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I , Purnima Saha hereby declare that this project report entitled regulatory changes in mutual fund industry over last few years(2007-2011), submitted by me, under the guidance of Prof.(Dr) Surya Dev (faculty guide) and Mr. Alok Sharma, Area manager-
Date: 3.6.2011
(PURNIMA SAHA)
(Roll No. : 10DF023)
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ACKNOWLEDGEMENT
In preparation of this report by me, I feel great pleasure because it gives me extensive practical knowledge in my career. I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals. I would like to extend my sincere thanks to all of them. I am highly indebted to Prof.(Dr) Surya Dev (faculty guide) for his valuable inspiration and guidance throughout the project work. I would like to give special thanks to Mr.Santosh Dabke (Regional head) for giving me the opportunity to undertake summer project training in Reliance Mutual Fund. I am also thankful to Mr. Nitin Khera ( Regional Manager-Institutional Business) for allowing me to work with corporate group in Reliance Mutual Fund. I would like to express my gratitude to Mr. Ali Ahemed (Manager,HR) for allotting me such a good and interesting topic for my project. I would like to express my sincere gratitude to Mr.Alok Sharma Area Manager-corporate (external guide) for his guidance and constant supervision.I will extend my sincere thanks to Mr Sugoto ghosh (Relationship Manager) and Mr. Parikshit Chanchani (RelationshipManager) for providing necessary information
regarding the project work & also for their support in completing the project. I would like to express my gratitude towards my parents for their kind cooperation and encouragement which help me in completion of this project. I would like to express my special gratitude and thanks to all the branch officials for giving me such attention and time.
PURNIMA SAHA
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EXECUTIVE SUMMARY The Indian mutual funds industry is witnessing a rapid growth as a result of infrastructural development, increase in personal financial assets, and rise in foreign participation. With the growing risk appetite, rising income, and increasing awareness, mutual funds in India are becoming a preferred investment option compared to other investment vehicles like Fixed Deposits (FDs) and postal savings that are considered safe but give comparatively low returns, according to Indian Mutual Fund Industry. This report provides detailed information along with current and future outlook of the Indian mutual fund industry . It also discuss the different regulatory changes which ever happened in the last few years. I have also discussed the impacts of those regulatory changes on mutual fund industry and on investors.
Key Findings a. What are the changes happened in this mutual fund industry in the context of regulation. b. Detail information about different regulatory changes in Mutual fund industry. c. The impacts on the mutual fund industry. d. The impact on the investors. e. Scenario of Mutual fund industry in Future.
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TABLE OF CONTENTS
Sr.No 1. Chapter 1 Introduction 1.1 Introduction 1.2 Objective of Study 1.3 Scope of the study 1. 4Methodology followed 1.5Llimitation of my study 2. 3. Chapter 2 Chapter 3 History of the Mutual Fund Industry Mutual Fund 3.1 Brief about Mutual Fund 3.2 Mutual Fund Cycle 3.3 Advantages of Mutual fund 3.4 Risk Factor related to Mutual Fund 4. Chapter 4 Regulation changes in MF industry 4.1SEBI & Mutual fund Industry 4.2 Regulation Changes In The Year -2011 4.3 Regulation Changes In The Year -2010 4.4 Regulation Changes In The Year -2009 4.5 Regulation Changes In The Year -2008 Content Page No
6-9 7 8 9 9 9 10-12 13-18 14 14 15-17 17-18 19-36 19 21-23 23-26 27-33 34-35
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. Chapter 5
4.6Regulation Changes In The Year -2007 Observation from my study 5.1Findings from the study 5.2 Future of Mutual Fund industry 5.2.1 Diverse Range of Products 5.2.2.Recommendations to re-visit the eligibility norms of AMCs 5.2.3.Real Estate Mutual Funds 5.3 Important aspects related to the future of mutual funds in India are 5.4 Conclusion 5.5 Bibliography
35-36 37-40 38 38 38 38 39 39 39 40
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CHAPTER:1
INTRODUCTION
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1.1 INTRODUCTION There are a lot of investment avenues available today in the financial market for an investor with an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where there is low risk but low return. He may invest in Stock of companies where the risk is high and the returns are also proportionately high. The recent trends in the Stock Market have shown that an average retail investor always lost with periodic bearish tends. People began opting for portfolio managers with expertise in stock markets who would invest on their behalf. Thus we had wealth management services provided by many institutions. However they proved too costly for a small investor. These investors have found a good shelter with the mutual funds. Mutual fund industry has seen a lot of changes in past few years with multinational companies coming into the country, bringing in their professional expertise in managing funds worldwide. In the past few months there has been a consolidation phase going on in the mutual fund industry in India. Now investors have a wide range of Schemes to choose from depending on their individual profiles.
