Mutual Funds
Mutual funds are Dynamic financial institutions, which plays a crucial role in an economy by mobilizing and investing them in the capital markets, thus establishing a link between savings and the capital market. Mutual fund is a method of channeling the savings of a layman person directly to the productive capacities of the country. They assist in financial deepening, intermediation and enhancing liquidity in the market. In India, mutual funds made their modest beginning in the year1964 with the establishment of UTI since then the industry has covered a huge distance. Today this industry is having 15% (approx) of the total market capitalization. It is a pool of investors' money invested and managed by an Investment adviser. Money can be invested in the fund or withdrawn at any time, with few restrictions, at NAV minus any loads' and/or fees.
Advantage of Mutual fund investing
(i) Professional Management
(ii) Diversification of Risk
(iii) Reduction in transaction cost due to the size and scale of operations:
(iv) Liquidity
Constitution of a Mutual Fund
A mutual fund is to be established through the medium of a sponsor. A sponsor means anybody corporate that, acting alone or in combination with another body corporate, establishes a mutual fund after completing the formalities prescribed in the SEBI's mutual funds regulations. The sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions. The word "sound track record" shall mean the sponsor should,
(i) Be carrying on business in financial services for a period of not less than five years; and
(ii) The net worth is positive in all the immediately preceding five years; and.
(iii) The net worth in the immediately preceding year is more than the capital contribution of the sponsor in the asset management company; and
(iv) The sponsor has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year.
The mutual fund has to be established as a TRUST and the instrument of trust shall be in the form of deed duly registered under the provisions of the Indian Registration Act 1908. The deed shall be executed by the sponsor in favor of the trustees named in the instrument of trust. The trustee should hold the property of the Mutual Fund in trust for the benefit of the unit holders.
An Asset Management Company, who holds an approval from SEBI is to be appointed by the trustees to manage the affairs of the mutual fund. The appointment of an AMC can be terminated by majority of the trustees or by 75% of the unit holders of the scheme. The sponsor should contribute at least 40% to the net worth of the AMC. The mutual fund shall appoint a custodian to carry out the custodial services for the schemes of the fund.
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