ASSETS UNDER MANAGEMENT

ASSETS UNDER MANAGEMENT

What does Asset Management Mean?

The management of a client’s investments by a financial services company, usually an investment company.  The company will invest on behalf of its clients and give them access to a wide range of traditional and alternative product offerings that would not be to the average investor.

What is Assets Under Management?

The market value of assets that an investment company manages on behalf of investors.

Assets Under Management (AUM) is a term used by financial services companies in the mutual fund, hedge fund, and money management, investment management, wealth management, and private banking businesses to gauge how much money they are managing.

Many financial services companies use this as a measure of success and comparison against their competitors; in lieu of revenue or total revenue they use total assets under management.

What is an Asset Management Company?

A company that invests its clients' pooled fund into securities that match its declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves.

AMCs offer their clients more diversification because they have a larger pool of resources than the individual investor. Pooling assets together and paying out proportional returns allows investors to avoid minimum investment requirements often required when purchasing securities on their own, as well as the ability to invest in a larger set of securities with a smaller investment.

Mutual Fund: Fund managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner. Before investing they carry out thorough research and detailed analysis on the market conditions and market trends of stock and bond prices.

Hedge Fund: A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives.

Money Management: Money management is the managing of different uses of money for different clients. It involves budgets, investments, savings, spending, and other uses of money.  . Some examples of money management are mutual funds (whether the management is active or passive), private consulting for individual clients, asset management, pension funds for companies, retirement planning for individuals, and estate planning for individuals. Money management is also called investment management and/or portfolio management, generally when referring to the professional management level.

Investment Management: The process of managing money, including investments, budgeting, banking and taxes. Also called money management.

The term asset management can be used interchangeably with investment, but asset management is more likely to be used in reference to the industry as a whole, while individual investment managers are more likely to use the term investment management to describe what they do.

Wealth Management: Wealth management is a service provided by financial institutions to help high net worth individuals protect and grow their wealth. This advanced investment advisory discipline involves providing a diverse range of services, such as financial planning, investment management, tax planning and cash flow and debt management, based on client requirements.

Wealth management services are provided by banks, professional trust companies, and brokerages.

Private Banking Business: Private banking is a term for banking, investment and other financial services provided by banks to private individuals investing sizable assets.  The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. It should not be confused with a private bank, which is simply a non-incorporated banking institution.

Investment in various Funds

The Clients’ Funds will be invested by an Asset Management Company in various funds.  Based on fund invested we can classify these AMCs’ in to 1. Traditional AMC and 2. Alternative AMC.

Traditional Asset Management Company is an AMC which invests the clients’ funds in traditional financial instruments such as Stock, Bonds and Money market instruments.

Alternative Assets management company is an AMC which invest the clients’ funds in various funds other than traditional investments. The broad definition makes it impossible to list all alternative strategies, but the most important areas are real estate, private equity, venture capital, commodities, and hedged or absolute return strategies. One advantage of alternative investments is the potential of high profits when stocks are under-performing, on the other hand, risks may be substantial.

Financial Instruments – Meaning:

Equity funds:

A fund which invests primarily in stock, usually common stocks.

Common stock - Securities representing equity ownership in a corporation, providing voting rights, and entitling the holder to a share of the company's success through dividends and/or capital appreciation.

Fixed Income Funds:

Funds invested in fixed income investments, such as bonds or certificates of deposit. These funds are dependable and limit the amount of risk an investor takes on, although it could mean a lesser return that would be possible in a more risky fund. E.g. Bonds, Certificate of Deposits

Money Market Funds:

Funds invested in short-term debt obligations such as Treasury Bills, Certificate of Deposit and Commercial Paper etc.

Bonds - A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.

Treasury bills – Short-term (usually less than one year, typically three months) maturity promissory note issued by a national government as a primary instrument for regulating money supple and raising funds via open market operations. A Treasury Bill does not pay interest. They are sold at a discount and the holder will receive full face value upon maturity.

Certificate of Deposits – A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions.

A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.

Commercial Paper - An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities.

Real estate Funds: A regulated investment company that specialized in owning securities offered by real estate-related companies, including REITs real estate development and management companies and homebuilders.

REITs: A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.

Private Equity and Private Equity Funds:

Equity securities of companies that are not listed on a public exchange.  Money invested in firms which have not gone public’ and therefore are not listed on any stock exchange.  Private equity is highly illiquid because sellers of private stocks (called private securities) must first locate willing buyers.  Investors in private equity are generally compensated when: (1) the firm goes public, (2) it is sold or merged with another firm, or (3) it is recapitalized.