The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most Glamorous in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals.
The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country.
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1.2OBJECTIVE:
The objective of the study are 1. To give a brief idea about the Mutual Fund industry. 2. To study the regulatory changes in mutual fund for the period of 2007-2011 4. To study changes in the mutual fund industry relating to regulations and other aspects.
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1.3 SCOPE OF THE STUDY The project is based in the changes that have occurred in the recent past in the mutualfund industry in india.
1.4METHODOLOGY To achieve the objective of this project, the changes of regulation has been collected from different sources. Research methodology carried for this study can be two types. 1.Primary 2.Secondary PRIMARY: The data, which has being collected for the first time and it is the original data. In this project the primary data has been taken from Reliance mutual fund employees and guide of the project. SECONDARY: The secondary information is mostly taken from websites, books, journals, etc. 1.SEBI site 2.AMFI site 3.Reliance mutual fund site 4.workbook for NISM series-V-A:MF Distributors Certification Exermination. 5. profit.ndtv.com Etc.
1.5 Limitations Every study has its own limitations and in my case it is not an exception. The time constraint was one of the major problems. The lack of information sources for the analysis part.
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CHAPTER:2
HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY
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2.1 HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY The Mutual Fund Industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. Though the growth was slow, but it accelerated from the year 1987 when Non-UTI players entered the Industry. In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets under Management (AUM) was Rs67 billion. The private sector entry to the fund family raised the sum to Rs. 470 billion in March 1993 and till April 2004; it reached the height if Rs. 1540 billion .The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of Non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores. Third Phase 1993-2003 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
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The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
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CHAPTER:3
MUTUAL FUND
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3.1BRIEF
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few hundred rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the schemes stated objectives. The income earned through these investments and the capital appreciation realised by the scheme are shared by its unit in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
3.2
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3.3 ADVANTAGES OF MUTUAL FUND There are numerous benefits of investing in mutual funds and one of the key reasons for its phenomenal success in the developed markets like US and UK is the range of benefits they offer, which are unmatched by most other investment avenues. We have explained the key benefits in this section. The benefits have been broadly split into universal benefits, applicable to all schemes, and benefits applicable specifically to open-ended schemes. Universal Benefits Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.500/-. This amount today would get you less than quarter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directly in the stock market. Diversification The nuclear weapon in your arsenal for your fight against Risk. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of your returns, for example during one period of time equities might under perform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology sector might be faring poorly but the auto and textile sectors might do well and may protect your principal investment as well as help you meet your return objectives. Variety Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For example, an investor can invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk appetite and thus create a balanced portfolio easily or simply just buy a Balanced Scheme. Professional Management: Qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money. When you buy in to a mutual fund, you are handing your money to an investment professional who has experience in making investment decisions. It is the Fund Manager's job to (a) find the best securities for the fund, given the fund's stated investment objectives
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(b) keep track of investments and changes in market conditions and adjust the mix of the portfolio, as and when required. Tax Benefits Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit holders. However, as a measure of concession to Unit holders of open-ended equity-oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10.5%. In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the Total Income will be admissible in respect of income from investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax. Regulations: Securities Exchange Board of India (SEBI), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors
Benifits of open ended schemes Liquidity In open-ended mutual funds, you can redeem all or part of your units any time you wish. Some schemes do have a lock-in period where an investor cannot return the units until the completion of such a lock-in period. Convenience: An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic Investment Plan (SIP) or a Systematic Withdrawal Advantage Plan (SWAP). In addition to this an investor receives account statements and portfolio of the schemes. Flexibility Mutual Funds offering multiple schemes allow investors to switch easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time. Transparency: Open-ended mutual funds disclose their Net Asset Value (NAV) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any
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other financial instrument. Thus the investor is in the know of the quality of the portfolio and can invest further or redeem depending on the kind of the portfolio that has been constructed by the investment manager.
