EQUITY FUND MANAGEMENT – PROCESSES &

PRACTCES
(FUNDAMENTAL ANALYSIS)

Module I – BACKGROUND
Evolution of Mutual Funds in India

2
 Concept of Mutual Fund

• AMFI defines Mutual fund as “a trust that pools the savings of a

number of investors who share a common financial goal. The
money thus collected is then invested in capital market
instruments such as shares, debentures and other securities”

• The income earned through these investments and the capital

appreciation realized is shared by its unit holders in proportion
to the number of units owned by them.

3
Workflow of a Mutual Fund

4
 AUM Growth – Indian MFs

Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of
November, 2021 stood at ₹ 38,45,378 crores (Source: AMFI)

See Link: https://www.amfiindia.com/indian-mutual 5

Components of Mutual Fund Industry
in India

6
• Sponsor: The Sponsor is the main body that establishes the Mutual fund. The
Sponsor can be compared to a promoter of a company. The Sponsor(s) carry
out the process by approaching the SEBI for registration of a mutual fund and
provides the funding. For example, Standard Chartered Mutual Fund was
sponsored by Standard Chartered bank. Can bank Mutual Fund was sponsored
by Canara Bank in December 1987.

• Trustee: A Trustee holds the fiduciary responsibility of protecting the interest

of the investor. A trust is created by the fund sponsor in favour of the trustees,
through a document called a trust deed. The trust is managed by the trustees
and they are answerable to investors. They can be seen as primary guardians of
fund and assets.

• Trustees can be formed by two ways – a Trustee Company or a Board of

Trustees. The trustees work to monitor the activities of the Mutual Fund and
check its compliance with SEBI (Mutual Fund) regulations. They also monitor
the systems, procedures, and overall working of the AMC. Without the trustees’
approval, AMC cannot float any scheme in the market. Example, The Trustee for
Tata Mutual Fund is Tata Trustee Company Pvt. Ltd, the trustee at ABN AMRO is
ABN AMRO Trustee (India) Pvt. Ltd., the trustee at Benchmark mutual fund is
Benchmark Trustee company Private Limited
7
• Asset Management Company: The AMC consists of the fund managers who
manage the investments. The AMC takes multiple day to day decisions including
investments purchase, sales, computing net asset values, impact of corporate
actions, declaring dividend, providing investor information amongst others.

• A custodian is a financial institution that holds customers' securities for

safekeeping in order to minimize the risk of their theft or loss.
A custodian holds securities and other assets in electronic or physical form. The
custodian has the custody of the all the shares and various other securities
bought by the AMC. The custodian is responsible for the safe keeping of all the
securities. The custodian is liable for keeping the investment account of the
mutual fund. They also collect & track dividends & interests received on the
Mutual Fund investment.

• Registrar and Transfer Agent (RTA): The RTA maintains and updates all the
investors records. The main function is investor servicing through its office and
various other branches. Its functions includes processing of investor
application, purchase and redemption transactions by investors in various
schemes and plans.

8
 Example
• Sponsor - SBI

• Trustee - SBI MF Trustee Co. Pvt. Ltd.

• AMC - SBI Funds Management Pvt. ltd

• Custodian - HDFC Bank, CITI Bank, etc.

• Registrar & Transfer Agent - Computer Age Management Services Pvt.

Ltd.

• Another Example: http://portal.amfiindia.com/spages/sai3.pdf

9
 TYPES OF MUTUAL FUND

Customized products submit to approvals are launched by AMCs, recent

developments include Fund of Funds, AIFs, InvITs, REITs, etc.
10
Categories of Mutual Funds
SEBI Circular no. – SEBI/HO/IMD/DF3/CIR/P/2017/114

Equity
Schemes

Debt Hybrid
Schemes Schemes
Mutual
Funds

Solution
Other
oriented
Schemes
Schemes

11
 Sub-categories of Equity Schemes
1. Multi-cap Fund
2. Large-cap Fund
3. Large and Midcap Fund
4. Midcap Fund
5. Small-cap Fund
6. Dividend Yield Fund
7. Value Fund
8. Contra Fund
9. Focused Fund
10.Sectoral/Thematic Funds
11.ELSS, etc.

