Question

1. what are the advantages of investing in a mutual fund

2. what are the roles of sponsor, trustee and AMC

Answer 1

1). MUTUAL FUND

Any Investment plan has its own advantages, be it for a short term or long term. Investors are usually keen on investing in Mutual Funds because of the risk management. However, needless to say, these investments also come with some disadvantages. But before we dwell upon the advantages and disadvantages of Mutual Funds let us first know what Mutual Fund scheme is.

Advantages and benefits of investing in Mutual Fund

Liquidity

Diversification

Expert Management

Flexibility to invest in Smaller Amounts

Accessibility – Mutual Funds are Easy to Buy

Schemes for Every Financial Goals

Safety and Transparency

Lower cost

Best Tax Saving Option

Lowest Lock-in Period

Lower Tax on the Gains

A Mutual Fund scheme is a type of financial instrument which is made by a pool of money collected from many investors. The AMCs invest in securities like company shares, bonds, stocks, debts, and other assets by mutual fund companies. The AMCs manage these open-ended investments. Mutual fund companies allocate the fund in different securities. This helps its investors to grow their wealth through their investments

The capital gain on a Mutual Fund scheme depends on the performance of the securities it decides to buy. The market condition is also a factor that determines the value of the particular security purchased.

The income or gain generated from these investments is then distributed among the investors. The distribution is done post deduction of certain expenses, by calculating the Net Asset Value of the scheme.

Mutual Funds can be a higher risk investment but the returns are generally greater than in any other investment plan.

Mutual Funds have both advantages and disadvantages. The advantages of investing include professional management, low risk, diversification, liquidity, economies of scale. The disadvantages of investing include the high fee, poor trade execution, tax inefficiency., etc.

Advantages and benefits of investing in Mutual Fund

Liquidity

The most important benefit of investing in a Mutual Fund is that the investor can redeem the units at any point in time. Unlike Fixed Deposits, Mutual Funds have flexible withdrawal but factors like the pre-exit penalty and exit load should be taken into consideration.

Diversification

The value of an investment may not rise or fall in tandem. When the value of one investment is on the rise the value of another may be in decline. As a result, the portfolio’s overall performance has a lesser chance of being volatile.

Diversification reduces the risk involved in building a portfolio thereby further reducing the risk for an investor. As Mutual Funds consist of many securities, investor’s interests are safeguarded if there is a downfall in other securities so purchased.

Expert Management

A novice investor may not have much knowledge or information on how and where to invest. The experts manage and operate mutual funds. The experts pool in money from investors and allocates this money in different securities thereby helping the investors incur a profit.

The expert keeps a watch on timely exit and entry and takes care of all the challenges. One only needs to invest and be least assured that rest will be taken care of by the experts who excel in this field. This is one of the most important advantages of mutual funds

  Flexibility to invest in Smaller Amounts

Among other benefits of Mutual Funds the most important benefit is its flexible nature. Investors need not put in a huge amount of money to invest in a Mutual Fund. Investment can be as per the cash flow position.

If You draw a monthly salary then you can go for a Systematic Investment Plan (SIP). Through SIP a fixed amount is invested either monthly or quarterly as per your budget and convenience.

Accessibility – Mutual Funds are Easy to Buy

Mutual Funds are easily accessible and you can start investing and buy mutual funds from anywhere in the world. An asset management companies (AMC) offers the funds and distributes through channels like :

• Brokerage Firms
• Registrars like Karvy and CAMS
• AMC’S Themselves
• Online Mutual Fund Investment Platforms
• Agents and Banks

This factor makes mutual funds universally available and easily accessible. More so, you do not require a Demat Account to invest in Mutual Funds. Mutual funds are easy to buy, track performance and one-click investment with Scripbox

Schemes for Every Financial Goals

The best part of the Mutual Fund is the minimum amount of investment can be Rs. 500. And the maximum can go up to whatever an investor wishes to invest.

The only point one should consider before investing in the Mutual Funds is their income, expenses, risk-taking ability, and investment goals. Therefore, every individual from all walks of life is free to invest in a Mutual Fund irrespective of their income.