3.4 RISK FACTORS OF MUTUAL FUNDS The risk-return trade off The most important relationship to understand is the risk-return trade-off. Higher the risk greater the returns/loss and lower the risk lesser the returns/loss. Hence it is upto you, the investor to decide how much risk you are willing to take. In order to do this you must first be aware of the different types of risks involved with your investment decision. Market Risk Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works on the concept of Rupee Cost Averaging (RCA) might help mitigate this risk. Interest Rate Risk In a free market economy interest rates are difficult if not impossible to predict. Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified portfolio might help mitigate this risk. Political/Government Policy Risk: Changes in government policy and political decision can change the investment environment. They can create a favorable environment for investment or vice versa. Growth Option: Dividend is not paid-out under a Growth Option and the investor realises only the capital appreciation on the investment (by an increase inNAV). Dividend Payout Option: ..... Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.
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Dividend Re-investment Option: Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same. Retirement Pension Option: Some schemes are linked with retirement pension. Individuals participate in these options for themselves, and corporate participate for their employees. Insurance Option: Certain Mutual Funds offer schemes that provide insurance cover to investors as an added benefit. Systematic Investment Plan (SIP): Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. The investor is allotted units on a predetermined date specified in the offer document at the applicable NAV.
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CHAPTER :4
REGULATION CHANGES IN MF INDUSTRY
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4.1 SEBI & Mutualfund Industry To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody. The general power of superintendence and direction over AMC is vested with the trustees.
4.2 THE REGULATION OF MUTUL FUND INDUSTRIES Today, the industry stands at 41 asset management companies that manage Rs. 7.1 trillion (USD 160 billion) of Assets under Management (AUM) raised from around 470million accounts. Since the economic liberalisation of the early nineties, mutual funds have been regulated by the securities market regulator, Securities and Exchanges Board of India (SEBI), which was itself a very new regulator in the early nineties. At the time, like all the other parts of the financial sector, the industry was lightly regulated with low levels of transparency about the management of funds. It was only in 1998, after a spectacular episode of market misconduct by the CRB group of companies that there was a sea-change in the regulation and supervision of the mutual fund industry. The regulator focussed on the production end of the mutual fund industry. This resulted in very high disclosure and transparency of the assets under management and improving the governance of the AMCs, setting it apart from the rest of the fund management industry in India. This path towards greater transparency became the industry norm when UTI, the only AMC that was exempt from full transparency on certain products, developed problems in fulfilling obligations to customers. As part of the government bailout package in 2001, the AMC was broken up into two funds. One had a fixed mandate of winding down upon completing the obligations of the original UTI schemes (primarily US-64) to existing customers. The other was a company where the government was one of other share holders, that would follow all the regulation of the other mutual fund companies. With this, the mutual fund industry became the only fund management industry in India with a minimal presence of public sector ownership. Since then, there have continued to be changes in the regulation of mutual funds, but largely driven by developments in the broader securities markets. The rules-driven regulatory framework in India has meant that innovation in the
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securities markets often drives changes in the rules on how mutual funds can access these innovation in offering new products to their customers. However, regulations governing the fund management process has been more or less stable, albeit conservative. The recent changes in regulation that have been the cause of much controversy has been in the area of the distribution of these products, and how the cost of distribution is attributed to the customer. This has been one of the major aspects of regulatory focus on the mutual industry since 2005.
