Merchant Bankers Definition of Merchant Banker The Notification of the Ministry of Finance defines a merchant banker as, any

person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. Role of Merchant Bankers Merchant Banker is the most important link between a company receiving funds and the investors. The role of Merchant banker is that of a catalyst in the process of converting formulation of projects into industrial ventures. They provide fund-based and fee-based services. The primary merchant banking functions are as under. 1. The provide long-term source of funds required by industries/trade/commerce for investment. The merchant banker primarily came into being as corporate counselors for restructuring base of capital, thereafter for issue management and underwriting of the same. 2. Project counselling which includes credit syndication and the working capital. 3. Capital structuring. 4. Portfolio management. Their accountal for activities connected with an issue right upto the allotment of shares. They have to certify the statement in the prospectus to the SEBI. Penalty points are awarded to the merchant banker who do not comply with the stipulated conditions. Services Rendered by Merchant Banks The working of merchant banking agencies and subsequent units formed to offer merchant banking services has shown that merchant banks are rendering diverse services and functions, such as organizing and extending finance for investment in projects, assistance in financial management, acceptance holes business, raising Euro-dollar loans and issue of foreign currency bonds, financing of local authorities, financing export of capital goods, ships, hydropower installation, railways, financing of hire-purchase transactions, equipment leasing, mergers and takeovers, valuation of assets, investment management and promotion of investment trusts. Not all merchant banks offer all these service. Different merchant bankers specialize in different services. Merchant banking in India Merchant banking activity was formally initiated into the Indian capital markets when Grindlays Bank received the licence from Reserve Bank in 1967. Grindlays which started with management of capital issue, recognized the needs of emerging class of entrepreneurs for diverse financial services ranging from production planning and systems design to market research. Apart from meeting specially the needs of small scale units, it provided management consultancy services to large and medium sized companies. following Grindlays Bank, Citibank set up its merchant banking division in 1970. The division took up the task of assisting new entrepreneurs and existing units in the evaluation of new projects and raising funds through borrowing and issue of equity. Management consultancy services were also offered. Consequent to the recommendations of Banking Commission in 1972, that Indian banks should start merchant banking services as part of their multiple services which banks could offer their clients. State Bank of India started the Merchant Banking Division in 1972. In the initial years the SBIs objective was to render corporate advice and assistance to small and medium entrepreneurs. The commercial banks that followed State Bank of India were Central Bank of India, Bank of India and Syndicate Bank in 1977; Bank of Baroda, Standard Chartered Bank and Mercantile Bank in 1978; and United Bank of India, United Commercial Bank, Punjab National Bank, Canara Bank and Indian Overseas Bank in the late seventies and early 80s followed by IFCI (1989) and IDBI (1991). Merchant banking activities are regulated by (1) Guidelines of SEBI and Ministry of Finance, (2) Companies Act, 1956 and (3) Listing Guidelines of Stock Exchange and (4) Securities Contracts (Regulation) Act, 1956.

SEBI (Merchant Bankers) Rules and Regulations, 1992 Merchant Banking in India is governed by the SEBI (Merchant Bankers) Rules 1992 and SEBI (Merchant Bankers) Regulations 1992. Under these Rules & Regulations, the registration of Merchant Bankers with SEBI is compulsory. The regulations provide for the registration of four categories of Merchant Bankers. Under the first category, bankers can portfolio manager. Under the second underwriter and portfolio manager. In consultant and in the fourth category he act as an issue manager, adviser, consultant, underwriter and category, he can act as an adviser, consultant, co-manager, the third category, he can act as an underwriter, adviser and could act only as an adviser or consultant to an issue.

