A mutual fund is a method of pooling money by distributing units to investors and investing the proceeds in securities in accordance with the objectives stated in the offer document. Securities investments are dispersed throughout a diverse range of businesses and sectors, reducing risk because not all stocks move in the same direction or in the same proportion at the same time. Mutual funds issue units to investors based on the amount of money they have invested. Unitholders are the people who invest in mutual funds. Investors share gains and losses in proportion to their investments.
Unit Trust of India was the first mutual fund established in India in 1963. In the late 1980s, the government permitted public-sector banks and institutions to establish mutual funds. The Securities and Exchange Board of India (SEBI) Act was passed in 1992. SEBI’s objectives are to protect the interests of investors in securities, as well as to promote the development and regulation of the securities market. In terms of mutual funds, SEBI develops policies, regulates, and supervises mutual funds in order to protect the interests of investors. In 1993, SEBI published mutual fund regulations. Mutual funds sponsored by private-sector entities were then permitted to enter the capital market. The regulations were completely revised in 1996 and have been amended on a regular basis since then. SEBI has also issued guidelines to mutual funds in the form of circulars from time to time in order to protect the interests of investors. All mutual funds, whether promoted by public or private sector entities, as well as those promoted by foreign entities, are subject to the same set of Regulations. There are no differences in regulatory requirements for these mutual funds, and all are subject to SEBI monitoring and inspections.
A mutual fund is structured as a trust, with a sponsor, trustees, Asset Management Company (AMC), and custodian. The trust is established by a sponsor or more than one sponsor who acts as a company promoter. The mutual fund’s trustees manage its assets for the benefit of its unitholders. AMC approved by SEBI manages the funds by making investments in various types of securities. The securities of the fund’s various schemes are held in custody by the custodian, who is required to be registered with SEBI. The trustees have general superintendence and direction authority over AMC. They monitor the mutual fund’s performance and compliance with SEBI regulations. According to SEBI regulations, at least two-thirds of the directors of a trustee company or board of trustees must be independent, i.e. not associated with the sponsors. In addition, at least half of AMC’s directors must be independent. Before launching any scheme, all mutual funds must be registered with SEBI.
Net Asset Value denotes the performance of a specific scheme of a mutual fund (NAV). Mutual funds invest the money they collect from investors in the stock market. In layman’s terms, NAV is the current market value of the securities held by the scheme. Because the market value of securities changes on a daily basis, the NAV of a scheme also changes on a daily basis. The NAV per unit is the market value of a scheme’s securities divided by the total number of units in the scheme on any given date.
These are funds/schemes that invest only in the securities of the sectors or industries specified in the offer documents, such as pharmaceuticals, software, fast moving consumer goods (FMCG), petroleum stocks, information technology (IT), banks, and so on. The performance of the respective sectors/industries determines the returns in these funds. While these funds may provide higher returns, they are more risky than diversified funds; investors must monitor the performance of those sectors/industries and exit at the appropriate time. They may also seek the advice of a professional.
These schemes provide tax breaks to investors under specific provisions of the Income Tax Act of 1961, as the government provides tax breaks for investments in specific avenues, such as Equity Linked Savings Schemes (ELSS) under section 80C and Rajiv Gandhi Equity Saving Scheme (RGESS) under section 80CCG of the Income Tax Act of 1961. Mutual fund pension plans also provide tax advantages. These funds are growth-oriented and primarily invest in equities. Their growth opportunities and risks are similar to those of any equity-oriented scheme.
An FoF scheme is one that invests primarily in other schemes of the same mutual fund or other mutual funds. An FoF scheme allows investors to achieve greater diversification by utilizing a single scheme. It disperses risks across a larger universe.
An investor must clearly state his or her name, address, the number of units sought, and any other information requested on the application form. A first-time investor must submit Know Your Customer (KYC) documents.
From January 1, 2013, SEBI has mandated mutual funds to compulsorily launch a direct plan for direct investments, i.e., investments not routed through a distributor. Such a separate plan has a lower expense ratio, excluding distribution expenses, commissions, and so on, and such plans are not to pay commissions. The plan also has its own NAV. Investments can be made in a lump sum, or as a series of payments over time, or through a Systematic Investment Plan (SIP).
An Initial Public Offering (IPO) is the process by which a company sells its stock to the general public. During an IPO, the company sells shares to investors in exchange for money. This is one of the ways that the company raises funds. Any company that meets the SEBI’s requirements can go public.
Yes. Companies can be listed on an exchange without an IPO if they meet the SEBI requirements.
