Académique Documents
Professionnel Documents
Culture Documents
and
Services performed by Mutual Fund
Table of Contents
Sr. No.
Contents
Page No.
Introduction
Redeeming of Shares
Bibliography
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Introduction
Mutual Funds An Investment Solution
Most savers invest in Fixed Deposits (FD) with banks or companies, Post Office Deposits,
National Savings Certificate (NSC), Public Provident Fund (PPF) and such other investments.
They are permitted to take exposure, similarly, to the financial markets, by investing in equity
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shares, debentures etc. Many savers who wish to invest in the financial markets are unable to do
so, because they do not have the requisite knowledge or time. Mutual funds offer an investment
solution for such savers. Mutual funds offer schemes that collect money from investors and
invest in the markets on their behalf. The profits or losses arising in a mutual fund scheme out of
such investments belong to the investors in that scheme. The nature of investments that a scheme
proposes to make is announced when the scheme is launched. Thus, investors can decide to
invest in only those schemes that offer them the kind of financial market exposure that they are
looking for. Mutual funds offer several such schemes to cater to the needs of different types of
investors. They are closely regulated by Securities & Exchange Board of India (SEBI) with a
view to protect investors. SEBI (Mutual Funds) Regulations, 1996 sets out the regulatory
framework.
Association of Mutual Funds in India (AMFI) is an industry body constituted by mutual funds in
the country. It works closely with SEBI to address various mutual fund related regulatory issues,
and ensure smooth functioning of the industry.
The money that goes into new projects or expansion of existing projects, boosts overall
economic activity and employment in the country.
The mutual fund industry itself provides employment or a source of livelihood to lakhs of
people who are associated with the industry. This includes mutual fund employees,
distributors and employees of various service providers.
Systematic Withdrawal Plan
Just as investors do not want to buy all their units at a market peak, they do not want all their
units redeemed in a market trough. Investors can therefore opt for the safer route of offering for
re-purchase, a constant value of units.
Suppose an investor were to offer for re-purchase Rs 1,000 per month for 6 months. If, in the
first month, the NAV is Rs 10, the investors unit-holding will be reduced by Rs 1,000 Rs 10
i.e. 100 units. In the second month, if the NAV has gone up to Rs 12, the unit-holding will go
down by fewer units viz. Rs 1,000 Rs 12 i.e. 83.333 units. If the NAV goes down to Rs9 in the
following month, the unit-holder will be offering for re-purchase a higher number of units viz.
Rs 1,000 Rs 9 i.e. 111.111 units. Thus, the investor re-purchases his Units at an average NAV
during the 6 month period. The investor does not end up in the unfortunate position of exiting all
the units in a market trough.
Mutual funds make it convenient for investors to manage their SWPs by indicating the amount,
periodicity (generally, monthly) and period for their SWP. Some schemes even offer the facility
of transferring only the appreciation or the dividend. Accordingly, the mutual fund will re
purchase the appropriate number of units of the unit-holder, without the formality of having to
give a re-purchase instruction for each transaction. An investor may opt for SWP for several
reasons:
Minimize the risk of redeeming all the units during a market trough.
Meet liquidity needs for regular expenses.
Assuming the scheme is profitable; the re-purchase ensures that some of the profits are
Redeeming of Shares.
Redemption involves meticulous research about the performance of the fund and clarity about
the reasons for redemption. Investors often make such decisions based on sentiment. If the
market is uncertain or their fund is underperforming, a reflex action is to redeem units. This
might not be the best thing to do.
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One must understand that even uncertain markets can present opportunities for earning good
returns. In addition, unlike index funds, other mutual funds do not always follow the benchmark
index. In fact, their performance is a function of the specific underlying securities. In addition,
mutual funds are managed by professional fund managers who take proactive decisions and try
to factor-in the perceived market movements. However, if a mutual fund scheme is consistently
underperforming for a very long period (vis-a-vis its benchmark) one may choose exit. Once the
reason for redemption is clear, here are a few points to make the process straightforward.
1. Redemption if purchased through the AMC or Distributors
The most common route for investing in mutual funds is through the AMC (direct) or
through a distributor. In order to redeem funds through offline modes, you need to send a
duly signed redemption request to the AMC's or the distributor's office. A standard
redemption form asks for details like your name, folio number, plan and scheme details,
and number of units you wish to redeem. In addition, all the holders have to sign the slip.
The proceeds from the redemption will be credited to the registered bank account.
