DEPOSITORY

SERVICE AND
MUTUAL FUNDS
Module 6
DEPOSITORY SERVICE - MEANS
A Depository is an organization, which holds
securities of investors in electronic form at the
request of the investors, through a registered
depository participant. It also provides services
related to transactions in securities.

It present two depositories are registered with SEBI.

 National securities depositories limited (NSDL).
 Central securities depositories limited (CSDL).
ROLES OF DEPOSITORY & SERVICES
 Dematerialization, that is converting physical
certificates to electronic form. And conversion of
securities in demat form into physical certificates.
 Facilitating repurchase or redemption of units of
mutual funds.
 Electronic settlement of trade on stock exchange
connected to NSDL.
 Servers related to change of address.
 Effecting transmission of securities.
 Nominations facility for demat accounts.
ADVANTAGE
 To increase global trade which in turn can help
increase not only volume on local and foreign
markets, but also the exchange of information
technology.
 Raise capital from international market to get
international recognition.
 Domestic shares can be traded globally.
NATIONAL SECURITIES DEPOSITORY LIMITED
Using innovative and flexible technology systems.
NSDL works to support the investors and
brokers in the capital market of the country.

Objectives:-
• Ensure safety.
• Increase efficiency of markets.
• Minimize risk.
• Provide settlement solutions.
• Providing service at lower cost.
CENTRAL SECURITIES DEPOSITORY LIMITED
CSDL was set up with objective of providing
convient, dependable and secure depository
services at affordable cost to all market
participants.
Objectives:-
 Ensure safety.
 Increase efficiency of markets.
 Minimize risk.
 Provide settlement solution.
DEPOSITORY PARTICIPANTS AND THEIR ROLE
۞ A Depository Participant is the registered agent of the
depository concerned (either NSDL or CSDL)
۞ It is through the DP that an investor gets the services of
a depository.
۞ To avail this service, one has to open a Depository
Account with the DP `
۞ Shares for Dematerialisation have to be surrendered
after it have been duly transferred to his name.
DEPOSITORY PARTICIPANTS AND ITS
ROLE
 Banks, financial institutions and stock brokers are
acting as Depository Participants after obtaining the
required approval from SEBI and also complying
with other statutory requirements.
 The DP account links the investor to the Depository
which in turn has electronic links with the Stock
Exchanges, corporate and their Transfer agents etc.
DEPOSITORY PARTICIPANTS AND ITS
ROLE
 This interface of the depository with various associates
opens up a lot of services to the investor through the DP
account such as
 Payment or Receipt of shares towards his transactions via
Stock Exchanges,
 Receipt of bonus or right shares from the corporate in
which he is a share holder,
 Registering of share transfer, dematerialisation (and many
more).
 STOCK BROKING SERVICES INCLUDING
SEBI GUIDELINES
 Stock Brokers :- Are the member of a
recognized stock exchange, who buys, sells or
deals in securities. To work as a stock broker
registration with SEBI is mandatory.
 SEBI GUIDELINES :-

 Registration
 Capital adequacy norms for brokers.
 Additional capital related to volume of
business.
 Duty to the investor.
MUTUAL FUNDS
A mutual fund collects the savings from small
investors, invest them in Government and other
corporate securities and earn income through
interest and dividends, besides capital gains. It
works on the principle of small drops of water
make a big ocean.
STRUCTURE OF A MUTUAL FUND
The formation and operations of the mutual funds
are governed by the Securities Exchange Board of
India Mutual Fund Regulation1993.
Later , it was replaced by the SEBI Mutual Fund
Regulations 1996.
Its comprise four separate entities namely,
 Sponsor.
 Mutual Fund Trustee.
 Asset management company.
 Custodian.
STRUCTURE OF A MUTUAL FUND