FEW REGULATORY CHANGES IN MUTUAL FUND INDUSTRY OVER LAST FEW YEARS IN BROADLY
The Indian mutual fund industry is undergoing a transformation, adapting to the various regulatory changes that are coming about. I highlight some of the key ones which have undergone an amendment impacting the industry as a whole.
Sometime it happens, that investors request for dematerialising their units is rejected as Depository Participants are not having correct ISIN of each option of the scheme. Now Mutual Funds/AMCs have to provide ISIN for each option of the scheme and quote the respective ISIN along with the name of the scheme, in all Statement of Account/Common Account Statement (CAS) issued to the investors from October 01, 2011 onwards. Industry effect & effect on investors: Positive effects It would be Convenient transactions for investors.Now investors can centralize their mutual fund and stock investments at one place and/or have multiple schemes spread across AMC. Also, there would be no tiresome process of form filling or giving documents every time when they buy MF.
It would be Convenient in case of change in contact information for investors.This consolidated platform Demat Account helps if the investor changes his address or mobile number. Instead of multiple applications to different Fund Houses requesting for change of address, they only need to give just one application for the multiple investments they hold. Once the change in contact information is updated with depository participant (DP), the same will get registered electronically with all the AMCs and RTA. Negative impact
Trading and holding mutual funds schemes through Demat Account is a bit expensive compared to the same done through independent online mutual fund platforms such as FundsIndia and FundsSuperMart. Most Brokerage houses charge a flat fee for both lump sum and SIP investment in mutual fund schemes unlike the online mutual fund platforms who offer the same service for zero fees.so it is costly in the point of view of investors.
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Investment in mutual fund schemes through Demat Accounts is useful and cost effective for those who also invest/trade in direct stocks.
It is not convenient for distributors. This regulation may effect the distribution channels of mutual fund industry.
c) Mutual Funds/AMCs shall make investment out of the NFO proceeds only on or after the closure of the NFO period. On July 28, 2011 it also has been declared by SEBI that all Mutual Funds / AMCs shall provide ASBA facility to investors for all NFOs launched on or after October 1, 2010. Industry effect & effect on investors Investors can now make more money out over their investment as now they do not need to block their investment for a particular span of time before investing in NFO MF market became more efficient for New Fund Offer..
REGULATORY CHANGES: 3 CERTIFICATION PROGRAMME FOR SALE DISTRIBUTION OF MUTUAL FUND PRODUCTS AND/ OR
CIRCULAR NUMBER: Cir / IMD / DF / 5 / 2010 dated June 24 , 2010 APPLICABLE FROM: June 01, 2010 onward Now it is mandatory for all mutual funds distributor and agent to certify AMFI certification examination as per the circular dated 25,2001.That is agents or any other persons employed or engaged or to be employed or engaged in the sale and/or distribution of mutual fund products, have to clear the examination conducted by AMFI. In the next circular February 4, 2004 SEBI exempted it for senior citizen that is 1. All agents/distributors who were above the age of 50 and had experience of at least 5 years as on 30/9/03, would not be required to pass the certification test. 2. Moreover, as a one-time measure, the persons who have already been exempted from the certification test as per the earlier criteria (i.e., above 60 years of age and having experience of at least 2 years) shall continue to be exempted from the certification requirement Now as per the new regulation May 31, 2010,now distributor & agent need to pass the AMFI certification course through National Institute of Securities
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Markets (NISM).it also states that The persons who have attained the age of fifty years or who have at least ten years experience in the securities markets in the sale and/ or distribution of mutual fund products, will be given the option of obtaining the certification either by passing the NISM certification examination or qualifying for Continuing Professional Education (CPE) by obtaining such classroom credits as may be specified by NISM from time to time. Industry effect & effect on investors: It helps investors to get more proficient advisor, as all distributor are now more knowledgeable and aware of the market scenario. It helps indirectly the efficiency of the market. It is difficult for distributors as it is time consuming and costly. REGULATORY CHANGES: 4
DISCLOSURE OF INVESTOR COMPLAINTS WITH RESPECT TO MUTUAL FUNDS CIRCULAR NUMBER: Cir / IMD / DF / 2 / 2010 dated may13, 2010 APPLICABLE FROM: June 30, 2010 onward In order to improve the transparency in the grievance redressal mechanism, SEBI has issued a Circular on May 13, 2010 which requires MFs to include details of investor complaints in their Annual Report as part of the Report of the Trustees, beginning with the annual report for the year 200910.MFs provide abridged booklets of the Annual Reports to all the unit holders. Industry effect & effect on investors: Now it became more easier for the investors to clarify their doubts. The risk related to investment in mutual fund had reduced. Industry now became more conservative while making the portfolio of the investors.
