Mutual Funds

Lithin BM. SCEM Mangalore,

Meaning
A mutual fund is a company that pools money from many
investors and invests the money in securities such as stocks,
bonds, and short-term debt. The combined holdings of
the mutual fund are known as its portfolio.

Lithin BM. SCEM Mangalore,

Functions of Mutual Funds
1. Collection of funds from the public
2. Portfolio diversification
3. Professional Management
4. Stability in the stock market
5. Promoting savings habit among the people
6. Risk Control
7. Liquidity

Lithin BM. SCEM Mangalore,

Structure of Mutual Funds
 Sponsor: A sponsor is a body corporate who establishes a
mutual fund. It may be one person acting alone or together
with another corporate body. Additionally, the sponsor is
expected to contribute at least 40% to the net worth of the
AMC. However, if any person holds 40% or more of the net
worth of an AMC, he shall be deemed to be a sponsor and
will be required to fulfill the eligibility criteria specified in
the mutual fund regulation.

Lithin BM. SCEM Mangalore,

 Board Of Trustees: A mutual fund house must have an
independent Board of Trustees, where two-thirds of the
trustees are independent persons who are not associated with
the sponsor in any manner. The Board of Trustees of the
trustee company holds the property of the mutual fund in
trust for the benefit of the unit-holders. They are responsible
for protecting the unit-holders interest.

Lithin BM. SCEM Mangalore,

 Asset Management Company: The role of an AMC is
highly significant in the mutual fund operation. They are the
fund managers i.e. they invest investors' money in various
securities (equity, debt and money market instruments) after
proper research of market conditions

Lithin BM. SCEM Mangalore,

 Custodian: The mutual fund is required by law to protect
their portfolio securities by placing them with a custodian.
Nearly all mutual funds use qualified bank custodians. Only a
registered custodian under the SEBI regulation can act as a
custodian to a mutual fund.

Lithin BM. SCEM Mangalore,

Types of Mutual Funds
 Open-ended Fund:These funds buy and sell units on a
continuous basis and, hence, allow investors to enter and exit
as per their convenience. The units can be purchased and sold
even after the initial offering (NFO) period (in case of new
funds). The units are bought and sold at the net asset value
(NAV) declared by the fund.

Lithin BM. SCEM Mangalore,

 Closed-ended funds: The unit capital of closed-ended
funds is fixed and they sell a specific number of units.
Unlike in open-ended funds, investors cannot buy the
units of a closed-ended fund after its NFO period is over.
This means that new investors cannot enter, nor can
existing investors exit till the term of the scheme ends.
However, to provide a platform for investors to exit
before the term, the fund houses list their closed-ended
schemes on an exchange.

Lithin BM. SCEM Mangalore,

 Other types of Mutual Funds
 EQUITY FUNDS
 DEBT FUNDS
 MONEY MARKET FUNDS
 HYBRID FUNDS
 GROWTH FUNDS
 INCOME FUNDS
 TAX-SAVING FUNDS(Equity linked savings scheme)

Lithin BM. SCEM Mangalore,

 Regulations of Mutual Funds in India
 Mutual funds are regulated by the Securities and Exchange
Board of India (SEBI).
 In 1996, SEBI formulated the Mutual Fund Regulation.
 Along with SEBI, mutual funds are regulated by RBI, Companies Act,
Stock exchange, Indian Trust Act and Ministry of Finance.
 In order to provide a guaranteed returns scheme, a mutual fund needs
to take approval from RBI.
 The Ministry of Finance acts as a supervisor of RBI and SEBI and
appellate authority under SEBI regulations.
 Mutual funds can appeal to the Ministry of finance on the SEBI
rulings.
 Association of Mutual Funds in Has been set up to protect the interest
of the unit holders.
Lithin BM. SCEM Mangalore,
Depository system
A depository is an organisation which holds securities (like
shares, debentures, bonds, government securities, mutual
fund units etc.) 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. At present two Depositories viz. National
Securities Depository Limited (NSDL) and Central
Depository Services (India) Limited (CDSL) are registered
with SEBI.