The Merchant Bankers are required to fulfil the capital adequacy requirements which are Rs. 5 crore, Rs. 50 lakh, Rs. 20 lakh for the first three categories of Merchant Bankers, respectively. As category four Merchant Bankers are authorizes to act as consultant or advisers to an issue, no capital adequacy requirements has been prescribed. The Code of Conduct specified that every merchant banker should observe high standards of integrity and fairness in his dealings with clients and other Merchant Bankers. Merchant Bankers are required to take adequate steps for allotment of securities and refund of application money without delay and not indulge in price rigging and manipulation. To ensure transparency and accountability, SEBI has advised Merchant Bankers to enter into agreements with corporate bodies setting out their mutual rights, liabilities and obligations relating to an issue particularly on disclosures, allotment and refund, maintenance of books of accounts, and submission of half yearly report to SEBI. The regulations stipulate that all issue should be managed by atleast one Merchant Banker functioning as a lead manager. Number of lead managers The number of lead manages depends on the size of the pubis issue. The guidelines stipulate that for an issue upto Rs. 50 crores/ the number of lead managers should not exceed two, for issues between Rs. 50100 crores maximum of three, for issues between Rs. 100-200 crores, four, for issue above Rs. 200 crores but less than Rs. 400 crores, five and for issues above Rs. 400 crores, five or as may be agreed by SEBI. Responsibilities of lead manager Lead managers should not agree to manage any issue unless his responsibilities relating to the issue mainly disclosures, allotment and refund are clearly defined. A statement specifying such responsibilities should be furnished to SEBI. Underwriting obligation Lead merchant banker in Category I should accept a minimum underwriting obligation of five per cent of the total underwriting commitment or Rs. 25 lakhs whichever is less. The lead Merchant Banker is responsible for verification of contents of a prospectus or the letter of offer in respect of an issue and is required to submit to SEBI, a due diligence certificate confirming that the disclosures made in the draft prospectus are true, fair and adequate to enable to investor to make a well informed decision. The lead manager undertaking the responsibility for refunds on allotment of securities would continue to be associated with the issue till the subscribers have received the shares or excess application money. The regulations provide for a procedure for inspection of Merchant Bankers for SEBI. Under these regulations, SEBI will be empowered to suspend a registration of a merchant banker in case he furnishes wrong or false information, fails to resolve the complaints of investors, indulges in price rigging or fails to maintain capital adequacy requirement. In case of deliberate manipulation or price rigging or cornering activities or deterioration in the financial position, the Board is empowered to cancel the registration of the Merchant Banker. The penalty of suspension or cancellation of registration can be imposed by the SEBI only after holding an inquiry and giving sufficient opportunity to the Merchant Banker of being heard.

SEBI Guidelines for Merchant Bankers SEBI has issued a number of general instructions to authorized Merchant Bankers. These have been consolidated and codified in the form of a Circular issue by the SEBI. All registered Merchant Bankers are required to ensure compliance with the instructions contained in the Compendium, which particularly deals with the following matters: 1. Registration 2. Pre-Issue Obligations: Memorandum of Understanding Inter se allocation of responsibilities Submission of Draft Offer Documents Disclosures Application form Front, Outer Cover page Payment to other intermediaries Despatch of Issue Material Certificate relating to Promoters contribution.

3. Underwriters 4. Advertisements 5. Post Issue Obligations 6. General 7. Capital Structure Submission of due diligence certificate A due diligence certificate about verification of contents of prospectus or the letter of an offer in respect of an issue and the reasonableness of the views excessed therein should be submitted to SEBI atleast two weeks prior to the opening of an issue by the lead merchant banker. Documents to be submitted to SEBI by lead Manager The lead manager should submit to SEBI, (a) Particular of the issue, draft prospectus or letter of offer, (b) Any other literature intended to be circulated to the investors including the shareholder and (c) Such other documents relating to prospectus or letter of offer as the case may be. These documents should be furnished at least two weeks before filing the draft prospectus or letter of offer with ROC or with Regional Stock Exchange. The lead manager has to ensure that modifications suggested by SEBI are incorporated. The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue should continue to be associated with the issue till the subscribers have received share certificate or refund of excess application money.

Mutual Funds Mutual Funds - Objectives - Worlds Leading Mutual Fund - Operations - Mutual Funds in India - Private sector mutual funds Registration of Mutual Funds - Phases of Development - Structure of Indian Mutual Funds - Types of Schemes - Performance of Mutual Funds - Regulation regarding Mutual Funds - Merits of Mutual Funds - Limitations. In India, mutual fund came into being through the Unit Trust of India. UTI came into existence in 1964 and pioneered the concept of units in India. However, the first mutual fund scheme in the real sense of the term had to wait until 1986 when UTI introduced the Master Share. The response from the investors was splendid and its success heralded the birth of other mutual funds. Now mutual funds are operated by public sector organisation like the State Bank of India, PNB, Canara Bank, Bank of India, Indian Bank, LIC, GIC, ICICI and IDBI through their wholly owned subsidiaries and also by private sector operators such as the Alliance Capital, 20th Century finance etc. The latest entrant is the IDBI with a novel feature of safety net, whereby the original subscribers are assumed of protection of face capital value, in the case of the scheme faltering. There are about 20 operators, providing as many as 250 schemes. 50 schemes are quoted in stock exchanges, 90 schemes are repurchased while the rest are neither traded in stock exchange nor repurchased. Mutual funds are subject to stock market fluctuations, which is turn are caused by several factors. Objectives: The objectives of mutual funds are

To provide an investment opportunity for the investors, especially the small income group of people to
participate in the growing corporate securities market though not directly, but in an indirect manner.

