Theme: Organizational aspects and procedure of mutual funds

History of Mutual Funds
The first modern investment funds, the forerunner of mutual funds, were established in the Republic of the Netherlands. In response to the financial crisis of 1772–1773, Amsterdam businessman Abraham (or Adrian) van Ketwich created a trust called Eendragt Maakt Magt ("unity makes strength"). Its purpose was to give small investors an opportunity to diversify.
Mutual funds were introduced in the United States in the 1890s. Early US mutual funds were typically closed-end funds with a fixed number of shares traded at prices above the portfolio's net asset value. The first open-end mutual fund with redeemable shares was founded on March 21, 1924 as Massachusetts Investors Trust, which still exists today and is managed by MFS Investment Management.
In the United States, closed-end funds became more popular than open-end funds in the 1920s. In 1929, open-ended funds accounted for only 5 percent of the industry's $27 billion in total assets.
After the Wall Street Crash of 1929, the United States Congress passed a number of laws regulating the stock markets, particularly mutual funds.
The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the SEC and that they provide prospective investors with a prospectus that discloses important facts about the investment. does.
The Securities Exchange Act of 1934 requires issuers of securities, including mutual funds, to make regular reports to their investors. The act also created the Securities and Exchange Commission, the primary regulator of mutual funds.
The Revenue Act of 1936 established guidelines for the taxation of mutual funds. This allowed mutual funds to be treated as a flow-through or pass-through entity to investors liable for income tax.
The Investment Company Act of 1940 established rules governing mutual funds.
These new rules encouraged the development of open-end mutual funds (as opposed to closed-end funds).
Growth in the US mutual fund industry remained limited until the 1950s, when confidence in the stock market returned. In the 1960s, Fidelity Investments began selling mutual funds to the public, not just to wealthy individuals or those working in finance. In the high interest rate environment of the late 1970s, the introduction of money market funds dramatically increased the growth of the industry.
The first retail index funds appeared in the early 1970s and focused on average market returns rather than detailed company-by-company analysis like earlier funds. Rex Sinquefield offered the first S&P 500 index fund to the public beginning in 1973 while working at American National Bank in Chicago. The Cinquefield Foundation had $12 billion in assets after its first seven years. John "Mac" McQuown also started an index fund in 1973, but it was part of a larger pension fund managed by Wells Fargo and not publicly available. Batterymarch Financial, a small Boston firm where Jeremy Grantham worked at the time, also offered index funds beginning in 1973, but it was such a revolutionary concept that they did not pay clients for over a year. John Bogle was another early pioneer of index funds with First Index Investment Trust, founded by The Vanguard Group in 1976; it is now called "Vanguard 500 Index Fund" and is one of the largest mutual funds.
Since the 1980s, the mutual fund industry has entered a period of growth. According to Robert Posen and Theresa Hamacher, growth is the result of three factors:
A bull market for stocks and bonds,
Introduction of new products (including funds based on municipal bonds, various industries, international funds and target date funds) and
Wider allocation of fund shares. Among the new distribution channels were pension plans. Mutual funds are now the preferred investment option in certain types of retirement plans that became popular in the 1980s, particularly 401(k), other defined contribution plans, and individual retirement accounts (IRAs).
The mutual fund scandal of 2003 involved unequal treatment of fund shareholders, whereby some fund management companies allowed preferred investors to schedule prohibited late trading or market timing. This scandal was exposed and regulated by former New York Attorney General Eliot Spitzer
A strong financial market with funds from retail investors is essential for a developed economy. The first mutual fund was established in 1963 by the Unit Trust of India (UTI) as an initiative of the Government of India and the RBI to increase savings and investments. Participation in the income, profits and gains from the acquisition, custody, management and disposal of securities by UTI has been made available to retail investors.
First Phase: In 1978, UTI was separated from RBI and IDBI took over the regulatory and administrative control of UTI.
Second Phase: SBI Mutual Fund was the first non-UTI mutual fund launched in June 1987, followed by Can bank Mutual Fund (December 1987), PNB Mutual Fund (August 1989), Bank of India (November 1989), Bank. of India (June 1990) and Bank of Baroda Mutual Fund (October 1992).
Third Phase: The erstwhile Kothari Pioneer (now merged with Franklin Templeton MF) became the first private sector MF to register in July 1993. In 1993, private sector mutual funds entered the fray in the Indian MF industry, ushering in a new era for Indian investors. A diverse selection of MF products.
Fourth Phase: In February 2003, the UTI Act, 1963 was repealed and UTI was divided into two separate entities viz. Prescribed Obligation of Unit Trust of India (SUUTI) and UTI Mutual Fund operating under SEBI MF Regulations, 1996.
Fifth phase since 2012: Noting the lack of penetration of mutual funds, especially in tier-II and tier-III cities, and taking into account the interests of various stakeholders, SEBI in September 2012 launched a plan to revive sluggish Indian mutual funds. initiated a number of positive measures. Financing the industry and increasing the penetration of MFS in remote corners of the country.
Advantages
Increase Diversification: The Fund will diversify by holding many securities. This diversification reduces risk.
Daily Liquidity: In the United States, mutual fund shares can be bought for their net asset value within seven days, but the actual redemption is often much faster. This liquidity can create asset-liability mismatches, creating challenges that partially triggered the SEC's liquidity management rule in 2016.