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REGULATORY CHANGES: 5 ADVERTISEMENT BY MUTUAL FUNDS. CIRCULAR NUMBER: CIR No.15/191378 /2010 dated January 18, 2010 APPLICABLE FROM: January 18, 2010 onward As per SEBI (Mutual Funds) Regulations, 1996 on Advertisement Code, in advertisements through audio-visual media like television, a statement Mutual Fund investments are subject to market risks, read the offer document carefully before investing is required to be displayed on the screen. but AMC never empathised on this particular sentence while advertising before. it had been observed that in some cases the visual and voice over were run for less than 5 seconds, or if the visual stayed for 5 seconds the voice over either started late or ended early or both. Now per the current guidelines it should be stay at least for 5 seconds and be accompanied by a voice over reiteration. has to be announce clearly to make all investors aware of the risk factor related to investing in mutual fund Industry effect & effect on investors Now it makes investors more aware of the risk factor regarding to investment in mutual fund. It could slow down the AMCs business.
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While charging exit loads, no distinction among unit holders should be made based on the amount of subscription. While complying with the same, Mutual Funds should ensure that any imposition or enhancement in the load shall be applicable on prospective investments only. Further, the parity among all classes of unit holders in terms of charging exit load shall be made applicable at the portfolio level.
REGULATORY CHANGES: 8 MUTUAL FUNDS- EMPOWERING INVESTORS THROUGH TRANSPARENCY IN PAYMENT OF COMMISSION AND LOAD STRUCTURE CIRCULAR NUMBER: CIR No. 4/ 168230/09 dated June 30, 2009 APPLICABLE FROM: August 1, 2009 SEBI had earlier abolished initial issue expenses and mutual fund schemes were allowed to recover expenses connected with sales and distribution through entry load only. Further, investors making direct applications to the mutual funds were exempted from entry load. . To make the load or commission structure more transparent as per SEBI , it has been decided that: a) There shall be no entry load for all mutual fund schemes. b) The scheme application forms shall carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor. c) Of the exit load or CDSC charged to the investor, a maximum of 1% of the redemption proceeds shall be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance shall be credited to the scheme immediately. d) The distributors should disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor.