SPONSOR

BOARD OF TRUSTEE
SPONSOR
A mutual fund is to be established by a sponsor
and registered with the SEBI. A sponsor can be
any person acting alone or in combination with a
corporate body.
 should have a sound track record.
 Should have been carrying on business in financial
services for a period of not less than five years.
 Should contribute at least 40 percent of the net
worth of the Asset Management Company.
 Should have a positive net worth in all the
preceding five years.
TRUSTEE
Mutual funds are established in the form of a trust.
The trustees have the responsibility to safeguard
the interest of the investors. They have wide
powers to overview, supervise and monitor the
activities of an asset management company.
ASSET MANAGEMENT COMPANY
A sponsor or the trustees appoint an AMC, and it
should be approved by the board. An appointee
can be terminated by a majority of the trustees or
75 percent of the unit holders of the scheme. And
professional experience in finance and financial
services. An AMC should have a net worth of not
less than Rs. 10 crore. Each director of an AMC is
required to give the details of his dealings in
securities with the trustees, on a quarterly basis.
AMC takes all reasonable steps, exercises and due
diligence.
CUSTODIAN
Mutual funds have a custodian, he carry out
custodial services for the various schemes of a
funds. It is their duty to send intimation of the
custodial services rendered to the board. A
custodian is supposed to act only for a single
mutual fund unless otherwise approved by SEBI.
TYPES MUTUAL FUNDS
In the investment market, one can find a varieyt
of investors with different needs, objectives and
risk taking capacities.

Mutual fund schemes can broadly be classified

into many types as given on next slide.
 Mutual
f und

On the basis of yield and investment

On the basis of execution and operation
pattern
 CLOSE- ENDED
Under this scheme, the corpus of the fund and its
duration are prefixed. In other words, the corpus of
the fund and the number of units are determined in
advance. The expiry of the fixed period, the entire
corpus is disinvested and distributed to unit holders.
Features:-
 The period or the target amount of the fund is
definite and fixed beforehand.
 The main objective of this fund is capital
appreciation.
 Once the period is over, they cannot purchase any
more units.
 OPEN-ENDED FUNDS
It is just the opposite of close-ended funds . Under this
scheme, the size of the fund or the period of the fund
is not pre-determined.

Feature:-
≈ These units are not publicly traded but, the fund is
ready to repurchase them and resell them at any time.
≈ The main objective of this fund is income generation.
The investors get dividend, rights as rewards for their
investment.
≈ The listed prices are very close to their Net Asset
Value.
 INCOME FUNDS
As the very name suggests, this fund aims at
generating and distributing regular income to the
members on a periodical basis.
Features:-
o The investor is assured of regular income at
periodic intervals, say half-yearly or yearly.
o This type of fund is to declare regular dividends
and not capital appreciation.
o It is best suited to the old and retired people.
o The pattern of investment is oriented towards
high and fixed income, like debentures, bonds etc.,
PURE GROWTH FUNDS
The Growth funds concentrate mainly on long run
gains, i.e., capital appreciation in the long run.
Features:-
 The growth oriented fund aims at meeting the
investors need for capital appreciation.
 The fund may declare dividend, but its principal
objective is only capital appreciation.
 It is best suited to salaried and business people
who have high risk bearing capacity and ability
to defer liquidity.
BALANCE FUNDS
It is nothing but a combination of both income
and growth funds. This is achieved by
balancing the investments between the high
growth equity shares and also the fixed income
earning securities.
 SPECIALISED FUNDS
A large number of specialised funds are in
existence aboard. They offer special schemes so
as to meet the specific needs of specific
categories of people like pensioners, widows
etc., In fact these funds open the door for
foreign investors to invest on the domestic
securities of these countries. Japan fund, South
Korea fund etc.,
MONEY-MARKET MUTUAL FUNDS
These funds are basically open ended mutual
funds. But, they invest in highly liquid and safe
securities like commercial paper, banker’s
acceptances, certificates of deposits, treasury
bills etc., also it is called money market
instruments, take place of shares, debentures
and bonds in capital market. They pay money in
market rates of interest.
ADVANTAGES OF MUTUAL FUNDS
Convenienc
Professional
TaxStability eManagement
Research
Benefits Diversificat
Flexibility
ion
Affordabilit
Transpare
y
Liquidity
Advantage
of Mutual
funds
ADVANTAGES
 Affordability:- Compare to direct investing in the
capital market, investing through the funds is
relatively less expensive.
 Flexibility :- Mutual funds offer a family of
schemes, and investors have the option of
transferring their holdings from one scheme to the
other.
 Tax Benefits:- Mutual fund investors now enjoy
income-tax benefits
 Stability:- A large amount of funds which provide
those economies of scale by which they can absorb
any losses in the stock market.
Cntd…
 Conveniences:- It reduces paper works, saves time and
makes investment easy.
 Professional Management:- An average investor lacks the
knowledge of capital market operations and does not have
large resources to reap the benefits of investment.
 Research :- Information and data required for investments
as they have large amount of funds and equity research
teams available with them.
 Diversification:- Invest in a number of companies across
various industries and sectors. And reduces the riskiness of
the investments.
 Transparency:- It declare their portfolio every month, an
investor knows where his/her money is being deployed &
in case they are not happy with the portfolio.
 EXCHANGE TRADED FUNDS(ETFs)
 ETFs came into existence in the US in 1993.
These are passively managed funds that track a
particular index and have the flexibility to trade
like a common stock. Without large investment,
an average investor can have an entire range of
index stocks. Where units are issued in return
for cash and redeemed as per the net asset
value in cash.
 HEDGE FUNDS
 It is a fund that can take both long and short positions, use
buy and sell under-valued securities, trade
options/bonds, and invest in almost any opportunity in
any market. The primary aim of most hedge funds is to
reduce volatility and risk, to preserve capital and deliver
positive returns.
 Benefits of Hedge Funds