To provide a return that is more than bank deposit rate, to the subscribers without corresponding rise in the level of risk. To mobilize the savings of the public and channel them into productive investments. To provide for different investment objectives like current return, capital appreciation, tax benefit or a mixture of these and To strengthen the capital market by adding the mutual and dimension to the same.

Worlds Leading Mutual Fund According to U.S. News and world report, Indias largest mutual fund. Unit Trust of India is far behind worlds leading mutual funds as is revealed from the following statistics. Mutual Fund Fidelity Vanguard Merrill Lynch American Funds Franklin Templeton Unit Trust of India Operations The mutual fund operation works this way. The mutual fund management designs a scheme with specified goal, viz, income, growth, tax off or mixture of these and floats the scheme after meeting the legal formalities thereto. The public are invited to subscribe to the scheme. Baring a handful of schemes, all other schemes just require a minimum exposure of Rs. 500, at present, per application. So many can participate in mutual fund schemes unlike public issues of shares requiring minimum exposure of Rs. 5000. The collected sum is invested, on behalf of the subscribers to the schemes, by there fund managers in corporate, money market and other securities. The capital gains realized by dealing in the securities and interest and dividend earned from the scrips are distributed or reinvested after meeting fund expenditures, subject to the nature of the fund. In an income scheme major portion of earnings is distributed as dividend on the units of the funds, while in the case of growth scheme, the earnings are mostly ploughed back.
Assets ($ in billion)

No. of Schemes 210 90 128 28 102 59

295.0 132.0 114.2 102.0 56.3 20.0

Mutual Funds in India In India, the only mutual fund operating for a long time since 1964 was the Unit Trust of India (UTI). It is an open-ended mutla fund, whose units can be sold and repurchased at any time. It is in the public sector enjoying a monopoly position and some unique tax benefits such as exception from income-tax of its entire income. UTI was alone in the field until 1987. Mutual Funds have been established since 1987 by the public sector banks following an amendment to the Banking (Regulations) Act in 1983, which empowered the RBI to permit the banks to carry on non-banking business such as leasing, mutual funds etc under section 6 of this Act. The growth of the mutual fund industry in India was very slow till the end of the 1980s, primarily due to government controls and over regulations of the financial services industry. Severe entry barriers restricted the growth of the mutual fund industry in terms of number of players, mobilization of savings and creating of assets. This was the Scenario till 1986-87. The mutual fund market in India was solely controlled by a single institution, namely Unit Trust of India which was formed by the Government of India under an Act of parliament. UTI commenced operations in July 1964, with a view to encourage savings and investment and participation in the income, profits and gains accruing to the corporation from the acquisition, holding, management and disposal of securities.Today there are three different types of players operating in the Indian market. UTI, non-UTI, Public Sector Mutual Funds and private sector mutual funds (including foreign mutual funds). Private sector mutual funds Performance of existing mutual funds promoted by nationalized banks had been viewed with interest and with the entry of private sector mutual funds, this industry is all set for explosion. Government allowed entry of private mutual funds in the country in 1992 buy none of the private mutual funds has commenced operations yet although SEBI has cleared a number of private mutual funds. The following have launched their mutual funds so far Kothari Pioneer Mutual Fund 20th Century Mutual Fund ICICI Mutual Fund IDBI Mutual Fund Morgan Stanley Growth Fund Alliance 1995 GIC Mutual Fund JM Mutual Fund SRF Mutual Fund Biria Mutual Fund ITC Threadneedle Mutual Fund IDBI Mutual Fund Templeton Mutual Fund Jardine Fleming Mutual Fund