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Industry effect & effect on investors This load was charged to compensate the MF houses for marketing and distribution costs. So it is bad for AMC. The charging of entry load resulted in less of your money being invested in an MF scheme. It is good for the investors. It is tremendously beneficial for regular and long term investors. Agents are getting now trial fees, or ,sometimes commissions paid by fund houses from their own pocket. So it is bad for AMC. Distributors are free to charge investors any additional fees for service they offer. It is not convenient for distributors as they are not getting any commission from fund houses for the sale of their units, most such people would start offering fee based services. From time to time, most MF agents ask investors to purchase something else instead of holding underperforming schemes .which could give you better returns. This professionals advice helps investors while purchasing a new fund. In return MF agent used to get a fresh commission from investors entry load. That free advice is now difficult because distributors are not getting commission any more
CIRCULAR NUMBER: CIR No./ 13/187052 /2009 dated December 11, 2009 APPLICABLE FROM: December 11, 2009
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If someone want to change his distributor to avail of better advice and / or services. There is a process to change mutual fund distributor. This process requires to get NOC ( No Objection Certificate ) from customers previous mutual fund distributor. This requirement is impossible to achieve, as previous mutual fund distributor will never give customer NOC. So changing unsatisfactory mutual fund distributor is difficult for the investors. But now as per SEBI regulation, the process to change your mutual fund distributor became easier. Now customer can change their mutual fund distributor by submitting a simple request letter, stating the distributor change, to Mutual Fund Company or to the registrar of that mutual fund. SEBI has removed the requirement of NOC from your previous mutual fund distributor. Industry effect & effect on investors Iit made the industry more user friendly. This regulation could demotivate all mutual fund distributors
REGULATORY CHANGES: 10 TRANSACTIONS THROUGH SOME MUTUAL FUND DISTRIBUTORS AND COMPLIANCE WITH THE SEBI CIRCULAR ON AML CIRCULAR NUMBER: CIR No.12 /186868 /2009 December 11, 2009 APPLICABLE FROM: December 11, 2009 As per the SEBIs new regulation AMC need to complete all investors KYC process. The KYC process for individuals involves verifying the identity and address. In the case of mutual funds, investors have to complete the KYC formalities with an identified service provider, CDSL Ventures . This is a onetime exercise and applies to investments in all mutual funds registered by Sebi. The application for buying units for the first time must be accompanied by the KYC acknowledgement. The existing investors are also required to complete the procedure as follows.
DOCUMENTATION:
In December 2009, SEBI had made it mandatory for all AMCs to maintain a copy of full investor documentation including Know Your Customer i.e. KYC details. Such documentation was earlier maintained by the respective
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MF distributors who have now been asked to give a copy of the same to the fund houses. For the convenience of investors in mutual funds, all mutual funds have made special arrangements with CDSL Ventures Ltd. (CVL), a wholly owned subsidiary of Central Depository Services (India) Ltd. (CDSL). Investors have to provide the relevant documents and information ONLY ONCE for complying with KYC, instead of providing the required documents again and again to different mutual funds in which one would like to invest. After that Investors could invest in the schemes of all mutual funds by merely attaching a copy of the KYC acknowledgement slip with the application form / transaction slip when investing for the first time in every folio (Post KYC) in each Mutual Fund house, without the necessity to submit the KYC documents again. This facility is being provided absolutely FREE OF COST to the investors. DOCUMENTS AND INFORMATION TO BE PROVIDED BY INVESTORS 1. Photo PAN Card 2. In case of Non Photo PAN Card in addition to copy of PAN Card any one of the following : 3. Driving License /Passport copy / Voter ID /Bank Photo Pass Book. 4. Proof of Address (any one of the following): 5. Latest Telephone Bill: Landline (not more than 3 months prior to the date of application). 6. Latest Electricity Bill (not more than 3 months prior to the date of application). 7. Passport copy. 8. Latest Bank Passbook/Bank Account Statement (not more than 3 months prior to the date of application) . 9. Latest Demat Account statement (not more than 3 months prior to the date of application). 10.Voter ID. 11.Driving License. 12.Ration Card. 13.Rent Agreement. For Overseas Address of NRIs: Overseas Bank Account Statement (not more than 3 months prior to the date of application). Any other document duly certified by local authority in the country of residence. In case the documents are in any language other than English the same must be translated to English and certified by Government
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Authority in country of residence or by the Indian Embassy. In case investors provide more than one address, proofs of both the addresses need to be provided. For HUF (Hindu undevided Family) Units can only be held in the name of Karta on behalf of the HUFAMFI Proof of Identity (any one of the following): 1.Copy of PAN Card of the HUF. Proof of address (HUF) 1. Latest Bank Passbook (not more than 3 months prior to the date of application). 2. Bank account statement (not more than 3 months prior to the date of application). Alternately, any of the documents listed for proof of address for an individual can be provided by the karta. Non individuals (PAN Mandatory) Companies / Bodies Corporate (Certified copy of the following): 1. Certificate of incorporation. 2. Memorandum & Articles of Association. 3. Resolution of the Board of Directors authorizing investment in mutual funds. 4. Power of Attorney granted to its managers, officers or employees to transact business on its behalf (Authorised Signatories List). Partnership firms (Certified copy of the following): 1.Certificates of Registration, in case of registered Partnership Firms. 2. Any other officially valid documents in respect of holding a power of attorney to transact (Authorised Signatories List and resolution / authority to invest). Trusts, foundations, NGOs Charitable Bodies, Clubs/Mutual Fund Schemes (Certified copy of the following) : 1. Certificate of Registration, in case of registered Trusts. 2. Any other valid documents in respect of holding a power of attorney to transact (Authorised Signatories List and resolution / authority to invest) 3. Offer Document of the Mutual Fund Scheme. The originals of these documents along with a copy each to be presented and the original will be returned after verification. Alternatively, investors can also provide an attested true copy of the relevant documents. Attestation could be done by Notary Public/ Gazetted Officer/ Manager of a Scheduled Commercial Bank.