 Generate Positive Returns

 Reduces Risk
 Wide choice
 Higher Returns
 Long-term Investment
 Provides Diversification.
REGULATIONS ON MUTUAL FUNDS

The regulatory structure for mutual funds as

operating in India is as follows:
1) RBI Guidelines
2) UTT’s Own Guidelines, and
3) SEBI (Mutual Funds) Regulations.
A) Constitution and Management Guidelines.
1) Trustee
2) Sponsor
3) Mutual Fund Bank.
B) Investment Objectives and Policies
1) Trust Deed
2) Funds Deployment
3) No Lending.
4) Inter Scheme
5) Delivery
6) Prohibited Avenues
C) Prudential Exposure Ceiling Limits:- Mutual
funds shall not hold, under any scheme , more
than 5% of issued share capital or debentures
stock of any company.
D) Pricing :- The maximum spread between
purchase and selling price or units not be
more than 5%.
E) Income Distribution
1) Cost
2) Income distribution
3) Provision
F) Statement of Accounts & Disclosures
1) Separate Accounts
2) Annual Statement
3) NAV
2) UTT’s Guidelines
A) Constitution and Management
1) Trust
2) Board of Trustees
3) Sponsor
4) Approval
B) Investment objectives & Policies.
1) Areas of Investment.
2) Granting Advance.
3) Borrowings.
4) Schemes.
C) Investment Limits
1) Scheme Limit:- No schemes of a Mutual funds
should invest more than 5% of its assets in the equity of
a Company. Not should not exceed 15% of the securities
issued by the company.
2) New Company:- Investment in capital issues of new
companies shall not exceed 10% of the securities for
30% of the aggregate assets of a s scheme.
ACCOUNT STATEMENT AND DISCLOSURES
 The MF should maintain separate account for
each scheme.
 Account should be balance & closed at the yea.
 Valuation of each scheme to be done.
 The fund shall not be obliged to disclose its
investment portfolio
 Accounts to be audited each year.
 PERFORMANCE EVALUATION

From simple evaluation tools to sophisticated

models, which take into consideration the risks &
uncertainty associated with the returns, are
available for evaluating the performance of mutual
funds.
Treynor’s Model:- used to calculate the return per unit of
risk

ARi = Avg. Rate of return for portfolio

ARf = Avg. Rate of return on a risk free investment.
Bt = Slop of portfolio ‘i’ characteristic line which represents the
portfolios relative volatility & its systematic risk.
PM= The Treynor’s portfolio performance measure for the period.
 Sharpe Model:- It measures the total risk, not
merely systematic risk.

Nt= standard deviation of rate of returns

A positive performance measure value is
indicative of good performance.
 ACCOUNTING ASPECTS
Three types of accounting aspects
1. Regular Accounts
2. Accumulation Accounts
3. Withdrawal Accounts.