2. Redemption if bought online
Mutual funds can also be purchased online. Such units can be redeemed online through a
trading account or the AMCs website. You simply have to log in, select the fund and the
number of units you wish to redeem and confirm your order. In addition, central service
providers like CAMS (Computer Age Management Services Pvt. Ltd.), Karvy, etc. offer
the option of redeeming mutual fund bought from several AMCs. You can download the
form online or visit the nearest office. Please note that these agencies might not service
all the AMCs.
Points to remember
i.
Applicable NAV: The time of the day when your redemption request is received is
crucial because the NAV (Net Asset Value) for each day is declared after the close of
trading on that day. However, the NAV will be applicable only for redemption requests
ii.
iii.
account.
Funds with Lock-In Period: Unlike the units of a close-ended scheme, open-ended
schemes can be redeemed anytime. Schemes like Equity Linked Savings Scheme (ELSS)
iv.
Like every investment decision, it is advisable to consult your financial advisor beforehand. Stay
true to your financial plan and ensure that you are redeeming for the right reasons. Remember,
redeeming from one scheme and investing into another scheme of the similar kind is called
'churning' and is not advisable unless backed by sound logic.
Services performed by Mutual Funds
Triggers: It is not uncommon for investors to rue missed opportunities of buying or selling
because they could not give the requisite instructions in time. This is addressed through the
trigger option that is available for some schemes. For instance, an investor can specify that the
Units would be re-purchased if the market reaches a particular level. In that case, once the
market reaches that level, the Units would be re-purchased, without the need for going through a
separate re-purchase documentation. It stands to reason that if the market continues to go up after
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the trigger is auctioned, the investor loses on the further gain. Similarly, an investor can set a
trigger to transfer moneys into an equity scheme when the market goes down, say 20%. This
would help the investor conveniently increase his position in equities, when the market goes
down 20%. Investors should study the conditions attached to trigger options (and any value
added service), because these vary from scheme to scheme.
Statement of Account and Investment Certificate: The time limit within which these need to
be issued was discussed in Chapter3. The Statement of Account shows for each transaction
(sale / re-purchase), the value of the transaction, the relevant NAV and the number of units
transacted. Besides, it also provides the closing balance of units held in that folio, and the value
of those units based on the latest NAV
Annual Account Statement: The Mutual Funds shall provide the Account Statement to the
Unit-holders who have not transacted during the last six months prior to the date of generation of
account statements. The Account Statement shall reflect the latest closing balance and value of
the Units prior to the date of generation of the account statement. The account statements in such
cases may be generated and issued along with the Portfolio Statement or Annual Report of the
Scheme. Alternately, soft copy of the account statements shall be mailed to the investors e-mail
address, instead of physical statement, if so mandated.
Consolidated Account Statement (CAS): This is a single account statement that consolidates
financial transactions in all folios of an investor across all schemes of all mutual funds. The
consolidation of investors records across schemes and mutual funds is done on the basis of PAN.
All types of financial transactions like purchase including NFOs, redemption including maturity,
switches, systematic transactions like SIP, SWP and STP, dividend payouts or reinvestments,
merger, bonus transactions etc. are covered. Non-financial transactions like updation of address,
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bank details, nominee registration etc. are not included. Confirmation for non-financial
transactions is sent separately by individual AMCs. Demat transactions are not covered in CAS.
These are part of the demat statement sent by the DP. Folios of minors too are not shown in the
CAS. Details such as, opening and closing unit balances in each folio, financial transactions, the
email id registered, nominee registration status, mode of holding and KYC status are included in
CAS. However, sensitive information like registered bank account details, PAN and contact
numbers are not included. Mobile number shown in CAS is masked. CAS is sent to the KYC
address of the investor. However, if KYC is not updated in any of the folios considered for
consolidation, then CAS is sent to the address available in such folio where the investor had
transacted the last transaction in the month. A Consolidated Account Statement (CAS) for each
calendar month will be sent by post/email on or before 10th of the succeeding month. If an email
id is registered with the AMC, only a CAS via email will be sent. For the purpose of sending
CAS, investors will be identified across mutual funds by their Permanent Account Number
(PAN). Where PAN is not available, the account statement shall be sent to the Unit holder.
Further, where there are no transactions in a folio during any six month period, a CAS detailing
holding across all schemes of all mutual funds at the end of every such six month period (i.e.
September/March), shall be sent by post/e-mail by the 10th day of the month following that half
year, to all such Unit holders.