The total number of shares offered to the public in an IPO is divided into lots. During an IPO, investors are not permitted to purchase any number of shares. They must do it in batches. Furthermore, a minimum and maximum lot size is predetermined. As an example, consider the phrase “Company.” A going public establishes a lot size of ten shares for each lot, with a minimum and maximum lot purchase of one and ten shares, respectively. This essentially means that an investor can purchase a minimum of 10 shares and a maximum of 100 shares. If an investor wishes to purchase 65 shares, he will be unable to do so. However, he can buy 6 lots, which is the closest denomination.
No. The mere act of applying for shares does not guarantee allotment. When you apply for shares, you are bidding for them. The allotment is determined by the number of bids received and the price at which they are made.
The primary market is the section of the capital market where securities are created and sold to investors for the first time. This market is concerned with initial public offerings (IPOs).
Secondary markets are the areas of the capital market where investors can buy and sell securities that they already own. Shares can only be sold and purchased after the company opting for an IPO is listed.
A Follow on Public Offering (FPO) occurs when a company decides to offer shares to the public after previously issuing shares in an IPO.
Following SEBI approval of their prospectus, the company determines the most appropriate offering dates.
An IPO is open for at least three working days and no more than ten working days
The company appoints the registrar. They are in charge of processing IPO applications and allocating shares to applicants. They also handle refunds and transfers of shares to IPO applicants’ Demat accounts. All of this is carried out in accordance with SEBI regulations.
The company appoints these lead managers or underwriters, who are independent financial institutions. They are in charge of coordinating all activities related to the problem. Among the activities are drawing attention to the IPO, creating draught documents, getting the draught approved by the SEBI, and so on.
Money market mutual funds, or MMMFs, are open-ended, highly liquid funds that are typically used for short-term cash needs. The money market fund only invests in cash and cash equivalents with a one-year average maturity and fixed income. The fund manager invests in money market instruments such as treasury bills, commercial paper, certificates of deposit, and bills of exchange, among others.
Currently, the interest rate is determined by market forces such as the demand for and supply of short-term money. A fiscal deficit, for example, occurs when government spending exceeds government revenue. To fund the deficit, the government needs money, which necessitates borrowing by the government and thus influences interest rates. In other words, the greater the fiscal deficit, the greater the amount of money required by the government. As a result, interest rates will rise as a result.
The money market keeps the market liquid. To control liquidity, the RBI employs money market instruments.
It meets the government’s and the economy’s short-term needs. Any business or organization can borrow money quickly and for a short period of time.
Aids in the use of surplus funds in the market for a short period of time in order to earn an additional return. It directs savings to investments.
Assists in the transfer of funds from one sector to another in the most transparent manner possible.
Monetary policies are devised with the help of these guides. The current state of the money market is the result of previous monetary policies. As a result, it serves as a guide for developing new short-term money policies.
A bond is simply a certificate that the borrower promises to repay within a specified time frame. The government entity, municipality, or company will agree to pay a certain amount of interest per year, usually, an exact percentage of the amount loaned, in exchange for the privilege of using the money.
Bondholders do not own any part of the companies to which they lend; they do not receive dividends or the right to vote on company matters, as stockholders do, and the success of the investment is unrelated to the company’s performance in the market. A bondholder is entitled to receive the agreed-upon amount as well as the bond’s principal. Corporate bonds are generally issued in denominations of $1000. This price is known as the face value of the bond; it is the amount agreed to be paid by the company when the bond matures. Bond prices can differ from face values because bond prices are correlated with current market rates. When interest rates fluctuate, the bond’s value fluctuates as well. If the bond is sold before it matures, it may be worth less than the amount originally paid. A callable bond is one that the issuer has the option to repurchase at full face value before the maturity date.
Bonds have three main characteristics:
Issuing Organization
Maturity
Quality
Long-term bonds mature in ten years or more, while short-term bonds mature in two years or less. Intermediate is a period of two to ten years.
Bond quality is a rating of an issuing organization’s creditworthiness. There are organizations that specialize in determining the quality of bonds. The lower the risk of the investment, the higher the rating. The letter A through D is used in the rating system. The only bond that is considered risk-free is the US Treasury Bond.
Bond prices and interest rates generally have an inverse relationship: as interest rates fall, bond prices rise, and vice versa.
Bond prices are heavily influenced by maturity – the longer the maturity, the greater the price change in response to an interest rate change. If interest rates rise, it will have a greater impact on the 20-year bond than on the 10-year bond. As a result, bond fund managers will try to change the fund’s average maturity in order to anticipate changes in interest rates.
A “call” occurs when the issuer of the bonds has the option to redeem the bonds after a certain amount of time has passed. This does not guarantee that the high yield will continue after the call date – it limits the bond’s appreciation and makes the investment riskier. Because these call provisions can be complicated, it is best for investors who do not have a strong understanding to avoid bonds with a call feature.
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