Wednesday, 27 October 2021

How to establish mutual funds and what are the benefits of investing in mutual funds?

 In order to establish a mutual fund, there is need for the registration with the Securities and the Exchange Board of India before collecting the fund from the public. A similar set of regulations are governing the mutual funds and all the mutual funds are subject to inspection and monitoring by SEBI.

There is always a need for the sponsor in order to establish the mutual funds. The sponsor needs to be a corporate who either alone or after combining with another corporate can establish a mutual fund after completing all the formalities which are prescribed in the Mutual fund regulations by SEBI.

The role of sponsor in the process of the establishment of the mutual fund is like a promoter who provides the initial investment and helps in appointing the trustee. The sponsor for the establishment of the mutual fund requires being a corporate in the business of financial services for minimum 5 years and should be financially sound and be fit in the eyes of SEBI.

The mutual funds can be established either as a trustee or as a trust which lies under the Indian Trust act and the trust should be in the form of a deed. The deed shall be executed by the sponsor in favor of the trustee named in the instrument of trust. The trust deed needs to be duly registered under the provision of the Indian registration Act, 1908. It should contain the clauses which are specified in the third schedule of the regulations.

The SEBI approve the asset management company who further manage the affairs of the mutual funds and it requires operating the multiple schemes of such funds. One can establish the asset management company as a Limited Liability company with the minimum net worth of not less than 10 crores.

The sponsors need to contribute at least 40% to the net worth of the Asset Management Company. The Trustee requires holding the Mutual Fund’s property in trust for the benefits of the unit holders.

AS per the SEBI regulations, at least 2/ 3 of the board of Trustees or the directors of the Trustee Company should not be associated with the Sponsors. And, the 50% of the AMC also requires being independent.

Also, the mutual fund needs to appoint a custodian as well in order to hold the valid certificate of registration which is issued by SEBI for having the custody of the securities held by the mutual funds under different multiple schemes. And, in the case of dematerialized securities, this can be done by the Depository Participants. Also, the custodian requires being independent from the sponsors and the AMC.

What are the advantages of investing in the mutual funds?

Following are some of the advantages of investment in the mutual funds:

Professional management:

The best part of the mutual fund investment is that these funds are managed by top professionals and highly skilled managers along with the research team as well.

Mutual funds

There is feature of diversification in portfolio which helps in reduction of the risks.

Convenient administration

The mutual funds carries no risk associated with the administrations of the share transfers and also, many of the mutual funds provides the features of the services in the form of Demat which is helpful in saving much of the time as well as efforts of the investors.

Better returns

This is the main advantage of the mutual funds which inspires investors and many mores to invest in mutual funds. All the medium as well as the long term mutual fund investment plans often provides the investors with the high returns in compare to all other investment methods. And, from last multiple years, Mutual funds have been performing well and is providing the investors with the higher returns and better investment options.

However, despite of their general excellent performance, the investor’s needs to cautioned as more the chances of the returns, more will be the chances for the risk as well. Thus the investors require to be cautioned that these high returns riding on the IT boom should not be taken as regular returns. There is need that they should look at their average returns which are provided by the mutual funds particularly in the equity schemes during the last couple of years.

Low management cost

The mutual funds are not allowed to increase their cost beyond the prescribed limit which is 2.4% and any extra cost of management is to be borne by the AMC.

Liquidity

In most of the open ended funds, the liquidity is provided by the repurchase or the direct sales by the mutual funds. And, in the case of the close ended funds, the liquidity is provided by listing the units on the stock exchange.

Transparency

As per the SEBI regulations, Mutual funds need to comply them and requires disclosing their entire portfolio on the half yearly basis. However, several mutual funds used to disclose their portfolio on the quarterly or even the monthly basis as well.

Highly regulated

All over the world, mutual funds are highly regulated, and in India, it is regulated by SEBI and as per the strict Mutual fund Regulation which is helpful in providing excellent protection to the investors.

Other benefits

Mutual funds are great option for the investment where the investors can get the regular withdrawal and the systemic investment plans as well as per the requirement of the investors. Also, the investors are allowed to switch from one scheme to another without any load.

The bottom line

So this is how to establish mutual funds and what are the advantages of investing in mutual funds!

 

   

 

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