Private Equity Fund:

A fund which invest its money in private equity, often in attempts to gain control over companies in order to restructure the company.  When the fund gains control of a company, they will usually take the company off the market if it isn’t private already, go through a multi-year restructuring process, and then relist the company on the stock market.

Venture Capital and Venture Capital Fund:

Venture Capital: Venture capital is financing provided by wealthy independent investors, banks, and partnerships to help new businesses get started, reach the next level of growth, or go public.

In return for the money they put up, also called risk capital, the investors may play a role in the company's management as well as receive some combination of equity, profits, or royalties.

Private financing used to fund a new business; in other words, money provided by investors to start-up firms and small businesses with perceived long-term growth potential. This is a very important source of funding for start-ups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

Venture Capital Fund: A pooled investment that uses the money from third-party investors, such as investment banks or wealthy investors, to invest in business projects.  Businesses that seek venture capital often carry more risk, and are either unwilling to pay the interest on bank or market loans or are unable to obtain them.

Commodity and Commodity Fund:

Commodity:

A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across the market. E.g. Petroleum, copper.

Commodity Fund: These funds are true commodity funds in that they have direct holdings in commodities. For Example, a gold fund that holds gold bullion would be a true commodity fund.

Nature Resource Funds: Funds that invest in companies that are engaged in businesses that operate in commodity-related fields, such as energy, mining, oil drilling and agricultural businesses, are often referred to as natural resource funds. While they often hold neither actual commodities nor commodity futures, they provide exposure to the commodities markets by proxy.

Absolute Return: 

The absolute return or simply return is a measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital.

The return that an asset achieves over a certain period of time.

CLO - Collaterized Loan Obligation: A debt security backed by a pool of commercial loans.

An asset-backed security backed by the receivables on loans. Banks package and sell their receivables on loans to investors in order to reduce the risk coming from loan defaults. Returns on CLOs are paid in tranches; that is, individual loans backing CLOs have different maturities and investors are paid out according to their level of investment. Banks offer higher interest rates to investors willing to buy CLOs backed by higher-risk loans. From a bank's perspective, in addition to reducing risk, CLOs also reduce their capital requirements by raising funds through the issue of CLOs.

Publicly-Traded Closed-End Mutual Funds: A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.

Clients

Two types of AUM breakups are observed on clients’ basis.

1. Based on Client Type: Institutional clients, Retail Clients, HNW Clients.
2. Based on Client Domicile: E.g. US, Canada

Institutional Client: Institutional clients are defined both in terms of size and nature. In general, they tend to be large corporations in any line of business.  They also normally include other financial services firms of any size.

Larger clients are called institutions.

Retail Client: In the financial services industry, the definition of retail clients usually includes individuals, families and small businesses.

Note that clients defined as retail can include very wealthy individuals and rather successful small businesses.

High Net Worth Individual (HNWI): A classification used by the financial services industry to denote an individual or a family with high net worth. Although there is no precise definition of how rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by financial institution and region. The categorization is relevant because high net worth individuals generally qualify for separately managed investment accounts instead of regular mutual funds.

A high net worth individual is a person with large personal financial holdings. Traditionally the term used was millionaire, but in recent years the term high net worth individual has become the descriptor of choice.

AUM based on Fee Earning

Fee generating AUM: Fee-Earning Assets Under Management refers to the assets managed on which management fees are derived.

Fee generating assets are those on which we earn management fees and monitoring fees from our structured portfolio vehicles. (Apollo Management, L.P.)

“Fee-earning assets under management” refers to the assets we manage on which we derive management fees. (The Blackstone Group)

Non-Fee generating AUM:

Non-fee generating assets include, but are not limited to, the net of the funds’ fair value above and below invested capital. (Apollo Management, L.P.)

Movement in Assets Under Management

One more presentation we come across our research is Movement in Assets Under Management. This statement presents the value of total inflows and outflows during the reporting period, appreciation or depreciation in the value of assets under management and other adjustments during the period. In some case, net flows information is also available in the statement.

The general presentation pattern is as below:

  

The difference between two AUM balances consists of market performance gains/ (losses), foreign exchanges movements, net new assets (NNA) inflow/ (outflow), and structural effects of the company, such as acquisitions.

Opening and Ending Assets Under Management: Represents total market value of assets under management as of the date.

Inflows: These are the new funds from the clients during the period. Capital Raised, Sales, Subscriptions are other line items used in the statement.

Outflows: Outflows represents the funds withdrawn by the clients during the period. Redemptions, Distributions are other line items used in the statement.

