Mutual Fund Basics

Mutual Funds are a vehicle to mobilize money from investors, to invest in different markets and securities in line with the investment objective of the AMC. Basically they act as collective investment schemes for likeminded investors who would desire to invest through investment professionals instead of taking a call themselves.

Mutual Funds seek to mobilize money from various investors who may have different investment preferences. In order to accommodate these preferences, mutual funds mobilize funds through different pools of money where each pool of money is called a Mutual Fund Scheme. Every Scheme has a pre-announced Investment Objective – e.g. investment in long term equities or short term debt etc. The investor needs to select the scheme whose investment objective matches his need for returns vis-à-vis his risk appetite.

There are several benefits from investing in a Mutual Fund.

Small investments: Mutual funds help you to reap the benefit of returns through a portfolio spread across a wide spectrum of companies with small investments. Such a portfolio selection would not be possible by an individual investor. Professional Fund Management: Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They analyze markets and the economy to select good investment opportunities.

Spreading Risk: An investor with a limited amount of fund might be able to invest in only one or two stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing in a number of researched stocks or bonds, across sectors, so the risk is diversified, along with taking advantage of the position it holds. Also in cases of liquidity crisis where stocks are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs (Net Asset Values). Transparency and easy access to information: Mutual Funds regularly provide investors with information on the value of their investments and also declare a daily NAV. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type and clearly layout their investment strategy to the investor.

Liquidity: Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at their market/traded value. As far as Open Ended Funds are concerned, the units can be bought and sold (redeemed) from /to the Mutual Fund directly as and when they announce the repurchase. Thus while an individual investor may get locked in to a particular investment in a stock and may not be able to withdraw from it when it is down, can do so in a mutual fund by simply redeeming his units with the mutual fund directly.

Choice: The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a MF scheme depending upon his risk / return profile.

Regulations: All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor. Distributors or Advisors who advise investors on which mutual finds to invest in are also required to be compulsorily AMFI certified i.e. they are required to pass certain uniform tests that will ensure their knowledge and expertise to advise other people.

Other advantages are:

• a. Professional Management (investor need not select specific equities; instead professionals do the job for him)
• b. Affordable Portfolio Diversification (scale of operations allows multiple stocks)
• c. Tax Advantage (dividend from Mutual fun units is presently non-taxable)
• d. Systematic and disciplined savings and investment thru SIP etc.

BSE StAR MF stands for BSE Ltd.’s online Stock exchange platform for Allotment and Redemption of Mutual Fund units.

In order to extend the convenience that investors in the secondary market have, to investors in Mutual funds, a SEBI Committee under the chairmanship of Mr. K N Vaidyanathan, ED - FII & MF, SEBI consisting of representatives from Exchanges, industry and depositories was set up to consider the feasibility of allowing Stock Exchanges (SEs) to offer their existing infrastructure for buying and selling of MF units, in addition to the prevailing distributor / Independent Financial Advisor route. This culminated in SEBI issuing a circular on November 13, 2009 enabling this route and giving guidelines to all stake holders on the facility of collecting applications for Mutual Fund transactions through Stock Exchanges. BSE’s online mutual fund transaction platform - BSE StAR MF was launched on December 4, 2009 in the presence of SEBI Chairman Mr C B Bhave and several CEOs of leading Mutual Funds.

Some of the key benefits of transacting through this platform are:

Reduction in paper work: Although the platform allows both physical and demat forms of holding ofr MF investments, it is more amenable and easier to hold units in dematerialsed form by opening a demat account. This reduces considerably the hassle and tedium of filling out application forms, giving cheques, depositing them at near by collection centres, getting statements of account (SOA) after few days, etc. In the existing framework, Demat account holders benefit from much shorter delivery times than Physical account holders as Demat obviates significant amount of paper movement and in case of subscription investors can actually view the units allotted by the AMC to them on the very next day in their demat account (which is also available for viewing online as facilitated by both depositories).

Faster Execution: Allotment by way of Demat credit. Hence investor can get demat units on the next working day following their date of application as well as redemption proceeds as per the respective TATs followed by the RTAs for each scheme.

Convenience: Existing investors can invest through the same channel (brokers) that they use to purchase stocks. Investors have the added convenience of viewing their Mutual fund investments all in one place along with the other investments in a single Demat account.

Till now, an investor who wanted to subscribe to a mutual fund had to identify a distributor of the mutual fund and submit all documents in physical form along with payment instrument (cheque) to the distributor or directly to the Mutual Fund/AMC/RTA. The subscription/redemption request would then get processed and investor would know about status of the request only in the form of direct communication (SoA) from Mutual Fund/AMC/RTA.

In BSE’s StAR MF system, the investor has to deal with a SEBI-registered BSE member who is eligible to participate in StAR MF for subscription/redemption of units. Investors can simply place an order with their brokers who are members of BSE StAR MF who would in turn submit the investors order into the StAR MF system. Investor would get an Order Confirmation Note from the member and would be able to modify his order details till the order acceptance time ends i.e. up to 3.00 pm. By end of the day investor would also get to know about the validity of his order and the number of units / value of redemption proceeds that would get credited to his bank / demat account. Almost all the transactions entered till date on the platform have requested holding in demat form as that is the most convenient way of transacting for all parties involved.

All mutual fund investors can use this electronic platform of the BSE through their broker who is registered for this service on BSE StAR MF. This stock exchange platform is an additional facility and the existing (physical) route thru MF distributor / IFA will continue in parallel as before. Individuals, HUF and Body Corporate can participate in StAR MF subject to completing the KYC procedure. In case of a minor, the guardian would have to be KYC compliant. It may be noted that in terms of the SEBI guideline on this matter, any investor who opts to hold units in demat form is DEEMED to be KYC compliant and need not get a separate KYC done for this purpose.

This list presently includes 27 AMCs whose combined Assets Under Management (AUM) is greater than 90% of the industry AUM – the details are available at http://bseindia.com/about/ListOfAMC.asp

Broadly, there are two types of schemes available:

• a. Open-Ended Schemes
• b. Close- ended Schemes

Open Ended Schemes: Open-ended schemes usually do not have a fixed maturity period and are available for subscription and redemption on an ongoing basis. The units can be bought and sold any time during the life of the scheme at NAV-related prices. Open-ended schemes can issue and redeem units any time during the life of the scheme. (Note: BSE StAR MF will accept all applications of those Open ended schemes that are offered by the respective AMCs.)

Close ended Schemes: Close-ended schemes cannot issue new units except in case of bonus or rights issue. Hence, the number of units of an open-ended scheme can fluctuate on a daily basis while that is not the case for close-ended schemes. Another way of explaining this difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open-ended schemes while that is not the case in case of close-ended schemes, where new investors can buy the units from secondary market only. (Note: Certain close ended schemes of AMCS are presently available for trading on the BSE's BOLT (Equity segment))