Safety and Transparency

With the introduction of SEBI guidelines, all products of a Mutual Fund have been labeled. This means that all Mutual Fund schemes will have a color-coding. This helps an investor to ascertain the risk level of his investment, thus making the entire process of investment transparent and safe.

This color-coding uses 3 colors indicating different levels of risk-

1. Blue indicates low risk
2. Yellow indicates medium risk, and
3. Brown indicates a high risk.

Investors are also free to verify the credentials of the fund manager, his qualifications, years of experience, and AUM, solvency details of the fund house.

Lower cost

In a Mutual Fund, funds are collected from many investors, and then the same is used to purchase securities. These funds are however invested in assets which therefore helps one save on transaction and other costs as compared to a single transaction. The savings are passed on to the investors as lower costs of investing in Mutual Funds.

Besides, the Asset Management Services fee cost is lowered and the same is divided between all the investors of the fund.

Best Tax Saving Option

Mutual Funds provide the best tax saving options. ELSS Mutual Funds have a tax exemption of Rs. 1.5 lakh a year under section 80C of the Income Tax Act. You can use Scripbox’s income tax calculator to ensure tax plan requirement

All other Mutual Funds in India are taxed based on the type of investment and the tenure of investment.

ELSS Tax Saving Mutual Funds has the potential to deliver higher returns than other tax-saving instruments like PPF, NPS, and Tax Saving FDs.

Lowest Lock-in Period

Tax Saving Mutual Funds have the lowest lock-in periods of only 3 years. This is lower as compared to a maximum of 5 years for other tax saving options like FD, ULIPs, and PPF.

On top of that one has the option to stay invested even after the completion of the lock-in period.

Lower Tax on the Gains

With Equity linked saving scheme you can save tax up to Rs. 1.5 Lakh a year under section 80C of Income Tax (IT) Act. All other types of Mutual Funds are taxable depending on the type of fund and tenure.

2).  The roles of sponsor, trustee and AMC

Fund Sponsor – The Sponsor is the main body that establishes the Mutual fund. The Sponsor can be compared to a promoter of a company. The responsibility of the sponsor includes appointing the trustees with the approval of SEBI and setting up an AMC under the Companies act 1956 while getting the trust registered with SEBI. Since the Sponsors play the most important role in the functioning of a mutual fund, SEBI has a set of strict guidelines for the eligibility of a sponsor. Some of them are as follows: the sponsor should have a sound track record of carrying out business in the financial services space for not less than five years. A Sponsor also needs to have made profits in at least three of the five years including the latest year. During the same period, it is also important that the sponsor has had a positive net worth. It should be contributing a minimum of 40 per cent net worth of the AMC. it is also important that the sponsor has a good track record of fairness and integrity in all its transactions. For example ICICI Bank and Purdential Plc are sponsors for ICICI Mutual Fund. For Birla Sun Life Mutual Fund, Aditya Birla Financial Services and Sun Life (India) AMC Investments Inc. are sponsors.

Trustee – The main role of a trustee is to ensure that the interest of the unit holders is protected while making sure that the mutual fund complies with all the regulations of SEBI. Either, the sponsor should appoint four trustees or establish a trustee company with at least four independent directors. Additionally, at least two thirds of the trustees or the directors should be independent not associated with the sponsor in any way.

Some of the key responsibilities of the trustees include, entering into an investment management agreement with the AMC to define its functioning. They are also responsible for ensuring that the AMC has all the required process, procedures and systems in place while making sure that all the key personnel such as the CEO, CIO, the fund managers and the analysts are appointed after through due diligence. All the schemes launched by the AMC have to be approved by the trustees prior to launch. The trustees will be reviewing all the transactions of the AMC on a quarterly basis wile filing reports to SEBI on a half yearly basis.

Asset Management Company (AMC) – The AMC is the investment manager of the trust. It takes care of the day today operation of the mutual fund and managing the investors money as well. The AMC is appointed either by the trustee or the Sponsor after obtaining the approval of SEBI. The AMC consists of the Chief Investment Officer, the fund managers and analysts, who are together responsible for managing the various schemes launched. The compliance officer ensures compliance of all the activities of the AMC in line with SEBIs rules and regulations. For example; HDFC AMC is the Asset Management Company for HDFC Mutual Fund.