12
 Sub-categories of Debt Schemes
1. Overnight Fund
2. Liquid Fund
3. Ultra Short Duration Fund
4. Low Duration Fund
5. Money Market Fund
6. Short Duration Fund
7. Medium Duration Fund
8. Medium to Long Duration Fund
9. Long Duration Fund
10. Dynamic Fund
11. Corporate Bond Fund
12. Credit Risk Fund
13. Banking & PSU Fund
14. Gilt Fund
15. Gilt Fund with 10 years constant duration
16. Floater Fund
13
 Sub-categories of Hybrid Schemes
1. Conservative Hybrid Fund
2. Balanced Hybrid Fund
3. Aggressive Hybrid Fund
4. Dynamic Asset Allocation or Balanced Advantage Fund
5. Multi-Asset Allocation Fund
6. Arbitrage Fund
7. Equity Savings Fund

14
 Sub-categories of Solution-oriented Schemes

1. Retirement Fund
2. Children’s Fund

Sub-categories of Other Schemes

1. Index Funds/ ETFs

2. FOFs (Domestic/ Overseas)

15
 Advantages and Disadvantages of investing in a Mutual
Fund
Advantages:

• Professional Management
• Liquidity
• Economies of Scale
• Divisibility
• Government regulated industry
• Tax benefits in certain cases
• Diverse range of products to choose from
• Convenience of investment without skills & technical know-how, etc.

16
Advantages and Disadvantages of investing in a Mutual
Fund

Disadvantages:

• Risk: Like any other investment a mutual fund carries its own
inherent risk including market risk, interest rate risk, and credit risk
amongst others.
• Fluctuating Returns
• Excessive Diversification
• Costs
• Misleading Advertisements
• Performance Evaluation

17
 AMFI
• The Association of Mutual Funds in India (AMFI) is dedicated to developing the Indian
Mutual Fund Industry on professional, healthy and ethical lines and to enhance and
maintain standards in all areas with a view to protecting and promoting the interests of
mutual funds and their unit holders.
• AMFI, the association of SEBI registered mutual funds in India of all the registered Asset
Management Companies, was incorporated on August 22, 1995, as a non-profit
organisation. As of now, all the 42 Asset Management Companies that are registered with
SEBI, are its members.

• Objectives of AMFI
• Maintain high professional and ethical standards of industry
• To recommend and promote best business practices and code of conduct to be followed
• To interact and represent to SEBI on all matters concerning the mutual fund industry.
• To undertake nation wide investor awareness programme of mutual funds.
• To disseminate information on Mutual Fund Industry and to undertake studies and
research directly and/or in association with other bodies.
• To take regulate conduct of distributors including disciplinary actions (cancellation of
ARN) for violations of Code of Conduct.
• To protect the interest of investors/unit holders.
18
Organization structure within a fund management company

19
Fund Sponsor

The Fund Sponsor

▪ Any person or corporate body that establishes the Fund and registers it with SEBI.
▪ Form a Trust and appoint a Board of Trustees.
▪ Appoints Custodian and Asset Management Company either directly or
through Trust, in accordance with SEBI regulations.

SEBI regulations also define that a sponsor must contribute at least 40% to the net
worth of the asset management company.

20
Trustees

Trustees
▪ Created through a document called the Trust Deed that is executed by the Fund
Sponsor and registered with SEBI.
▪ The Trust-the mutual fund may be managed by a Board of Trustees- a body of
individuals or a Trust Company- a corporate body.
▪ Protector of unit holders interests.
▪ 2/3 of the trustees shall be independent persons and shall not be associated
with the sponsors.

21
Asset Management Company

▪ Acts as an invest manager of the Trust under the Board Supervision and direction
of the Trustees.
▪ Has to be approved and registered with SEBI.
▪ Will float and manage the different investment schemes in the name of Trust and
in accordance with SEBI regulations.
▪ Acts in interest of the unit-holders and reports to the trustees.
▪ At least 50% of directors on the board are independent of the sponsor or the
trustees.

22
Structure of Mutual Funds

⮚ Custodian
▪ Has the responsibility of physical handling and safe keeping of the securities.
▪ Should be independent of the sponsors and registered with SEBI.

⮚ Depositories
▪ Indian capital markets are moving away from physical certificates for securities to
‘dematerialized’ form with a Depository.
▪ Will hold the dematerialized security holdings of the Mutual Fund.

23
Distribution Channels

▪ Mutual Funds are primary vehicles for large collective investments,

working on the principle of pooling funds.
▪ A substantial portion of the investments happen at the retail level.
▪ Agents and distributors are a vital link between the mutual funds and
investors.

24
⮚ Agents

▪ Is a broker between the fund and the investor and acts on behalf of the
principal.
▪ He is not exclusive to the fund and also sells other financial services. This in a
way helps him to act as a financial advisor.

⮚ Distribution Companies

▪ Is a company which sells mutual funds on behalf of the fund.

▪ It has several employees or sub-broker under it.
▪ It manages distribution for several funds and receives commission for its
services.

25
⮚ Banks and NBFCs

▪ Several banks, particularly private and foreign banks are involved in a fund
distribution by providing similar services like that of distribution companies.
▪ They work on commission basis.

