Rights of Mutual Fund Investors

There are certain rights enjoyed by the investors with respect to service standards that they can expect from mutual funds:

  • Investors are entitled to receive dividends declared in a scheme, within 30 days.
  • Redemption proceeds have to be sent to the investor within 10 business days from the date receipt of such request by the AMC. Delays in this respect will lead to the AMC paying a penal interest on the proceeds at a rate specified by SEBI from time to time. (The current rate is 15% and is to be borne by the AMC or sponsor and not the fund).
  • If an investor fails to claim the dividend or redemption proceeds he has the right to claim it up to a period of 3 years from the due date at the then prevailing NAV. After the expiry of this period, investors will be eligible to receive the NAV prevailing at the end of the 3rd year.
  • Mutual funds have to allot units within 30 days of the IPO and also the scheme for redemption if it is open-ended scheme.
  • Mutual funds have to publish their half-yearly results in at least one national daily, and publish their entire portfolios at least once in six months. Such disclosure should be done within 30 days from the six monthly account closing dates of the fund.
  • Trustees will have to ensure that any information having a material impact on the unit holders’ investments should be made public by the mutual fund.
  • If 75% of the unit holders’ so decide:
  1. A scheme can be wound up.
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Precautions must Investors take before Investing in Mutual Funds

Most important of all, there are certain precautions investors should take while investing in mutual funds:

  • Always the investor should keep a photo copy of the application form. This can be filed to know the manner in which application was made (single, joint ownership and order of ownership). Investors will also be able to see how they have signed the forms (many investors change their signatures over time; some investors have different signatures for banking and investment transactions). Investors will also know the choice they have exercised (dividend and redemption option).
  • The investor must preserve the counterfoil/acknowledgement issued by the collecting agency. This acknowledgement has the application number. If account statement or certificate is not received, the acknowledgement is the proof of purchase, with which investors can approach the registrar and the transfer agent.
  • It is preferable to have joint ownership so that investments will pass on to the joint owner in the event of death of the first holder.
  • It is important to fill up the nomination details in the application. This will enable legal heirs to claim the holdings without procedural delays. Nominations that do not indicate the guardian of a minor are not valid. Guardian indicated will have to be a person other than the holders of the investment.
  • Cheques should be crossed and application number and name should be written on the back of the cheque. Most mutual funds do not accept outstation cheques, post-dated cheques or postal orders.
  • Existing investors can quote their unique account numbers so that their holdings will be consolidated.
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Legal and Regulatory Framework for Mutual Funds in India

Securities and Exchange Board of India (SEBI) is the apex regulator of Indian capital markets. Issuance and trading of capital market instruments and regulation of capital market the intermediaries is under the purview of SEBI. SEBI is the primary regulator of mutual funds in India. SEBI has enacted the SEBI (Mutual Funds) Regulations, 1996, which provides the scope of the regulation of mutual funds in India. It is mandatory that mutual funds should be registered with SEBI. The structure and the formation of mutual funds, appointment of key functionaries and investors, investment restrictions, compliance and penalties are all defined under SEBI Regulations, Mutual funds have to send a seven-year compliance reports to SEBI. SEBI is also empowered to periodically inspect mutual fund organizations to ensure compliance with SEBI regulations. SEBI also regulates other fund constituents such as AMCs, Trustees, Custodians, etc.

Reserve Bank of India capital adequacy(RBI) is the monetary authority of the country and is also the regulator of the banking system. Earlier bank sponsored mutual funds were under the dual regulatory control of RBI and SEBI. Money market mutual funds which invested in short-term instruments were also regulated by the RBI. These provisions are no longer in vogue. SEBI is the regulator of all mutual funds. The present position is that RBI is involved with the Indian mutual fund industry, only to the limited extent of being the regulator of the sponsors of bank-sponsored mutual funds. Specifically if the sponsor has made any financial commitment to the investors of the mutual funds, in the form of guaranteeing assured returns, such guarantees can no longer be made without the prior approval of the RBI.… Read the rest

Liquid Mutual Fund Schemes

The objective of liquid mutual fund schemes is to invest in short-term money market instruments of good credit quality. The fund predominantly invests in money market instruments and provides investors the returns that are available on these instruments. The investment portfolio is very liquid, and enables investors to hold their investments for very short horizons of a day or more. The liquid funds are normally open-ended. It provides with the following options/schemes, which are sub-products within the liquid fund.

  • Overnight Option (Growth): This option is meant to be used by investors with very short-term investment horizon and is fully invested in the call money market.
  • Overnight Option (Dividend): This option is meant for investors who have short-term funds to deploy but would like to earn some income on such deployment. The portfolio in this option is invested in short-term floating rate instruments, call markets and in repos. The average maturity of this portfolio is about 8 days. Dividends are declared daily under this option.
  • Liquid-fund Option (Growth): This option is meant for investors with short-term funds, but of a slightly longer duration. The average maturity of the portfolio is about 15 days and about 45% of the portfolio is deployed in short-term debt instruments with a fixed rate of return. The balance is invested in short-term floating rate instruments and call markets.
  • Liquid-fund Option (Dividend): This option is meant for investors with short-term funds, investment horizon slightly longer, but with the need to earn dividend income. The average maturity of the portfolio is 25 days and about 55% of the portfolio is invested in fixed rate short-term products, with the balance in call money markets and short-term floaters.
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Balanced Mutual Funds

Mutual funds that invest both in debt and equity markets are called balanced mutual funds or simply balanced fund. A typical balanced fund would be almost equally invested in both the markets. The variations are equity funds that invest predominantly in equity (about 70%) and keep a smaller part of their portfolios in debt securities. These funds seek to enhance the income potential of their equity component, by bringing in debt. Similarly, there are predominantly debt funds (over 70% in debt securities) which invest in equity, to provide some growth potential to their funds. A balanced fund also tends to provide investors exposure to both equity and debt markets in one product. Therefore, the benefits of investment diversification get further enhanced as equity and debt markets have different risk and return profiles.… Read the rest

Factors Conducive to the Growth of Mutual Funds

On observing the past trends, it can be seen that certain factors are essential for the growth of the mutual funds industry. These factors are:

  • Investor Base: A mutual fund makes it possible for investors to earn a higher return on their capital by pooling the capital of a large number of small investors and investing the pooled sum in a diversified manner. As the small investors cannot diversify on their own, their presence acts as a catalyst for the mutual funds to grow. As different investors have different investment requirements, their presence also acts as an incentive for the mutual funds to come up with new schemes, thus helping in further evolution of the industry.
  • Returns On Market: Mutual funds invest in a diversified manner; the returns generated by them are generally reflective of the market returns. Higher the market returns, higher the expected returns from mutual funds. Higher expected returns attract more investors, giving a boost to the mutual funds.
  • Investment Avenues: The presence of certain investment avenues make mutual funds more attractive than direct investment. One example of such investment avenues is money market instruments. These instruments generally involve a large minimum investment which makes it impossible for a small investor to invest directly. Another example is investment in real estate. While a small investor may not be able to invest in real estate, especially on a diversified basis, internationally, there are mutual funds dedicated to such investments and are called Real Estate Mutual Funds (REMF) such funds are now introduced in Indian mutual fund market.
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