Entry of private mutual funds has encouraged competition in the financial sector and improved the existing investment climate, both qualitatively and quantitatively. Many more companies, which have announced MF activities, are companies with proven tract record. The entry of private M.F. will also ensure better accounting standards, policies, disclosures and transparency in accounts and operations. Registration of Mutual Fund All mutual funds are required to obtain a certificate of registration from SEBI. The application shall be made by the sponsor in Form A alongwith a fee of Rs. 25,000. The application should be complete in all respects and must conform to the instructions specified in the form. The sponsor may be required to furnish further information or clarification or to appear personally before the Board, The Board shall consider the following aspects, before granting the certificate. The sponsor has a sound track record and experience of at least 5 years, professional competence, financial soundness and general reputation of fairness and integrity. Mutual Fund is in the form of a Trust and managed by an Asset Management Company (AMC) with a custodian to keep custody of the securities. Sponsor contributes at least 40% to the net worth of the AMC, and

The sponsor or any of its directors or the principal officer of the mutual fund has not been convicted of an offence.

If the board is satisfied, it shall grant a certificate in From B, subject to certain terms and conditions. The Mutual Fund shall pay the registration free of Rs. 25 lakhs. Besides, an annual service fee of Rs. 2.5 lakhs shall be payable for every financial year following the year of registration. If the mutual fund fails to pay the annual fee, the Board may prohibit it form launching an new scheme till the fees is remitted. If the applicant does not satisfy the requirement of registrations, the Board shall reject the application and communicate the order of rejection to the applicant. Appointment of a trustee A Mutual Fund shall be constituted as a trust under a registered trust deed the managed by a company to be appointed as Trustee or by a Board of Trustees. The appointment of a Trustee shall be subject to certain terms and conditions. Asset management company The application for approval of the AMC shall be made in Form D alongwith the Memorandum and Articles of Association. The sponsor or the trustee shall appoint an AMC approved by SEBI, to manage the affairs of the Mutual Fund. SEBI shall grant approval to an AMC after taking into account certain considerations and subject to certain conditions. The minimum net worth of an AMC shall be Rs. 10 crores. The AMC shall neither act as a Trustee of any mutual fund or as an AMC for any other mutual Fund, nor undertake any other business activity which is in conflict with the activities of the mutual fund. Custodian services The Mutual Fund shall have a custodian who is not associated with the sponsor or its associates. Schemes The schemes shall be announced by the AMC after approval of the Trustees and filing a copy of the offer document with SEBI. The draft particulars of the scheme, prospectus, letter of offer and relevant material shall be submitted to the SEBI for its approval alongwith a filing fee of Rs. 25,000. Any modifications required by the SEBI should be carried out. The letter of offer and other advertising materials should be in conformity with the advertisements code given under he regulations. Listing shall be compulsory for a close-ended scheme within 6 months. Except where the scheme provides for re-purchase facility. A closeended scheme may be converted into open-ended if the offer documents make disclosure for the same and a majority of unit holders give the consent to that effect. The maximum offering period for all schemes except equity linked saving schemes, shall be 45 days. In case the amount collected falls short of the minimum subscription amount, the entire amount should be refunded not later than six weeks fro the date of closure of the scheme. If this is not done, the fund is required to pay an interest of 15% p.a. from the date of expiry of six weeks. Investment The Mutual Funds can invest only in transferable securities in the money and capital market or any privately placed debenture or securitized debts. The investments should be made subject to certain restrictions such as Investments under all schemes do not exceed 10% of any companys paid-up capital carrying voting rights. Curbs on transfer of investments from one scheme to another, and inter-scheme investment or borrowing, Curbs on borrowings by a mutual fund to finance its investments. Besides, mutual funds cannot deal in option trading, short selling or carrying forward transactions in securities.

Account and reports The mutual funds are obliged to maintain books of account, expenses, appropriation of expenses among the individual schemes, the limit on expenses on the AMC that can be charged to the mutual fund, provision for depreciation and band debts. Mutual funds are under an obligation to publish schemewise annual report and half-yearly unaudited financial results, and furnish to SEBI annual report, audited annual statements of accounts, six monthly

