requirement of minimum initial corpus for both open-end and closed-end schemes is likely to be removed.
(viii) Further, the requirement of refunding subscription in case of collection falling below 60% of the target collection is sought to be removed.
(ix) There is a proposal to extend the lock in period of 60 days before redemption in the case of open-end schemes to 6 months.
(x) For the purpose of meeting the redemption requests alone, it has been suggested that mutual funds be permitted to borrow upto 10% of their net assets for a maximum period of 3 months only.
Mutual funds provide following facilities to the investors :
(i) Repurchase Facilities
The units of closed ended schemes must be compulsorily listed in recognized stock exchanges. Such units can be sold or bought at market prices. But, units of open ended schemes are not at all listed and hence they have to be bought only from the fund. So, the fund reserves the right to buy back the units from its members. This process of buying back the units from the investors by the fund is called repurchase facility. This is available in both schemes so as to provide liquidity to investors. The price fixed for this purpose is called repurchase price.
(ii) Reissue Facilities
In the case of open ended schemes, units can be bought only from the fund and not in the open market. The units bought from the investors are again reissued to those who are interested in purchasing them. The price fixed for this purpose is called re-issue price.
(iii) Roll Over Facilities
At the time of redemption, the investor is given an option to reinvest his entire investment once again for another term. An investor can overcome an adverse market condition prevailing at the time of redemption by resorting to this roll over facility. This is applicable in the case of close-ended funds.
(iv) Lateral Shifting Facilities
Some mutual funds permit the investors to shift from one scheme to another on the basis of the Net Asset Value with a view to providing total flexibility in their operation. This is done without any discount on the fund and without any additional charges. This is a great privilege given to the investors. This shifting is called ‘lateral shifting’.
NET ASSET VALUE
The repurchase price is always linked to the Net Asset Value(NAV). The NAV is nothing but the market price of each unit of a particular scheme in relation to all the assets of the scheme. It can otherwise be called “the intrinsic value” of each unit. This value is a true indicator of the performance of the fund. If the NAV is more than the face value of the unit, it clearly indicates that the money invested on that unit has appreciated and the fund has performed well.
Illustration
For instance, Fortune Mutual Fund has introduced a scheme called Millionaire Scheme. The scheme size is Rs.100 crores. The value of each units is Rs.10/-. It has invested all the funds in shares and debentures and the market value of the investment comes to Rs.200 crores.
Now NAV = 200 crores
--------------- x value of each unit
100 crores : 21 :
= 2 x 10 = 20
Thus, the value of each unit of Rs.10/- is worth Rs.20.
Hence the NAV = Rs. 20.
This NAV forms the basis for fixing the repurchase price and reissue price.
The investor can call up the fund any time to find out the NAV. Some MFs publish the NAV weekly in two or three leading daily newspapers.
INVESTORS RIGHTS
The SEBI (MF) Regulations, 1993 contains specific provisions with regard to investor servicing. Certain rights have been guaranteed to the investors as per these regulations. They are as follows :
(i) Unit Certificates
An investor has a right to receive his unit certificates on allotment within a period of 10 weeks from the date of closure of subscription lists in the case of a close ended scheme and 6 weeks from the date of closure of the initial offer in the case of an open ended scheme.
(ii) Transfer of Units
An investor is entitled to get the unit certificates transferred within a period of 30 days from the date of lodgement of the certificates along with the relevant transfer forms.
(iii) Refund of Application Money
If a mutual fund is not able to collect the statutory minimum amount it has to return the application money as refund within a period of 6 weeks from the date of closure of subscription lists. If the refund is delayed beyond this period, each applicant is entitled to get the refund with interest at the rate of 15% p.a. for the period of delay.
(iv) Audited Annual Report
Every mutual fund is under an obligation to its investors to publish the audited annual report and unaudited half yearly report through prominent newspapers in respect of each of its schemes within 6 months and 3 months respectively of the date of closure of accounts.
GENERAL GUIDELINES
For proper functioning of mutual funds and for ensuring investor protection, the following important guidelines have been framed by the Government of India:
(A) General
(i) Money market mutual funds would be regulated by the RBI while other mutual funds would be regulated by the Securities and Exchange Board of India (SEBI)
(ii) Mutual Fund shall be established in the form of Trusts under the Indian Trust Act and be authorized for business by the SEBI.
(iii) Mutual Funds shall be operated only by separately established Asset Management Companies (AMCs).
(iv) At least 50% of the Board of AMC must be independent directors who have no connections with the sponsoring organization. The directors must have professional experience of at least 10 years in the relevant fields such as portfolio management, financial administration, etc.
(v) The AMC should have a minimum net worth of Rs.5 crores at all times.
(vi) The SEBI is given the power to withdraw the authorization given to any AMC if it is found to be not serving the best interest of investors as well as the capital market. It is not applicable to bank sponsored AMCs.
(B) Business Activities
(i) Both AMCs and trustees should be treated as two separate legal entitles.
(ii) AMCs shuld not be permitted to undertake any other business activity except mutual funds.