Unit Certificate and Demat
Unlike SoA and CAS, which shows the flow of unit-holding during the period, a Unit Certificate
only confirms the number of units held in the name of the investor. In a way, the Statement of
Account is like a bank pass book, while the Unit Certificate is like a Balance Confirmation
Certificate issued by the bank. In practice, open-end schemes issue SoA, while closed-end
schemes issue Unit Certificates. Since physical units of open-end schemes are non-transferable,
Unit Certificate does not offer any real transactional convenience for the Unit-holder. However,
if a Unit-holder asks for it, the AMC is bound to issue a Unit Certificate. As already discussed,
the investor can hold his units in demat form. In that case, Unit Certificate is not issued to the
investor. Instead, he receives a confirmation from the DP on the change in demat units in his
account. Demat units are freely transferable.
Nomination: The unit-holder has a right to nominate one or more persons (upto three) in whom
the units shall vest in the event of his death. Most investors like clarity about what would happen
to their unit-holding, in the unfortunate event of their demise. This clarity can be achieved by
executing a Nomination Form, where the nominees name is specified. If the nominee is a minor,
then a guardian too can be specified. In the case of joint holding, every unit-holder will have to
sign the nomination form. If one joint holder dies, then the Units will continue to be held by the
surviving joint holder/s. If the sole Unit-holder or all joint holders die/s, then the Units will be
transferred to the nominee. The nomination can be made only by individuals applying for /
holding units on their own behalf singly or jointly. Non-individuals including society, trust, body
corporate, partnership firm, Karta of Hindu Undivided family, holder of Power of Attorney
cannot nominate. Nomination can also be in favour of the Central Government, State
Government, and a local authority, any person designated by virtue of his office or a religious or
charitable trust. The Nominee shall not be a trust (other than a religious or charitable trust),
society, body corporate, partnership firm, Karta of Hindu Undivided Family or a Power of
Attorney holder. A non-resident Indian can be a nominee subject to the exchange control
regulation in force, from time to time.
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Nomination in respect of the units stands rescinded upon the transfer of units. In case of multiple
nominees, the percentage of allocation/share in favour of each of the nominees should be
indicated against their name and such allocation/share should be in whole numbers without any
decimals making a total of 100 percent. If the aggregate is less than 100%, then the balance will
be re-balanced to the first unitholder. If the aggregate is greater than 100% then nomination
would be rejected. In the event of the unit-holders not indicating the percentage of
allocation/share for each of the nominees, the Mutual Fund / Asset Management Company shall
settle the claim equally amongst all the nominees.
Before the transfer is affected, the mutual fund will insist on the KYC documentation from the
nominee, death certificate/s of the deceased, and an indemnity against future problems for the
mutual fund arising out of the transfer. It would be pertinent to note here that nomination is only
an authorization for the mutual fund to transfer the units to the nominee in the event of demise of
the unit-holder. The inheritance laws applicable to the unit-holder too need to be considered by
the investor. Professional advice on inheritance issues and preparation of a Will are strongly
advised.
The cancellation of nomination can be made only by those individuals who hold units on their
behalf singly or jointly and who made the original nomination. On cancellation of the
nomination, the nomination shall stand rescinded and the Asset management Company shall not
be under any obligation to transfer the units in favour of the Nominee(s).
Pledge: Investors can borrow money against pledge of their mutual fund units. The
documentation for borrowing varies between different lenders. In order to mark the lien /
pledge / hypothecation / charge on his mutual fund units, the investor will have to submit a
request to the mutual fund, specifying his folio number, scheme name, number of units to be
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charged, and the person in whose favour the charge is to be created. Based on this, the RTA will
mark the charge in its records. Once the charge is created, the investor will not be able to sell
those units or offer them for re-purchase, though he can continue receiving the dividend. In order
to release the charge, the person in whose benefit the charge has been created will have to
confirm. Thereafter, the units are available for sale / re-purchase by the investor. Banks, NBFCs
and other financiers often lend money against pledge of Units by the Unitholder. This is effected
through a Pledge Form executed by the unit-holder. The form has a provision for specifying the
party in whose favour the Units are pledged. Once Units are pledged, the Unit-holder cannot sell
or transfer the pledged units, until the pledgee gives a no-objection to release the pledge.
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Bibliography
Workbook for Mutual funds, by National Institute of Securities Market.
Series V-A, Series-V-B
National Stock Exchange
Bombay Stock Exchange.
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