Lithin BM. SCEM Mangalore,

Key points
The minimum networth stipulated by SEBI for a depository
is Rs 100 crore.
A Depository Participant (DP) is an agent of the depository
through which it interfaces with the investor and provides
depository services

Lithin BM. SCEM Mangalore,

 Objectives of depository
 It removes the occurrences of forgery, duplicate share
certificates, and bad deliveries.
 This can increase the liquidity of securities by making a way for
easy transfer.
 Also, it can avoid the delay caused in the transfer of securities.
 Furthermore, it reduces the cost of a transaction for the
investors.
 It enables withdrawal and surrender from the securities with
great ease.
 It also maintains a perfect record of the holdings for an investor.
This is because all the details are stored in electronic form.
Lithin BM. SCEM Mangalore,
Activities or functions of depository
 Dematerialization
 Rematerialization
 Effecting settlement of securities
 Receipt of bonus and right issues in electronic form
 Carrying out settlements on OTC.
 Status update to the issuer

Lithin BM. SCEM Mangalore,

NSDL(National Securities Depository
Limited (NSDL)
NSDL is the first & largest depository in India established on
November 8, 1996 which was basically formed for the
purpose of handling the securities held in dematerialized
form in the Indian capital market. NSDL opens 3602
accounts on an average each day.
NSDL is promoted by Industrial Development Bank of India
(IDBI), Unit Trust of India (UTI), and National Stock
Exchange (NSE).

Lithin BM. SCEM Mangalore,

CDSL(Central Depository Services
Limited)
Central Depository Services Limited (CDSL) is a depository
service that works for the Bombay Stock Exchange (BSE) and
is promoted by the State Bank of India (SBI), Bank of India,
Bank of Baroda, HDFC Bank, Standard Chartered Bank, Axis
Bank and the Union Bank of India.
CDSL began its operations from February 1999 onwards
after obtaining prior clearance from market watchdog
Securities and Exchange Board of India (SEBI).

Lithin BM. SCEM Mangalore,

 Clearing and settlement process
 Trade recording: Key details about the trade.
 Trade confirmation: Confirmation from brokers about price and
quantity.
 Determination of obligation: determining what buyers and
sellers (counterparties) owe and what they have to receive on
settlement date. NSCCL acts as central counterparty.
 Pay-in of funds and securities: Buyers and sellers have to deposit
their funds and securities in pool account.
 Pay-out of funds and securities: Here funds and securities are
released.
Lithin BM. SCEM Mangalore,
Factoring
Meaning:
Factoring implies a financial arrangement between the factor
and client, in which the firm (client) gets advances in return
for receivables, from a financial institution (factor). It is a
financing technique, in which there is an outright selling
of trade debts by a firm to a third party, i.e. factor,
at discounted prices.

Lithin BM. SCEM Mangalore,

Functions of Factor
 Maintaining sales ledger
 Providing advisory services
 Providing short-term finance
 Providing credit protection
 Providing collection facilities

Lithin BM. SCEM Mangalore,

Types of factoring
i) Recourse Factoring
(ii) Non-Recourse Factoring
(iii) Advance Factoring
(iv) Confidential and Undisclosed Factoring
(v) Maturity Factoring.
(vi) Supplier Guarantee Factoring
(vii) Bank Participation Factoring
viii) Full factoring

Lithin BM. SCEM Mangalore,

 Forfaiting
Meaning:
Forfaiting is a means of financing that enables exporters to
receive immediate cash by selling their medium and long-
term receivables—the amount an importer owes the exporter—
at a discount through an intermediary. The exporter eliminates
risk by making the sale without recourse. It has no liability
regarding the importer's possible default on the receivables.
The forfaiter is an individual or entity that purchases the
receivables, and the importer then pays the receivables amount
to the forfaiter. A forfaiter is typically a bank or a financial firm
that specializes in export financing.

Lithin BM. SCEM Mangalore,

Securitization
Securitization is a process in which a company clubs its
various illiquid financial assets and gets it converted into
marketable security.

Lithin BM. SCEM Mangalore,

Process of Securitization
 The originator or lending institution identifies the assets for
securitization.
 Asset is then transferred to an institution called SPV( Special
Purpose Vehicle). It usually issues securities.
 Assets are rated by credit rating agencies before making the
isuue.
 SPV splits the assets into individual securities and reimburses
itself by selling this to investors. If there is any default only
SPV is liable.

Lithin BM. SCEM Mangalore,

Types of securitization
 Mortgage Backed Securities: Backed by mortgages.
 Asset Backed Securities: Backed by debts or receivables.
 Collateralized Debt Obligations: Backed by corporate bonds.

Lithin BM. SCEM Mangalore,

Benefits of securitization
a) Benefits to the issuer
1. More specialization in main business
2. Helps in improving financial ratios
3. Management of regulatory capital
4. Reduced cost of Borrowing.
5. Protection against default
b) Benefits to investors
c) Benefits to borrowers

Lithin BM. SCEM Mangalore,