I want to learn
- Mutual Funds
How Mutual funds work
Mutual Fund Insight
Unit Trust of India was the first mutual fund set up in India in the year 1963. In late 1980s, 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, regulates and supervises mutual funds to protect the interest of the investors. SEBI notified regulations for 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 through circulars to 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.
Mutual fund is a portfolio which invests in securities like stocks, bonds, cash, and government securities etc and based on the securities the type of mutual fund and the objective of the fund is decided. Once the objective and category of the mutual fund is decided it becomes a mandate for the fund manager to follow it while designing the strategy of the mutual fund portfolio selection.
Due to recent re-categorization, all the mutual funds which were not following their mandate as now either merged or their name has been changed. SEBI has also instructed the AMCs to follow 1 kind of fund per category with an exception to index funds and ETFs.
Types Equity Mutual funds:
These are different category and this is how mutual funds work in India -(Snippet (Li Format) Start)
Benefits of Mutual Funds - (Snippet (Li Format) Start)
Market cap funds
- Large cap fund
- Mid cap fund
- Large and mid cap fund
- Multi cap funds
- Small cap funds
- Dividend yield
Equity savings fund
Equity linked savings
Index fund - (Snippet (Li Format) End)
Debt fund has been divided under 16 categories and hybrid under 6.SEBI has also introduced a new category namely solution oriented which 2 sub categories as retirement oriented and children’s fund.
All the pain of re-categorization was taken by SEBI to make is more convenient for investor to choose the mutual funds based on their requirement.
The money flows in mutual funds from various sources. To understand how mutual fund works it’s important to understand the sources of inflow in mutual fund.
- Foreign Institutional investors: FII forms a very big part of mutual fund investments. They are foreign institute authorized by SEBI to invest via authenticated portals. They bring huge inflows to mutual funds and its inflow and outflow has a great impact on the performance of the mutual fund. FIIs investments in India are influenced by factors like rupee movement, policy reforms, investment regulations, interest rates, liquidity and macro-economic conditions. FIIs track the MSCI indices (MSCI emerging market index).
- Domestic Institutional investor: DII are domestic institutes authorized by SEBI to invest in mutual funds. DII being domestic institute doesn’t bring any foreign currency to the country.
- Retail Investors: because of AMFI putting a lot of efforts to make investors aware about mutual funds and its benefits, investors from B 12 and B 15 cities are increasing day by day. Irrespective of FII increasing our decreasing their cash flows, investment in mutual fund in the form Sip has started increasing. Retails investors even include NRI and Person of Indian origin. While Indian investors are free to invest in funds of their choice, NRI may face certain restrictions based on the country they are living in.
How do the retailers invest in mutual fund?
Lumpsum- It’s a way to invest in mutual fund. It stands for bulk or one time purchase in the mutual fund without any commitment of future investment. The amount is invested in mutual funds and the unites are allotted in t+2 working days where t= transaction. There is no date fixed by mutual fund AMCs for lumpsum inflow.
SIP-The inflow dates of SIP is decided by the fund manager and only on specified dates SIP inflow in mutual fund is allowed. Investor can choose auto debit or manual pay option for installments.
The benefit of choosing an auto pay option is even though you forget your SIP date, system will automatically deduct the amount from your bank account in invest in mutual fund.
This is how mutual fund works (inflow in mutual funds)
Once the money is invested, it is sent to AMC (Asset Management Company’s account) and they will share the information with RTA (registrar and transfer agent)
Registrar or transfer agents are the trusts or institutions that register and maintain detailed records of the transactions of investors for the convenience of mutual fund houses.
There are 2 main RTS for mutual funds in India: CAMS and Karvy.
List Karvy Service fund
- Axis Mutual Fund
- Baroda Pioneer Mutual Fund
- BOI AXA Mutual Fund
- Canara Robeco Mutual Fund
- DHFL Pramerica Mutual Fund
- Edelweiss Mutual Fund
- Essel Mutual Fund
- IDBI Mutual Fund
- India Bulls Mutual Fund
- INVESCO Mutual Fund
- JM Financial Mutual Fund
- LIC Mutual Fund
- Mirae Asset Mutual Fund
- Motilal Oswal Mutual Fund
- Principal Mutual Fund
- Quantum Mutual Fund
- Reliance Mutual Fund
- Taurus Mutual Fund
- UTI Mutual Fund
Once the details are shared by AMC to RTA it will then check the folio history of the investor linked with his PAN card. This will help them to understand if it is a new investor or existing investor.
Existing investor can invest in 2 ways: First is by creating a new folio, where units will be allotted to him under a new account. Second is under the same folio.
Investment under same folio is only possible when the investor has already invested under AMC and wants to purchase more units in the same fund or want to purchase another fund but under same AMC.
The unit allotment can happen in 2 forms, one is physical and another is demat.
It takes t+2 working days for the unit allotment in both demat and physical form.
How do mutual fund work in demat and physical form?
Units allotted in physical for and sold directly AMC and at the time of redemption are sold back to the AMC. Where as in demat , the units are dematerialized and the buyer or the selling can be either AMC or any other investor as the units are available freely.
It has been observed at the time of redemption of units of fund like liquid funds or gold funds, investors sometimes can face the liquidity issue or AMC may delay is buy back. On the other hand, investors don’t face problem in liquidity.
With Karvy, the mutual funds which you purchase are physical form and we are providing you the facility to transact in these funds online. Investors can also convert their old physical mutual funds to online which invested under Karvy broker code.
Once the units are converted online, investors can further buy, redeem, switch, these mutual funds.