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Applicability of KYC norms: Category of Investors Resident Individuals Up to December W.e.f. January 31, 2010 1, 2011 Rs. 50,000 and Any Amount more Any Amount Any Amount Any Amount
Non Resident Investors/ Persons of Indian Any Amount Origin Investors investing through Channel Any Amount Partners/Channel Distributors Non Individual Investors (Corporates, Any Amount Partnerships, Trusts, HUF, etc.) Industry effect & effect on investors
It is beneficial for the distributors. SEBI is looking at some way to incentivise distributors. SEBI took initiative to provide incentives to distributors who bring first-time investors into the mutual funds. Now investing in MF industry is no more easier for investors. Investors need to follow certain rules and regulation before investing in mutual fund. Huge rush in complying with Know your Customer (KYC) norms for the mutual funds industry is leading to an increase in its processing time. The KYC process which earlier used to take a day earlier now takes up to 810 days. MFs are facing the challenge of bringing KYC norms of the investors from rural area. AMC are losing out many investors due to delay in completing the KYC norms.
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REGULATORY CHANGES: 12 REMOVAL OF INITIAL ISSUE EXPENSES CIRCULAR NUMBER: CIR No. 11/ 115723 /08 dated January 31, 2008 APPLICABLE FROM: June 1, 2008onward Securities and Exchange Board of India (SEBI) has focused more on investor protection, introducing a number of regulations to empower retail investors in Mutual Funds (MFs). SEBI began by prohibiting the charging of
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initial issue expenses, which were permitted for closed-ended schemes, and mandating that such MF schemes shall recover sales and distribution expenses through entry load only. These steps aimed at creating more transparency in fees paid by investors and helping make informed investment decisions.
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Summarizes the change in costs across open and closed end funds.
Maximum charges allowed across open-end and closed-end mutual funds(%)
Upto Apr06 Open Initial issue expense Entry load Exit load Expense ratio 6 6 6 6.25
Close 6 6 6 6.25
Close 0 1 1 2.5
(The values are reported for equity funds. Debt funds could charge upto 2.25% and that actual expenses charged were lower than this limit. For example the expenses charged to a liquid fund is only 0.25%)
REGULATORY CHANGES: 14 EXTENSION OF TIME FOR UPLOADING OF NAVS OF FUND OF FUND SCHEMES. CIRCULAR NUMBER: CIR No.5 /96576/2007dated June 25, 2007 APPLICABLE FROM: January 25, 2008 onward As per the first SEBIs first circular February 9 2001 SEBI made it mandatory to update regular NAV sales /purchase price of all schemes floated in the market in the AMFI website within by 8 p.m. every day. After that SEBI had published a new regulation on June 25,2007 stated that In view of the practical difficulties being faced by the Mutual Funds in uploading the NAV of Fund of Fund Schemes on AMFIs website and their own website it has been decided that the time limit for uploading of NAV for fund of fund Schemes shall be extended to 10:00 am of the following business day. The NAVs of these Schemes shall appear in the Newspapers with one day time lag. The published NAVs would be made available with an asterix explaining that the NAVs are with one day/or the actual time lag As per the circular dated march 29,2006 In case of delay beyond 9.00 pm the mutual fund need to explain the reasons of delay in writing to AMFI.
