Spend, Save and Invest Smartly
I would like to start this article by saying that after driving our car for a certain number of kilometers we go for an engine checkup and oiling of its essential parts .Similarly mutual funds just like most financial products needs reforms. The Indian Mutual Fund industry witnessed the entry of a number of Private Sector mutual funds and also foreign fund management companies in the mutual fund industry in the year 1993. The entry of these large players necessitated the need for regulations in the mutual fund sector. Important steps were taken by SEBI for the regulation of mutual funds in the year 1993. I would like to remind all of you that the team of Financial Planners at Moneymindz.com are always there for you to plan your Financial needs in a most efficient manner.You can explore this unique Free Advisory Service just by giving a missed call at 022 6211 6588.
Mutual funds are set up as trusts managed by the Asset Management Companies. The custody of the assets is with the custodian who is independent of the Sponsors and AMC. Here 50% of the Board of Directors of AMC and two thirds of the trustees must not be associated or affiliated to the Sponsor.
On January 1993 SEBI prescribed the registration of mutual funds. This requires as a condition of registration that mutual funds should be setup only in the form of a trust by a sponsor, to raise sums of money by the trustees (fictitious owners of trust property) ,through the sale of units to the public under one or more schemes for investing in securities in accordance with the necessary rules and regulations
Offer documents of schemes launched by mutual funds need to be vetted by SEBI.
Mutual funds must adhere to specific rules regarding the sale, distribution and advertisement of mutual funds. The offer documents cannot be false and misleading and investment objective should be explained in detail.
Mutual Funds cannot provide guaranteed return unless fully guaranteed by the Sponsor or the AMC.
Here SEBI increased the time limit from six months to nine months within which mutual funds have to invest funds raised from tax saving schemes. You can learn more about mutual funds on Moneymindz.com
In order to further improve the service to investors in the mutual fund sector, across all categories of customers SEBI introduced a new set of regulations in the year 1996.
The Unit trust of India was created in 1964 through an act of Parliament. The US-64 scheme was set up to channelize the investments of small investors like widows, pensioners in order to give them relatively large returns. In 1992 it was changed from a debt based to an equity based scheme .The US-64 did not come under SEBI regulations, and investment details were kept secret to further, government interests. This proved to be highlymisleading. In the year 1998 , UTI crashed and a bailout fund of INR 3500 crores had to be arranged. However no lessons were learnt from this. Huge amount of UTI funds were channeled into the infamous K-10 list of Kethan Parekh stocks which continued to invest in the mid-2000’s even after these stocks crashed in order to prop up their value. Here during the Software stocks crash 1n August 2000 crores worth of funds were invested in Software stocks of (K-10) which lead to crores of losses as these stocks had lost their value.
A Mumbai based chartered accountant stock broker took advantage of low liquidity in certain stocks later called (K-10stocks) and held significant quantities of them. The buoyant markets raised these K-10 stocks to very high levels. As a result other stock brokers and investors including US-64 invested huge sums in these stocks.This led to huge manipulations in the market. In order to fund his purchases KP borrowed heavily from banks taking advantage of their laxity. His modus operandi was simple. With borrowed funds purchase shares trading at low prices. The prices go up in the bull runs. Pledge these shares with banks when their prices were high as collateral for borrowed funds. When the K-10 stocks crashed these pledged shares lost their value .This was a highly fraudulent practice. SEBI inspected book of accounts of brokers and capital exposure of banks and came to the conclusion that such a scam was not possible without a degree of collusion with banks. This led to further regulations in the financial and mutual fund sector.
SEBI has mandated that effective 1st January 2013 mutual funds shall provide a separate plan for direct investments not routed through a Distributor. They shall have a lower expense ratio and no commission shall be paid for these plans. This is good for do it yourself clients to improve their returns.
SEBI has mandated that for applications with an amount equal to or more than 2 Lakhs, the NAV will be the closing NAV of the day on which the funds are available for utilization, before the cut-off time. Earlier the applicable NAV used to be the closing NAV of the day on which the application was submitted, Subject to realization of the cheque. This is a good step from existing investors point of view as new investors will get to participate in the scheme only on the day.
SEBI has initiated a process that will require mutual funds to label their products. Here SEBI has made it mandatory that a fund should be classified by the AMC according to his investment style and this should be mentioned in the marketing communication.
Mis-selling is rampant in all financial products. These are all about future returns. Now under the new set of rules mis-selling is a fraudulent and an unfair trade practice If you have any complaints on mis-selling post on Moneymindz.com.
A large set of funds is set aside for investor education which would positively help mutual fund investors. This would eliminate cheating and fraud.
In order to prevent investors from selling units on a regular basis as this will impact performance of funds an exit load is charged. This was used to pay commission to the distributors. Now exit loads are added back to the scheme which will reduce the impact of increased expenses.