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Portfolio Investment by Mutual Funds
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Mutual Funds are examples of professional portfolio managers with built in expertise. They bring into focus the expertise of portfolio management service to the doors of the smallest investor, who can invest such modest amounts as Rs.10,000/- with a mutual fund to secure higher returns. The web site of East India Vyapaar, a portal on the Internet focussing on the Economy - Industries, Natural Resources, State Govt. Policies & Incentives; Data Bank; Trade & Commerce; etc., of East India, with its URL "eastindiavyapaar.com", while describing Mutual Fund clearly brings out the PMS content of its functions as under:

"A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Each Mutual Fund with different type of schemes is managed by respective Asset Management Company (AMC). An investor can invest his money in one or more schemes of Mutual Fund according to his choice and becomes the unit holder of the scheme. The invested money in a particular scheme of a Mutual Fund is then invested by fund manager in different types of suitable stock and securities, bonds and money market instruments. Each Mutual Fund is managed by qualified professional man, who uses this money to create a portfolio, which includes stock and shares, bonds, gilt, money-market instruments or combination of all. Thus Mutual Fund will diversify your portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest even a small amount of money."

Definition of Mutual Fund by SEBI"

"Mutual Fund" means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments;"

To the ordinary individual investor lacking expertise and specialised skill in dealing proficiently with the securities market a Mutual Fund is the most suitable investment forum as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. India has a burgeoning population of middle class now estimated around 300 million. A typical Indian middle class family can pool liquid savings ranging from Rs.2 to Rs.10 Lacs. Investment of this money in Banks keeps the fund liquid and safe, but with the falling rate of interest offered by Banks on Deposits, it is no longer attractive. At best a small part can be parked in bank deposits, but what are the other sources of remunerative investment possibilities open to the common man? Mutual Fund is the ready answer, as direct PMS investment is out of the scope of these individuals. Viewed in this sense India is globally one of the best markets for Mutual Fund Business, so also for Insurance business. This is the reason that foreign companies compete with one another in setting up insurance and mutual fund business shops in India. The sheer magnitude of the population of educated white-collar employees with raising incomes and a well-organised stock market at par with global standards, provide unlimited scope for development of financial services based on PMS like mutual fund and insurance.

The alternative to mutual fund is direct investment by the investor in equities and bonds or corporate deposits. All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy. Generally, however, longer the term, lesser is the risk. Companies may default in payment of interest/ principal on their debentures/bonds/deposits; the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillful management can minimise risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales help them to build a diversified portfolio that minimises risk and maximises returns.

The Advantages of Investing in a Mutual Fund

The advantages of investing in a Mutual Fund extending PMS to the small investors are as under:

  • Professional Management- The investor avails of the services of experienced and skilled professionals who are backed by a dedicated investment research team, which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

  • Diversification- Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.

  • Convenient Administration - Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.

  • Return Potential Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.

  • Low Costs- Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

  • Liquidity- In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.

  • Transparency- You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

  • Flexibility- Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

  • Choice of Schemes- Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

  • Well Regulated- All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.

Other Special Features of MFs in terms of Portfolio Functions

These are special safeguards for the investor prescribed by SEBI.

  • Portfolio Investment operations are entrusted to a professional company, i.e. The Asset Management Company. (AMC). Thus while MFs offer PMS functions on behalf of its unit holders, the actual PMS services are rendered by the AMCs.

  • Physical custody of the securities is not with the AMC but with a custodian, an independent organisation, appointed for the purpose. For instance, the Stock Holding Corporation of India Ltd. (SCHIL) is the custodian for most fund houses in the country.

Management of PMS by MFs through AMCs - Eligibility Criteria for Appointment of Asset Management Company

Mutual Funds are constituted as trusts and actual PMS service is rendered by AMCs. SEBI has prescribed rigid provisions for approval of an AMC. Some of these provisions are similar to those prescribed for Portfolio Managers and quoted as under:

  • In case the asset management company is an existing asset management company it has a sound track record based on the net-worth and the profitability of the asset management company, general reputation and fairness in transactions;

  • The directors of the asset management company are persons having adequate professional experience in finance and financial services related field and not found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws;

  • The key personal of the asset management company have not been found guilty of moral turpitude or convicted of economic offence or violation of securities laws or worked for any asset management company or mutual fund or any intermediary during the period when its registration has been suspended or cancelled at any time by the Board;

  • The board of directors of such asset management company has at least fifty percent directors, who are not associate of, or associated in any manner with, the sponsor or any of its subsidiaries or the trustees;

  • The Asset Management Company has a net-worth of not less than rupees ten crores:

  • The Asset Management Company shall take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provisions of these regulations and the trust deed.

  • The Asset Management Company shall exercise due diligence and care in all its investment decisions as would be exercised by other persons engaged in the same business.

  • The Asset Management Company shall be responsible for the acts of commissions or omissions by its employees or the persons whose services have been procured by the Asset Management Company.

All these characterise the safeguards and rules that are applicable to portfolio managers.


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[..Page Last Updated on 20.10.2004..]<>[Chkd-Apvd]