(iii) One AMC cannot act as the AMC for another mutual fund.
(C) Schemes
(i) Each scheme of a mutual fund must be compulsorily registered with the SEBI before it is floated in the market.
(ii) The minimum size of the fund should be Rs.20 crores in the case of each closed-end scheme and it is Rs.50 crores for each open-end scheme.
(iii) Closed-end schemes should not be kept opened for subscription for more than 45 days. For open-end scheme, the first 45 days should be considered for determining the target figure or the minimum size.
(iv) If the minimum amount or 60 per cent of the targeted amount, whichever is higher, is not raised, then, the entire subscription has to be refunded to the investors.
(v) To provide continuous liquidity, closed-end schemes should be listed on stock exchanges. In the case of open-end schemes, mutual funds shall sell and re-purchase units at pre-determined prices based on the Net Asset Value and such prices should be published at least once in a week.
(vi) For each scheme, there should be a separate and responsible fund manager.
(D) Investment Norms
(i) Mutual funds should invest only in transferable securities either in the capital market or money market or securitised debt. It cannot exceed 10 per cent in the case of growth funds and 40 per cent in the case of income funds.
(ii) The mutual fund should not invest more than 5% of its corpus of any scheme in any one company’s shares.
(iii) This list of 5 % can be extended to10 % if all the schemes of a mutual fund are taken together.
(iv) No scheme should invest if any other scheme under the same AMC.
(v) No mutual fund under all its schemes take together can invest more than 15 per cent of the funds in the shares and debentures of any specific industry, except in the case of those schemes which are specifically floated for investment in one or more specified industries.
(E) Expenses
(i) The AMC may charge the mutual fund with investment management and advisory fees. Such fees should have been disclose in the prospectus.
(ii) The initial issue expenses should not exceed 6% of the funds raised under each scheme.
(iii) Excepting the initial issue expenses, all other expenses to be charged to the fund should not exceed 3% of the weekly average net assets outstanding during the current year. It must be disclosed through advertisements, accounts etc.
(F) Income Distribution
All mutual funds must distribute a minimum of 90% of their profits in any given year.
(G) Disclosure and Reporting
(i) The SEBI is given wide powers to call for any information regarding the operation of mutual funds and any of its schemes from the mutual fund or any person associated with it like the AMC, Trustee, Sponsor etc. : (ii) Every mutual fund is required to send its copies of duly audited annual statements of accounts, six monthly unaudited accounts, quarterly statements of movements in net assets for each of its schemes to the SEBI.
(iii) The SEBI, can lay down the accounting policies, the format and contents of financial statements and other reports.
(iv) The SEBI shall also lay down a common advertising code for all mutual funds to comply with.
Accounting Norm
(i) All mutual funds should segregate their earnings as current income, short term capital gains and long term capital gains.
(ii) Accounting for all the schemes must be done for the same year-ending
(I) Winding Up
(i) Each closed-end scheme should be wound up or extended with the permission of the SEBI as soon as the predetermined period is over.
(ii) An open-end scheme shall be wound up, if the total number of units outstanding after repurchases at a point of time falls below 50% of the originally issued number of units.
(J) Violation of Guidelines
The SEBI can, after due investigation, impose penalties on mutual funds for violating the guidelines as may be necessary.
6.12 MUTUAL FUNDS 2000
During April 1996, the Mutual Funds Department of SEBI has released an exhaustive study on the mutual fund industry called “Mutual Funds 2000”. The study has suggested several reforms as given hereunder
(i) It has been proposed that mutual funds should broaden their areas of investment. Accordingly, there is a proposal to set up mutual funds to invest in quilt edged securities or real estate.
(ii) There is a proposal to do away with the restriction of a maximum industry exposure of 15% for a mutual fund scheme. Earlier this restriction applied to all Mutual Fund Schemes except those which are designed to invest in a particular industry.
(iii) At present, a mutual fund can hold at a maximum of only 5% of the equity of a company. It has been proposed that this limit be increased to 10%.
(iv) Similarly, it is proposed to remove the existing maximum limit of 10% of a mutual fund investment (both equity and debt) in a single company.
(v) All closed-end mutual funds should get used within 6 months from the date of allotment unless they offer a continuous repurchase facility to their clients.
(vi) It has been proposed that closed-end mutual fund schemes which offer monthly income or schemes which are targeted at any certain categories of investors like women need not get listed.
(vii) The existing requirement of minimum initial corpus for both open-end and closed-end schemes is likely to be removed.
(viii) Further, the requirement of refunding subscription in case of collection falling below 60% of the target collection is sought to be removed.
(ix) There is a proposal to extend the lock in period of 60 days before redemption in the case of open-end schemes to 6 months.
(x) For the purpose of meeting the redemption requests alone, it has been suggested that mutual funds be permitted to borrow upto 10% of their net assets for a maximum period of 3 months only.
Mutual funds have varieties of funds which is suits for all economical people. Mutual funds have an easy procedure to invest and easy to understand the process.
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