unaudited accounts, quarterly statements of movements in net asset value and quarterly portfolio statement to SEBI. The mutual fund should ensure adequate disclosures to the investors. Inspection by the board SEBI is empowered to appoint one or more persons as inspection authority to inspect the mutual fund, the trustees, AMC and custodian. SEBI is empowered to appoint an auditor to investigate into the books of account or the affairs of the mutual fund. SEBI can order suspension of registration in case of violation of the provisions of the SEBI Act or the regulations. The penalty of cancellation of registration can be imposed in case of deliberate manipulation or price rigging or in the event of financial position of the mutual fund deteriorating. The Boards Adjudicating Officer may impose penalty for any offence under the SEBI Act. Besides, the Board may order suspension of any scheme of the Mutual Fund for a period upto one year. However, no order shall be passed without giving an opportunity of being heard. Phases of Development In our country the mutual fund industry has witnessed three interrelated stages of development in terms of entry of players. Phase I - July 1964 November 1987 Phase II November 1987 October 1993 Phase III October 1993 on wards Phase I This period was market by the operations of a single institution, UTI, which prepared ground for the future-mutual fund industry. The first decade of UTIs operatins (1964-74) was the formative period. The second phase of operations (1974-84) was one of consolidation and expansion. During 1984-87, innovative and widely accepted schemes were launched. UTI was one of the few organizations to prepare it self fully to face the emerging challenges. In the following years it launched all round diversification progarmmes through backward and forward integration in order to retain its position as the undisputed market leader. Phase II This period was marked by the entry of non-UTI public sector mutual funds in the market, bringing in competition. With the opening up of the economy, many public sector financial institutions established mutual funds in India. The mutual funds industry remained the exclusive domain of public sector in this period. The entry of public sector mutual funds created waves in the market and attracted small investors. The years 1992-93 and 1993-94 saw a decline in collections by the public sector mutual funds. There were two reasons behind the fall in collection. First, SEBI had prohibited mutual funds form launching any scheme with an assured income. Second, according to SEBI Mutual Funds regulation, 1993 Indian mutual funds were to form Asset Management Companies (AMC). However, since UTI was not under the purview of SEBI, it was not prohibited from launching schemes with assured incomes. Before 1989, there were no regulatory guidelines for the mutual funds industry in India. The first such guidelines for setting up and regulating mutual funds were issued by the Reserve Bank of India in October 1989, but they were applicable only to mutual funds floated by banks. Comprehensive guidelines were issued by the Government funds floated by banks. Comprehensive guidelines were issued by the Government of India in June 1990, covering all mutual funds and making them mandatory to be registered with SEBI. These guidelines were revised and the Securities and Exchange Board of India (Mutual Funds), Regulations, 1993 came into effect from 20 January, 1993. Rules for the formation, administration and management of mutual funds in India were clearly laid down. The regulations made the formation of AMC and the listing of close ended scheme compulsory. With a view to protecting investors rights, disclosure norms were also tightened. Another significant development during the period was the opening up of the mutual funds market to the private sector. Phase III A new era in the mutual fund industry began with the entry of private sector funds in 1993, posing a serious competition to the existing public sector funds. The new private sector funds have distinctive operational advantages. They are:

1. Starting of mutual funds has been easier for them because infrastructural inputs created by the public sector mutual funds were already available. 2. Private sector funds are able to attract the best managerial talents from the public sector. 3. Most of them are jointly floated by Indian organisation along with experienced foreign asset management companies, facilitating access to the latest technology and foreign fund management strategies. Between 1993 and 1995, further regulatory measures were introduced. Mutual funds are allowed to invest in money market instrument up to 25 percent of resources mobilized. The Government of India has allowed NRIs and Overseas corporate Bodies (OCBs) to invest in LTTI and other mutual funds (in both primary and secondary markets) on a fully repatriable basis, within the existing ceiling. The practice of reissuing of units of close ended schemes has been dispensed with. Mutual funds have been allowed to launch income schemes with assured returns for one year at a time. Mutual funds have been allowed to enter into underwriting activities to augment their resources. The practice of obtaining prior approval for advertising by mutual funds has been dispensed with. Mutual funds are allowed to buy-back their own units from the secondary market in case they are traded at a substantial discount to NAV. With effect from 1 December 1993, new issues have been allowed to reserve 20 per cent of public issue for mutual funds.

