CHAPTER 2:
Mutual Funds -
Structure and
Constituents
PREPARED BY :
ANTONETTE C. LAZARO
CHRISTINE MARIE A. BAUTISTA
CRISHEL AN C. ZUELA
NOELYN MAE F. TOMACA
DARLENE F. SALSONA
Learning Outcomes:
At the end of the lesson, the students will be able to
discuss the following:
Constituents and structure of a mutual fund
Mutual funds in the USA and elsewhere.
Difference between a mutual fund and a commercial
bank
Parties to Mutual Funds
Trustees
AMC Distributors
Entities involved
Sponsors in Mutual Funds
Registrars
Custodian/
Investors
Depositors
INVESTORS
A mutual fund is a solution for investors who lack the time,
inclination, or skills to actively manage their investment risk in
individual securities. They delegate this role to the mutual fund
while retaining the right and the obligation to monitor their
investment in the scheme.
SPONSORS
Sponsors is the company, which sets up the Mutual Fund as
per the provisions laid down by the Securities and Exchange
Commission. SEC mainly fixes the criteria of sponsors based on
sufficient experience, net worth, and past track record.
Asset Management
Company (AMC)
Manages the funds of the various schemes
Comes out with new schemes periodically
Plays a key role in the running of the mutual fund
Operates under the supervision and guidance of
the trustees
Income comes from management fees
• Calculated as a percentage of net assets
managed
Guidelines for the for mation
of AMC:
Headed by the independent non-interested and non-executive
chairman
M a n a g i n g d i r e c t o r a n d o t h e r e x e c u t i v e s t a ff s h o u l d b e f u l l - t i m e
employees
50% of the board of trees should be outside directors who are not
connected with the bank
Board of Directors shall not be entitled to any remuneration other
than the sitting fees.
AMC will not be permitted to conduct other activities such as
merchant banking or issue management.
TRUSTEES
Important link in the working of any mutual fund
Responsible for ensuring that investors’ interest in a
scheme is taken of properly
• Constant monitoring of the operations of the
various scheme
• Paid trustee fees, which are charged to the
scheme
DISTRIBUTORS
Earn a commission for bringing investors into the schemes
• Commission is an expense
D i stri butors ea rn a commi ssi on from the A MC .
REGISTRARS
Tr a c k s i n v e s t o r s ’ h o l d i n g i n m u t u a l f u n d s c h e m e
R e g i s t r a r a n d Tr a n s f e r A g e n t ( R & T )
Maintains an account of investors’ investment and
disinvestment from the schemes
CUSTODIAN /
DEPOSITORY
Maintains custody of the securities in which the scheme
invests
Ensure an ongoing independent record of the investment of
the scheme
Types Of Mutual Funds Schemes
Mission
INSTITUTIONS
COMMERCIAL BANK MUTUAL FUND
o Accepts both demand and time deposits o Obtains funds through sales of shares and uses proceeds
o Offers interest-earning savings accounts against which to acquire bonds and stocks.
checks can be written o Creates a diversified and professionally managed
o Offers money market deposits accounts, which pay portfolio of securities to achieve a specified investment
interest at rates competitive with other short-term objective
investment vehicles o Thousands of funds, with a variety of investment
o Makes loans directly to borrowers or through the objectives
financial market. o Money markets funds provide competitive returns with
very high liquidity.
SECURITIES FIRM INSURANCE COMPANY
o Provides investment banking services by helping firms o The largest type of financial intermediary handling
to obtain funds individual savings
o Provides brokerage services to facilitate the sales of o Receives premium payments and places these funds in
existing securities loans or investments to cover future benefit payments
MUTUAL FUND
IN USA
AND ELSEWHERE
MUTUAL FUNDS
A mutual fund is a common pool of money into which investors
p l a c e t h e i r c o n t r i b u t i o n s t h a t a r e t o b e i n v e s t e d i n d i ff e r e n t
types of securities in accordance with the stated objective.
An equity fund would buy equity assets – ordinary shares,
preference shares, warrants, etc.