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CHAPTER:5
OBSERVATION FROM THE STUDY
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5.1FINDINGS FROM THE STUDY After going through different regulatory changes in MF industry over 20072011, I understood that SEBI first goal to make MF industry more transparent for the investors. All the time SEBI tries to simplify the entire investing process Investing in mutual fund is much easier now. With the help technology SEBI is trying to reduce the dependency of investors on distributor. SEBI is trying to re-educate agents and distributors about the industry so that investors can get proper advice.
5 2Future Of Mutual Fund Industry 5.2.1Diverse Range of Products There is a need for Indian MFs to come out with innovative products that cater to the ever changing customer requirements. In US, MFs provide products that cater to the entire life cycle of the investor. Diversified products will keep the present momentum going for the industry in a more competitive and efficient manner. Further, MFs have to compete with bank deposits and government securities for their share of consumer savings. Thus, in order to make MFs more acceptable to the retail investors, the MF would have to mature to offering comprehensive life cycle financial planning and not products alone.
5.2.2 Recommendations to re-visit the eligibility norms of AMCs SEBI had constituted the Committee on Review of Eligibility Norms (CORE) to re-visit the eligibility norms and other functional aspects prescribed for various intermediaries. Amongst other recommendations, the key ones are relating to increase in the minimum net worth of AMCs from the existing Rs. 10 crores to Rs. 50 crores, change in the definition of net worth, sponsor to be a regulated entity and change in definition of control. The objective of the proposed recommendations is to allow only the serious players to enter/ remain in the market. The proposed changes can lead to a better governance of the MF players, thereby boosting investor confidence in the industry.
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5.2.3 Real Estate Mutual Funds Real Estate Mutual Funds could be the next big thing for the industry provided the regulators bring in more clarity on the tax and regulatory aspects. 5.3 Important aspects related to the future of mutual funds in India are
The growth rate was 100 % in 6 previous years. It contribute less than 10% in india GDP. The saving rate in India is 23 %. There is a huge scope in the future for the expansion of the mutual funds industry. A number of foreign based assets management companies are venturing INTO INDIAN MARKETS.
The Securities Exchange Board of India has allowed the introduction of commodity mutual funds. The emphasis is being given on the effective corporate governance of Mutual Funds. The Mutual funds in India has the scope of penetrating into the rural and semi urban areas. Financial planners are introduced into the market, which would provide the people with better financial planning.
5.4 CONCLUSION:
After 1996 SEBI was formed, there were many regulatory changes in the mutual fund industry. It is also expected that SEBI will again go for time to time regulatory changes to get the total control over the Mutual fund industry in India. Its true that SEBIs foremost responsibility is to look after the investors interest. But as per the CNBC-TV18 report on august 18, 2009 Mutual Fund sales down by 60-70% after Sebi's no-entry-load rule. So SEBI should be careful before taking any vital regulatory changes, as Mutual fund industry in India contributes less than 10% in Indian GDP otherwise such kind of decision may slow down the Indian economy.
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5.5 BIBILIOGRAPHY WEBSITES I. II. III. IV. V. VI. VII. VIII. IX. X. http://www.sebi.gov.in/acts/certificationregu.html http://www.sebi.gov.in/boardmeetings/132/annualexpenses.pdf http://www.sebi.gov.in/circulars/2010/cirimddf22010.pdf SEBI site AMFI site Reliance mutual fund site profit.ndtv.com business.mapsofindia.com/mutual-funds/future.html http://www.igidr.ac.in/~susant/FSRR/PDF/20101102_mfissues.pdf http://www.pwc.com/en_IN/in/assets/pdfs/Publications-2010/CIIPwC_Mutual-Fund-Summit-2010.pdf www.moneycontrol.com
XI.
BOOKS NEWS PAPERRS& MAGAZINES I. workbook for Extermination NISM series-V-A:MF Distributors Certification
II. III.
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