Mutual Funds are not free from risks. It is so because basically the mutual funds also invest their funds in the stock market on shares which are volatile in nature and are not risk free. Hence, the following risk are inherent in their dealings :
(i) Market Risks
In general, there are certain risks associated with every kind of investment on shares. They are called market risks. These market risks can be reduced, but cannot be completely eliminated even by a good investment management. The prices of shares are subject to wide price fluctuations depending upon market conditions over which nobody has a control. Moreover, every economy has to pass through a cycle-boom, recession, slump and recovery. The phase of the business cycle affects the market conditions to a larger extent.
(ii) Scheme Risks
There are certain risks inherent in the scheme itself. It all depends upon the nature of the scheme. For instance, in a pure growth scheme, risks are greater. It is obvious because if one expects more returns as in the case of a growth scheme, one has to take more risks.
(iii) Investment Risk
Whether the Mutual Fund makes money in shares or loses depends upon the investment expertise of the Asset Management Company (AMC). If the investment advice goes wrong, the fund has to suffer a lot. The investment expertise of various funds are different and it is reflected on the returns which they offer to investors.
(iv) Business Risk
The corpus of a mutual fund might have been invested in a company’s shares. If the business of that company suffers any set back, it cannot declare any dividend. It may even go to the extent of winding up its business. Though the mutual fund can withstand such a risk, its income paying capacity is affected.
(v) Political Risks
Successive Governments bring with them fancy new economic ideologies and policies. It is often said that many economic decisions are politically motivated. Changes in Government bring in the risk of uncertainty which every player in the financial service industry has to face. So mutual funds are no exception to it.
ORGANIZATION OF THE FUND
The structure of mutual fund operations in India envisages a three tier establishment namely :
(i) A sponsor institution to promote the fund
(ii) A team of trustees to oversee the operations and to provide checks for the efficient, profitable and transparent operations of the fund and
(iii) An Asset Management Company AMC) to actually deal with the funds.
Sponsoring Institution : The company which sets up the Mutual Fund is called the sponsor. The SEBI has laid down certain criteria to be met by the sponsor. These criteria mainly deal with adequate experience, good past track record, net worth etc.
Trustees : Trustees are people with long experience and good integrity in their respective fields. They carry the crucial responsibility of safeguarding the interest of investors. For this purpose, they monitor the operations of the different schemes. They have wide ranging powers and they can even dismiss Asset Management Companies with the approval of the SEBI.
Asset Management Company (AMC) : The AMC actually manages the funds of the various schemes. The AMC employs a large number of professionals to make investments, carry out research and to do agent and investor servicing. In fact, the success of any Mutual Fund depends upon the efficiency of this AMC. The AMC submits a quarterly report on the functioning f the mutual fund to the trustees who will guide and control the AMC.
OPERATION OF THE FUND
A mutual fund invites the prospective investors to join the fund by offering various schemes so as to suit to the requirements of different categories of investors. The resources of individual investors are pooled together and the investors are issued units/shares for the money invested. The amount so collected is invested in capital market instruments like shares and debentures and money market instruments like treasury bills, commercial papers, etc.
For managing this fund, a mutual fund gets an annual fee of 1.25% of funds managed at the maximum as fixed by the SEBI (MF) Regulations, 1993 and if the funds exceed Rs.100 crores, it is only 1%. It can not take more than that. Of course regular expenses like custodial fee, cost of dividend warrants, fee for registration, the asset management fee etc. are debited to the respective scheme. These expenses cannot exceed 3% of the assets in the respective schemes each year. The remaining amount is given back to the investors in full.
(i) Market Risks
In general, there are certain risks associated with every kind of investment on shares. They are called market risks. These market risks can be reduced, but cannot be completely eliminated even by a good investment management. The prices of shares are subject to wide price fluctuations depending upon market conditions over which nobody has a control. Moreover, every economy has to pass through a cycle-boom, recession, slump and recovery. The phase of the business cycle affects the market conditions to a larger extent.
(ii) Scheme Risks
There are certain risks inherent in the scheme itself. It all depends upon the nature of the scheme. For instance, in a pure growth scheme, risks are greater. It is obvious because if one expects more returns as in the case of a growth scheme, one has to take more risks.
(iii) Investment Risk
Whether the Mutual Fund makes money in shares or loses depends upon the investment expertise of the Asset Management Company (AMC). If the investment advice goes wrong, the fund has to suffer a lot. The investment expertise of various funds are different and it is reflected on the returns which they offer to investors.
(iv) Business Risk
The corpus of a mutual fund might have been invested in a company’s shares. If the business of that company suffers any set back, it cannot declare any dividend. It may even go to the extent of winding up its business. Though the mutual fund can withstand such a risk, its income paying capacity is affected.
(v) Political Risks
Successive Governments bring with them fancy new economic ideologies and policies. It is often said that many economic decisions are politically motivated. Changes in Government bring in the risk of uncertainty which every player in the financial service industry has to face. So mutual funds are no exception to it.
ORGANIZATION OF THE FUND
The structure of mutual fund operations in India envisages a three tier establishment namely :
(i) A sponsor institution to promote the fund
(ii) A team of trustees to oversee the operations and to provide checks for the efficient, profitable and transparent operations of the fund and
(iii) An Asset Management Company AMC) to actually deal with the funds.
Sponsoring Institution : The company which sets up the Mutual Fund is called the sponsor. The SEBI has laid down certain criteria to be met by the sponsor. These criteria mainly deal with adequate experience, good past track record, net worth etc.
Trustees : Trustees are people with long experience and good integrity in their respective fields. They carry the crucial responsibility of safeguarding the interest of investors. For this purpose, they monitor the operations of the different schemes. They have wide ranging powers and they can even dismiss Asset Management Companies with the approval of the SEBI.
Asset Management Company (AMC) : The AMC actually manages the funds of the various schemes. The AMC employs a large number of professionals to make investments, carry out research and to do agent and investor servicing. In fact, the success of any Mutual Fund depends upon the efficiency of this AMC. The AMC submits a quarterly report on the functioning f the mutual fund to the trustees who will guide and control the AMC.
OPERATION OF THE FUND
A mutual fund invites the prospective investors to join the fund by offering various schemes so as to suit to the requirements of different categories of investors. The resources of individual investors are pooled together and the investors are issued units/shares for the money invested. The amount so collected is invested in capital market instruments like shares and debentures and money market instruments like treasury bills, commercial papers, etc.
For managing this fund, a mutual fund gets an annual fee of 1.25% of funds managed at the maximum as fixed by the SEBI (MF) Regulations, 1993 and if the funds exceed Rs.100 crores, it is only 1%. It can not take more than that. Of course regular expenses like custodial fee, cost of dividend warrants, fee for registration, the asset management fee etc. are debited to the respective scheme. These expenses cannot exceed 3% of the assets in the respective schemes each year. The remaining amount is given back to the investors in full.
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