A bond fund would buy debt instruments such as debenture
bonds, or government securities/money market securities.
A balance fund will have a mix of equity assets and debt
instruments.
Mutual Fund shareholder or a unit holder is a part owner of the
f u n d ’s a s s e t .
Myths about Mutual Fund
1. Mutual Funds invest only in shares.
2. Mutual Funds are prone to very high risks/actively
traded.
3. Mutual Funds are very new in the financial market.
4. Mutual Funds are not reliable and people rarely invest
in them.
5. The good thing about Mutual Funds is that you don’t
have to pay attention to them.
Facts about Mutual Fund
Equity Instruments like shares are only a part of the securities held by
mutual funds. It also invests in debt securities which are relatively much
safer.
Mutual Funds are there in India since 1964. The mutual funds market
has evolved in the U.S.A and is there for the last 60 years.
Mutual Funds are the best solution for people who want to manage
risks and get good returns.
The US is very much part of the market and is not immune to its
vagaries. The crisis has risen due to mismanagement of the fund.
The USA is the largest mutual fund industry. It has an amount of $ 18.9
trillion. Mutual fund assets worldwide is approximately $ 40.4 trillion.
A CYCLIC PROCESS
CAN YOU BUY A FUND FROM
ANOTHER COUNTRY?
A mutual fund from another country is not
the same as a global fund or
international fund. A global fund invests in
assets from around the world, including the
investor's home country. Meanwhile, an
international fund includes the entire world
except for the investor's home country. Both
of these funds still have to be registered with
the SEC before U.S. investors could buy
them.
COMMON TRAITS OF ALL
MUTUAL FUNDS
All mutual funds pool the many smaller deposits
of individual investors so they can make large
purchases in stocks or bonds.
Most mutual funds are available to both the retail
clients (individual investors) and institutional
clients (large companies, foundations, etc.).
There is usually a wide selection of funds, both by
company and style in each country, including a
good variety of stock, bond, money market and
balanced funds (blends of stocks and bonds in
the same fund).
COMMON TRAITS OF ALL
MUTUAL FUNDS
Another commonality among mutual funds throughout the
world is that every major economy has specific rules
pertaining to the registration, marketing, and sale of funds.
The mutual fund industry is a highly regulated space, but
those regulations differ by country or region. Regulations are
in place to protect the consumer; this helps to ensure that
asset managers are keeping the interests of the investor
above their own and that the investor does not get taken
advantage of. It is very important that the investor feels
confident that the proper authority is monitoring the industry
as a whole so that they will entrust their savings to a mutual
fund. If investors lacked confidence, the industry would likely
falter.
DIFFERENCES AROUND THE GLOBE
The U.S. Market
All mutual funds marketed to U.S. retail investors must be
registered with the SEC and must abide by the rules set forth
under the Investment Company Act of 1940, commonly
referred to as the '40s Act. Some of the rules under the '40s
Act deal with diversification issues. Specifically, Section 12
limits the amount of fund assets that can be invested in other
investment companies. In other words, the rule prohibits a
mutual fund from concentrating too many of its holdings in the
stock of an investment company.
DIFFERENCES AROUND THE GLOBE
The European Union
o Mutual funds authorized for sale in Europe are governed by regulations from the
Undertakings for Collective Investment in Transferable Securities, or UCITS. The most
recent iteration of the rules is called UCITS III, which differs from the previous rules by
paying more attention to the risk monitoring of derivative positions. The rules cover
many areas, but like the 1940s Act some deal with making sure the fund does not
concentrate its holdings to ensure diversification.
o To market your fund across all member countries of the European Union, you need
only register your fund in one EU country under the authority of that country's financial
regulator. For example, in Ireland, it is the
Irish Financial Services Regulatory Authority. In turn, the IFSRA is part of the
Committee of European Securities Regulators, which is in charge of coordinating the
securities regulators of all the EU countries.