The formation and operation of mutual funds in India is solely guided by the Securities and Exchange Board of India (Mutual Funds) Regulation, 1993 which came into force on 20 January, 1993. The regulations have since been replaced by the securities and Exchange Board of India (Mutual Funds) Regulations, 1996, through a notification on 9 December, 1996. Structure of Indian Mutual Funds A mutual fund comprised four separate entities, namely sponsor, mutual fund trust, AMC and custodian. As per SEBI, Regulations, 1996, a mutual fund is to be formed by the sponsor and registered with SEBI. A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form a deed, duly registered under the provision of the Indian Registration Act, 1908, executed by the sponsor in favour of trustees named in such an instrument. Growth of Indian Mutual Funds Status and occupational classification of Mutual Funds, Investor in India are given in the following tables to understand the readers. Types of Schemes Mutual funds offer a variety of schemes to investors so as to provide steady income or growth or both. They differ according to the investment policies. The funds like individual investors, have different goals. If the investor, who will first ascertain has investment objectives, thinks that the units of a fund have an investment goal paralleling his objectives, then he will go for that specific type of fund. Mutual Funds are broadly classified into four categories viz., 1. On the basis of investments portfolio. 2. On the basis of function 3. On the basis of geographical areas. 4. On the basis of tax benefit On the basis of investment portfolio

On this basis mutual funds may be classified into income funds, growth funds, money market funds, leveraged funds, balanced funds, bond funds, stock funds, specialized funds, performance funds, multipurpose funds, real estate funds and specialty funds. Income funds/schemes: It seeks to maximize yearly income in the form of dividend distribution. Income schemes can be close or open-ended. In order to obtain regular flow of income, these funds invest around 70-80 percent assets in income generating securities such as debentures and bonds. Up to 31 March 1996, 62 income schemes had mobilized substantial per cent of the total funds of all schemes. Examples of this type of schemes are Unit scheme 95, Birla Income-Plus (I) Ind Jyothi B, MIP 96, Can stock. Growth Funds: Under these funds there is no guarantee or assurance of returns. The funds seek to achieve maximum capital appreciation and invest around 80 per cent in equities Growth schemes are usually close ended and listed in stock exchanges. By the end of March 1995, 55 Growth schemes had mobilized 18.4 percent of the total fund. Example of this include Ind Ratna, Grandmaster Canbonus, Apple Goldshare, ICICI Premier. Balanced Funds: Long term growth of both capital and income is the investment objective of these funds and it is sought to be attained through the purchase of bonds, preferred stocks and equity shares or common stock. They are termed balanced funds due to the policy followed by these funds in trying to balance portions of their investments portfolio among these different securities in some fairly constant proportions. Money market Funds: Money Market Funds are open-ended mutual funds that trade only in short term debt instruments. They mobilize savings from small investors and invest in short-term debt instruments like treasury bills, commercial papers, certificates of deposits, bankers acceptance and short-term loans. Small investors who are otherwise notable to invest in these instrument due to the minimum denomination factor can buy a portion of these through money market funds. They are also known as liquidity or liquid asset funds. Leveraged funds:They are also referred to as borrowed funds as they are used in order to increase the size of the value of a portfolio and thereby benefit the unit holders with gains exceeding the cost of borrowed funds. Bond Funds: Under this funds are generally invested in corporate and government bonds. Safety of principal, stable earnings and lower risk are the features of these funds. Stock Funds: It holds equity shares and convertible bonds as investments. Generally capital appreciation or good dividend is the sought goal. There is risk and hence probability of high return. Performance Funds: Performance funds holds investments in scrips of unseasoned companies with high P.E. ratios and also price volatility. It is a speculative type. Specialized Funds: Under this, funds are invested in a small group of concerns or industries. Risk is more due to negligible diversification. Multipurpose funds: Multipurpose funds invest in a wide spectrum of diverse nature of scrips so that growth, income, speculative benefits, leverage benefits, etc. can be reaped. Specially Funds: Specialty funds invest in goods track record companies which offer handsome growth and income opportunity. Real-estate funds: Funds are invested in real estate ventures. On the basis of function On the functional basis, mutual funds may be classified into open ended and close-ended fund. Open-ended: A mutual fund is said to be open-ended, if the period of the fund and the target amount of the fund are not defined as specified. The holders of the units in the fund can resell them to the issuing mutual fund organisatoin at any time. Open ended mutual funds can sell an unlimited number or units and thus keep going larger The open-ended mutual funds can repurchase their own units. The minimum corpus for an open ended mutual fund Rs. 50 crores as per SEBI guidelines. UTI US 64 and 95, can bank Mutual Funds Canganga, Kothari Pioneer Prima etc are open-ended funds.