Net flows: Consist of total client asset inflows, less total client asset outflows.

Client asset inflows include interest and dividend payments and exclude change in client assets due to market fluctuations.

This indicates the total net new flows during the reporting period.

Also called as Net New Flows, Net New Assets, and Net New Clients. 

Market Appreciation (Depreciation):

This is the adjustment to the value of assets under management due to market fluctuations.  It may be an increase of decrease.

Other Adjustments: These are the adjustment made to the assets under management other than the above.

Translation adjustments, Acquisitions/Dispositions, Equity Buy Back, De-risking are some of the line items.

Movement in Mutual Funds Under Management

In international companies we have observed statement of movement in mutual funds under management.

Average Assets Under Management

The average asset under management reflects the total AUM through out the period. It may be a Weighted Average AUM or a simple Average AUM.

The average assets under management during the period, along with the average margins achieved, determine the level of management fee revenues.

  

Client Assets

Client assets is a broader measure than assets under management as it includes transactional and custody accounts (assets held solely for transaction-related or safekeeping/custody purposes) and assets of corporate clients and public institutions used primarily for cash management or transaction-related purposes.

Client Assets includes assets under management, assets under administration, and assets under custody.

Assets Under Custody: AUC is the value of assets held under custody by a "custodian of securities". Custody refers to Care, supervision, and control and legal responsibility for someone else’s assets.

Brokerage Assets:  Represent assets on which company is earning brokerage fees.

Some stock owners give their brokers power of attorney to make decisions about when to buy or sell stock and depend upon their brokers for researching new stock for purchase. Brokerage firm usually assesses a fee for this service and regardless of whether the owner loses or earns money, the firm is paid.

Other brokerage firms are employed by people who like to do their own research and make all their own decisions about what and when to buy and sell.  These firms have a tendency to charge per transaction and can be quite reasonable to employ.

Assets Under Administration: Represent client accounts in Wealth Management. Investment decisions, either at the strategic or tactical levels, are made by the account owners.

Assets under Supervision: Represent assets under management as well as custody, brokerage, administration and deposit accounts.

Hedge Fund Strategies

Hedge Fund Strategies

Hedge Fund Strategies for Mutual Fund Investors

Every now and then hedge funds become fashionable in the news – sometimes it’s pundits clamoring for increased regulation; sometimes it’s chicken littles sounding the market crash alarm. But most of us don’t have the $1 million to invest in a hedge fund, so we tend to ignore them. Doing so limits our ability to examine them for what they really are and effectively use their strategies.

What is a Hedge Fund?

A hedge fund, put simply, is a private investment organization that uses multiple strategies to protect wealth from the inherent risks of volatile markets.
Okay, simpler: a hedge fund is a fund that uses unconventional investments to offset losses when the market turns sour.

How is a Hedge Fund Different from a Mutual Fund?

First, a hedge fund will generally have a different investment philosophy than a mutual fund. A mutual fund may cite “growth” or “income,” while hedge funds tend to be much more philosophical. These are the investment vehicles of the wealthy, and the wealthy have already experienced growth. So, while capital growth (building wealth) is indeed a goal of hedge fund investors, capital preservation (maintaining wealth) can be even more important.
Typically, a hedge fund manager will be given much more control over the fund’s investments. While a mutual fund prospectus will usually outline maximum and minimum allocations for different asset classes and will sometimes expressly forbid the manager from riskier strategies such as shorting, a hedge fund prospectus will offer general guidelines to be followed but the investments are up to the sole discretion of the manager.
A hedge fund will use any number of investment strategies to limit the fund’s exposure to any given strategy. It’s sort of like asset allocation, but it’s actually strategy-based. One might call it strategy allocation.
So, what strategies do hedge funds employ to hedge against market downturns?

Hard Assets

Since hedge fund managers don’t have a prohibitive prospectus that they must follow under all circumstances, they may sell a large percentage of the fund’s securities and hold cash (typically US dollars and/or Euros, depending on the market conditions) or other hard assets. This includes commodities futures (gold, oil, pork bellies…you get the picture).