⮚ Direct Marketing

▪ Mutual funds sell their own products through their sales officers and
employees of the AMC.
▪ This channel is normally used to mobilize funds from high net worth
individuals and institutional investors.

26
Sales Practices

Agent Commissions
▪ No rules prescribed for governing the maximum or minimum commissions payable
by a fund to its agents.
▪ As per SEBI regulations, 1996 all initial expenses including brokerage charges paid
to agents cannot exceed 6% of resources raised under the scheme.
▪ Excess distribution charges have to be borne by the AMC.
▪ A no-load fund is authorized to charge the schemes with the commissions paid to
agents as part of the regular management and marketing expenses allowed by
SEBI.

27
 Role of Fund Manager

As an investor, when you choose to invest in a mutual fund, it involves building a

portfolio of securities. It is the fund managers who, based on research and analysis,
make the decisions about buying and selling. Your portfolio can be managed actively
or passively. If your portfolio is passively managed, it is based on an established
index, and the components are chosen by keeping in mind the underlying index. In
case of an actively managed portfolio, the fund manager picks the components of the
portfolio. These fund managers play a decisive role in the performance of active
mutual funds.

28
 Duties of a Fund Manager
Meeting the reporting requirements
• Mutual fund managers have to design funds keeping in mind the reporting standards
as per the regulatory guidelines.
• The building of a fund takes into account the objectives of the investors, the strategies,
risks, expenses and various policies.
• Fund managers are responsible for ensuring that the investors are aware and abide by
these details and rules.
• It is also the responsibility of the fund manager to make sure that all the documents
are furnished on time and following the laws and regulations.

Complying with Regulatory Authorities

• The operations of the funds must happen in line with the rules set out by the
governing bodies such as the Securities and Exchange Board of India, and other
relevant authorities.
• These regulations cover all aspects, starting from signing clients to handling the
redemptions.
• Fund managers are answerable to legislators and investors in case of non-compliance.
29
The Protection of Wealth

• The fund managers have to protect the wealth of investors.

• It is given that funds are subject to some risks to generate returns, but
they must not be subjected to reckless risk-assumption.
• The decision of the fund manager with regards to the buying or selling
of assets will be based on the extensive research and due diligence.
• To protect the wealth of the investors, the manager will, if need be,
employ investigations into the company in question, use risk
management techniques to evaluate the investments, and so on.
• To address risk, fund managers have to ensure that there is adequate
diversification in asset portfolios.

Monitor the growth and performance of the fund

• The fund managers will take a call as to where to invest, and these
decisions are governed by regulations, expectations and objectives of
the investors.
• The fund managers are judged based on how well their funds perform
and how they deliver growth that is above the interest rates and
inflation rate.
• This justifies the risk they take for investing.
30
⮚ Oversight and Hiring
With the responsibility of managing funds being extensive, fund managers have to
get assistance from various professionals and even firms in order to deliver.
Specific duties like issuing annual reports, getting capital, negotiating with
brokers, and so on, are outsourced. This way, the fund managers can transfer some
of the regulation related responsibilities to a third party. But ultimately it is still
the fund manager alone who is responsible for how the funds fare.

31
How to evaluate a Fund Manager?
Fund managers are critical for the selection and performance of your funds, and so
you must consider certain things when evaluating a fund manager. Most experienced
investors pay attention to the manager and their fund management team. One can
differentiate between a good fund manager and an average one by looking at such
factors as:

a. Has the fund manager succeeded in outperforming the benchmark in perpetuity?

b. Does the manager keep track of the other institutional investors’ (DII or FII)
buying and selling of stocks?
c. Are they experienced?
d. Are they able to identify scripts way ahead of their peers?

32
 How do fund managers decide where
to invest?
Apart from the comprehensive knowledge on the subject and far-reaching
insights, fund managers gather invaluable insights from their research team.
Some other considerations include:
a. They check for the shifts in the stock market to analyse the volume of the
shifts
b. An analysis of the competition in the industry plays an equally vital role to
gauge the macroeconomic outlook
c. A thorough review of the annual results of the companies that the fund
manager intends to invest in
d. Finally, all the information mentioned above is weighed along with the
experience of the top managers and directors before making investing
decisions

33
Investing in mutual funds is subject to market risk. Not having the insights to
pick the right fund or fund manager can be a costly affair.

Change of fund manager should not be the sole reason to switch or redeem from
one fund or fund house to another. The expense ratio of a fund and composition
of the portfolio a fund holds are other significant factors that may impact your
returns.

At last, a mutual fund is a tool for wealth creation and should not be judged in the
short run as it usually reaps benefit only in the long term.

34