Closed-ended: A mutual fund is said to be close-ended if the period of the fund and target amount of the found are definite and specified. Its size in terms of number of units is fixed. The minimum corpus for a close-ended fund is Rs. 20 crores. Canbonus, Mastershare are examples of close-ended funds. On the basis of geographical area On this basis mutual funds may be domestic or off-share funds. Most mutual funds are domestic and funds are mobilized within the country itself. Off-share mutual funds mobilize resources from foreign countries in foreign currency. UTI India Funds is the first off-shore fund-floated in 1986. Later India Growth Fund, Common wealth Equity Fund, were floated. Regulations regarding Mutual Funds 1. 2. 3. Mutual funds cannot deal in option reading trading, short selling or carrying forward transactions in securities. They can invest only in transferable securities in the money and capital market or any privately placed debenture or debt securities. Mutual funds are required to be formed as trusts and managed by separately formed asset management companies. the minimum net worth of the asset management company is stipulated at Rs. 10 crore out of which the minimum contribution of the sponsor shall be 40%. Restrictions to ensure that investments under all schemes do not exceed 10% of any companys paid up capital carrying voting rights. Curbs on the transfer of investment from one scheme to another and borrowing to finance investment. SEBI will grant registration to only those mutual funds which can prove an efficient and orderly conduct of business. Parameters for deciding this will include the tract record of sponsors, a minimum experience of five years in the relevant field of financial services, integrity in business transactions and financial soundness. The application forms for granting registration, seeking detailed information of the sponsor, trustees of the fund and the AMC. The advertisement code for marketing schemes of the mutual funds, the contents of the trust deed, investment management agreement and the schemewise balance sheet have to be in prescribed form. The mutual fund should have a custodian, not associated in any way with sponsor or its associates. In case the amount collected falls short of the minimum prescribed, the entire amount should be refunded not later than six weeks fro the date of closure of the scheme. If this is not done, the fund is required to pay an interest of 15% per annum from the date of expiry of six weeks. Listing shall be compulsory for a close-ended scheme within 6 months, except where the scheme provides for repurchase facility. A close-ended scheme may be converted into open-ended if the offer document makes disclosure for the same and a majority of unit holders give their consent to that effect.
The maximum offering period for all schemes except equity linked saving schemes, shall be 45 days.

4. 5. 6.

7. 8. 9. 10.

11. 12.
13.

14.

The mutual funds are obliged to maintain books of accounts, expenses, appropriation of expenses among the individual schemes, the limit of expenses of the asset management company that can be charged to the mutual fund, provision for depreciation and bad debts. Mutual funds are under an obligation to publish scheme-wise annual reports and half-yearly unaudited financial results, and furnish to SEBI annual reports, audited annual statements of accounts, six monthly unaudited accounts, quarterly statements of movements in net asset value and quarterly portfolio statement. The mutual fund should ensure adequate disclosures to the investors. SEBI is empowered to appoint an auditor to investigate into the books of accounts or the affairs of the mutual fund.
SEBI can impose suspension of registration in case of violation of the previsions of the SEBI Act, 1992 or the regulations.The penalty of cancellation of registration can be imposed in case of deliberate manipulation or price rigging or in the event of financial position of the mutual fund deteriorating.

15.

16. 18.
19.

17. SEBI is empowered to appoint one or more persons as inspecting authority to inspect the mutual fund.

20.

The SEBI may order suspension of any scheme of the mutual fund for a period upto one year. Mutual funds allowed to make rights issue The SEBI has decided to allow rights issues by mutual funds for close-ended schemes provided the existing unit holders are offered repurchase facility at net asset value (NAV) related price. Merits of Mutual Funds The following are the advantages of mutual fund schemes Safety of Principal Stable and fair return Risk reduction Diversified Portfolio Investors are relieved of he botheration of managing investments Board-basing of capital market Benefit of professional skill of fund managers Capital formation takes effect Small and pawn sophisticated investors can benefit from mutual fund Variety of scheme are available to choose from Some schemes have excellent liquidity and

Limitations Most Mutual fund schemes lack liquidity. Liquidity means ability to realize the asset in cash without loss of value and time. By this yardstick, most schemes are illiquid. The stock exchange quoted schemes also suffer liquidity since their prices are far below the published net assets value. mutual funds are subject to market fluctuations. The problem is, in a growing market, mutual funds grow less than the market, as it should not be. But in a declining market they slide down keeper than the market, which should not be case. It is reported, at any point of time, sellers outnumber buyers in the case of mutual funs. This is due to upward rigidity in a booming market and downward flexibility of mutual fund values in a bearish market. Mutual funds lack transparency. Safety net is not available, i.e. schemes quote below par value. Not all mutual funds are well managed.