DIFFERENCES AROUND THE GLOBE
The Hong Kong Market
Hong Kong's rules are the most restrictive. There are two fund governing bodies in the
Hong Kong market:
Securities and Futures Commission (SFC) - The SFC's rules are broader and not as
specific or restrictive as the rules set for by the MPFSA. They apply to all funds marketed
in Hong Kong, no matter what type of mutual fund they are.
Mandatory Provident Fund Schemes Authority - This rule only governs funds that
are marketed for use in the retirement accounts of its residents. The MPFSA's rules are
more restrictive partly because the authority wants to make sure that the nest eggs of its
residents are protected and not invested in funds of a speculative nature. The MPFSA
takes compliance with its rules very seriously. Some of the more restrictive rules deal with
unrated, or below-investment-grade, securities, and unlisted securities. The MPFSA
requires that bond mutual funds sell bonds that have been downgraded below investment
grade, even if they were investment grade at the time of purchase.
DIFFERENCES AROUND THE GLOBE
Other Markets
o Markets other than the three mentioned above, have their own structure and
regulations. In Canada, for example, mutual funds are subject to provincial
securities laws as well as national rules known as NI 81-102. The NI stands for
"National Instrument." For example, dealers who sell mutual funds must be
registered with the securities regulator of their province, while the mutual fund
asset manager must ensure that the fund they manage abides by the NI 81-102
rules.
o Another market that is currently opening up to outside fund managers is Taiwan.
In Taiwan, the regulator is the Financial Supervisory Committee (FSC). There are
only about 20 rules specific to mutual funds marketed in Taiwan, but this is still an
evolving market.
THE DIFFERENCE
BETWEEN A MUTUAL
FUND AND A COMMERCIAL
BANK
Are Mutual Funds Offered by
Banks?
Banks are in the business of savings and loans while
Mutual Funds are for investments. When you put your
money in a savings account or in a fixed deposit, you are
making savings whereas when you put your money in
Mutual Funds, you are making investments. Banking and
Mutual Funds are two completely different businesses,
requiring specific domain and organizational expertise.
Banks are governed by RBI while Mutual Funds are
regulated by SEBI. If some corporate wants to be in the
business of banking and Mutual Funds, it must seek
separate license permits from the respective regulators and
run these two businesses as different companies.
What Is a Commercial Bank?
The term “commercial bank” refers to a
financial institution that accepts deposits, offers
checking account services, makes various loans, and
offers basic financial products like
certificates of deposit (CDs) and savings accounts to
individuals and small businesses. A commercial bank
is where most people do their banking.
Commercial banks make money by providing and
earning interest from loans such as mortgages, auto
loans, business loans, and personal loans. Customer
deposits provide banks with the capital to make these
loans.
Mutual Fund Vs. Commercial Bank
Usually have tellers, sales associates, trust
A mutual fund is a professionally managed
officers, loan officers, branch managers, and
type of collective investment scheme that
technical programmers. You find many
pools money from many investors and invests commercial banks in your town operating as local
businesses.
it in stocks, bonds, short-term money market
Commercial banks give loans, take deposits, and
instruments, and/or other securities.
provide other account and banking services for
their customers. These banks also offer services to
small and medium-sized businesses, such as
business loans and lines of credit.
The difference between a Mutual
Fund and Commercial Bank
are in the business of savings and
loans while Mutual Funds are for
investments. When you put your
money in a savings account or in a
fixed deposit, you are making savings
whereas when you put your money in
Mutual Funds, you are making
investments.
REFERENCES:
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cture-and-constituentspdf#18
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n-mutualfunds
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u a l + f u n d + i n d u s t r y & e i = E Y d l Z P _ c A t _ s 2 r o P u d K E k AY & o q = & g s
_lcp=Cgxnd3Mtd2l6LXNlcnAQARgBMhkIABCKBRDqAhC0Ah
CKAxC3AxDUAxDlAhgBMhkoAEBsAEUwAEB2gEECAEYB9o
BBggCEAEYCg&sclient=gws-wiz-serp
h t t p s : / / w w w. g e e k s f o r g e e k s . o r g / c o m m e r c i a l - b a n k s -
advantages-and-disadvantages/
Thank
You!