Short Selling

Short selling is selling securities that one does not own in order to buy them back at a discount. Anyone with a margin account can do this, but most mutual funds do not because it is highly risky.
Basically, the investor (or fund manager) decides that a stock is overvalued for one reason or another. Let’s say XYZ is trading at $75. So the investor calls her broker and says she wants to sell short 1,000 shares of XYZ. She already has a $200,000 account with the broker, so the broker goes ahead and sells the shares, depositing the $75,000 ($75 per share X 1,000 shares) into her account. She now has $275,000, but she is obligated to buy back those 1,000 shares of XYZ at some point in time. Should the stock skyrocket to $280 a share, she will be broke (of course, the broker would not let that happen; generally a short must buy back the stock if it has risen by 15%).
Luckily, a week passes and the company starts to falter and the stock price drops to $65. Our investor calls her broker and purchases 1,000 shares for $65,000, keeping the remaining $10,000 for herself.
Such trading requires a healthy amount of assets (or a margin account) to cover in the case that the security actually rises in value.

Long-Short

In hedge funds, short selling is almost always accompanied by “long” positions, hence the name long-short. Long-short strategies purchase securities that they believe will rise in value while simultaneously short selling those they believe will fall. Some consider this to be a defining aspect of hedge funds.
Long-short funds are either net short or net long, meaning that over 50% of the fund can be long or short, depending on what direction the manager sees the market going. Some mutual funds, notably Prudent Bear (BEARX), are always net short.

Equity Market Neutral

An equity market neutral strategy earns returns from stock-picking within an industry or market and hedges against volatility using a long-short method within that asset class. For example, a manager may believe that UnitedHealth Group is a better health insurance stock than Aetna. The manager will then buy, or “long,” UnitedHealth while simultaneously short selling Aetna. With this strategy all that matters is the relative performance of these two companies. If UnitedHealth stock rises more than Aetna rises (or falls), the investment makes money. If UnitedHealth stock gains less (or drops) while Aetna stock surges higher, the investment lost money.
This strategy hedges against market risk. In our example, it does not matter what happens to the healthcare sector, or even the U.S. stock market in general. Even if all healthcare stocks plummet, all that matters is that UnitedHealth does better, falling less, than Aetna.

Market Neutral Arbitrage

Equity market neutral funds may employ a similar strategy called market neutral arbitrage. The term arbitrage means to exploit imbalances in pricing between securities.
Market neutral arbitrage seeks out imbalances in multiple securities from the same issuer. This strategy hedges market risk by investing in opposing positions (long and short) in different asset classes of the same issuer. A manager, then, may short sell a company’s stock while simultaneously purchasing the same company’s convertible bonds.
This is an investment in a vacuum, because the only factor that affects performance is how well the two different securities perform in relation to each other. Even if the company does poorly, the investment may do well.

MUTUAL FUND

MUTUAL FUND

                      What is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
What is the history of Mutual Funds in India and role of SEBI in mutual funds industry?
Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).

How is a mutual fund set up?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

What is Net Asset Value (NAV) of a scheme?

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.
What are the different types of mutual fund schemes?
Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
 Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.
What are sector specific funds/schemes?
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.
What are Tax Saving Schemes?
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
What is a Load or no-load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.
A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.
Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents?
Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.
What is a sales or repurchase/redemption price?
The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable.
Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.
What is an assured return scheme?
Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.
A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.
Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.
Can a mutual fund change the asset allocation while deploying funds of investors?
Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.
How to invest in a scheme of a mutual fund?
Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.
Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.
Can non-resident Indians (NRIs) invest in mutual funds?
Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.
How much should one invest in debt or equity oriented schemes?
An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.
How to fill up the application form of a mutual fund scheme?
An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.
What should an investor look into an offer document?
An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.


When will the investor get certificate or statement of account after investing in a mutual fund?
Mutual funds are required to despatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.
How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?
According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.
As a unitholder, how much time will it take to receive dividends/repurchase proceeds?
A mutual fund is required to despatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.
In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).
Can a mutual fund change the nature of the scheme from the one specified in the offer document?
Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g.structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.
How will an investor come to know about the changes, if any, which may occur in the mutual fund?
There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors.
At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.
How to know the performance of a mutual fund scheme?
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) http://www.amfiindia.com/ and thus the investors can access NAVs of all mutual funds at one place
The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format.
The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.
Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.
Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.
On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.
How to know where the mutual fund scheme has invested money mobilised from the investors?
The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders.
The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc.
Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.
Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.
If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?
Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.
Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.
On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.
How to choose a scheme for investment from a number of schemes available?
As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.


Are the companies having names like mutual benefit the same as mutual funds schemes?
Investors should not assume some companies having the name "mutual benefit" as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilise funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.
Is the higher net worth of the sponsor a guarantee for better returns?
In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.
Where can an investor look out for information on mutual funds?
Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors.
Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given.
There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.
If mutual fund scheme is wound up, what happens to money invested?
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.
How can the investors redress their complaints?

Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved. Investors may send their complaints to: Securities and Exchange Board of India , Mutual Funds Department