Professional investment management: Open-ended and closed-end funds hire portfolio managers to oversee the fund's investments.
Opportunity to participate in investments available only to large investors. For example, individual investors often find it difficult to invest directly in foreign markets.
Service and Convenience: Funds often provide services such as check writing.
Government Regulation: Mutual funds are regulated by a government body
Transparency and ease of comparison: All mutual funds are required to provide investors with the same information, making it easy to compare them with each other.
Disadvantages
Mutual funds also have disadvantages, including:
Payments
Less control over the timing of revenue recognition
Less predictable income
There is no customization option
Regulation and performance
United States
The main laws governing mutual funds in the United States are:
The Securities Act of 1933 requires that all publicly traded investments, including mutual funds, register with the SEC and that they provide potential investors with a prospectus that discloses important facts about the investment.
The Securities Exchange Act of 1934 requires issuers of securities, including mutual funds, to make regular reports to their investors; the act also created the Securities and Exchange Commission, the primary regulator of mutual funds.
The Revenue Act of 1936 established guidelines for the taxation of mutual funds. Mutual funds are exempt from taxation on their income and profits if they meet certain requirements under the US Internal Revenue Code; Instead, taxable income is passed on to investors in the fund. Funds are required by the IRS to diversify their investments, limit ownership of voting securities, distribute a large portion of their income (excluding dividends, interest, and losses) to investors each year, and invest a large portion of their income in securities. and requires to receive funds. currencies. The description of the fund's income does not change when it is paid out to shareholders. For example, when a mutual fund distributes dividend income to its shareholders, the fund's investors report the distribution as dividend income on their tax returns. As a result, mutual funds are often referred to as flow-through or pass-through vehicles because they pass income and related tax liabilities to their investors.
The Investment Company Act of 1940 sets the rules governing mutual funds. The main focus of this Law is to disclose to the investing public information about the fund and its investment objectives, as well as the structure and activities of the investment company.
The Investment Advisers Act of 1940 sets the rules governing investment advisers. With certain exceptions, the Act requires firms or individuals that receive compensation for advising others on securities investments to register with the SEC and comply with rules designed to protect investors.
The National Securities Markets Improvement Act of 1996 gave the federal government the power to make rules, bypassing state regulators. However, states have the authority to investigate and prosecute investment fund fraud.
Mutual funds are controlled by a board of directors if organized as a corporation or a board of trustees if organized as a trust. The board must ensure that the fund is managed in the interests of investors. The board hires the fund manager and other fund service providers.
A sponsor or fund management company, often called a fund manager, sells (buys and sells) the fund's investments in accordance with the fund's investment objective.
Mutual funds also have different terms for the sale and purchase of shares.
Open funds
You can buy and redeem their shares every business day. The money for the redeemed units will not be credited to your account immediately, but after a few days.
Exchange-traded funds
Units of such funds are traded on the stock exchange, like shares and other securities. You can buy or sell them at any time during the days of the exchange.
Interval funds
You can buy and sell their shares only at specific intervals - usually several times a year.
Closed funds
You can buy shares only when the fund is formed, and sell it only when the fund is closed.
Open funds invest, as a rule, in liquid assets, that is, in those that can be quickly sold at a fair price. For example, in securities for which there is always a demand.
Exchange-traded funds usually repeat the structure of one of the exchange indexes, for example, the government bond index of the Moscow Exchange or the RTS index. That is, they invest in the same assets and in the same proportion as in the selected index. These are always the most liquid instruments that can be sold instantly on the exchange. You can read more about the features of these mutual funds in the article “Exchange-traded funds, or ETFs: what is it and is it worth investing in them”.
Interval and closed-end funds invest money in less liquid assets. There are more risks, but the profits can be larger.
What are the advantages of mutual funds?
Availability
The initial amount of investments in the fund can be small - at least 1000 rubles.
Professionalism
Your money is managed by investment experts.
Likely high income
The profit from investments in the fund may be greater than the income on the deposit.
Low costs
If we compare investments in mutual funds with independent investment, the costs are lower. A mutual fund, as a large investor, has more favorable conditions for managing funds.
Liquidity
Units of open funds can be sold at any time without additional losses.
Preferential taxation
You do not need to pay income tax with an increase in the value of the assets of a mutual fund. Income tax (personal income tax) will have to be paid in three cases: if you invested in a mutual fund before 2014, or earned more than 3 million rubles a year on shares, or sold them earlier than three years after the purchase.
How much does a share cost?
The share price changes every day and directly depends on the value of the assets in which the funds are invested. The goal of the management company is to invest your money in such a way that this value is constantly growing. It is the increase in the share price that will bring you income when you decide to sell your shares.
When buying shares, you also pay a premium, in fact, a commission. Its maximum size can be up to 1.5%, depending on the amount of investments and on the agent through which you buy. And when selling a share, its price is considered at a discount. It depends on the period of ownership of the shares and the conditions of the agent through which you redeem the share, but does not exceed 3% of the total value.
Example:
You have decided to invest 100,000 rubles in a mutual fund. The cost of a share is 1000 rubles, and the premium is 1%. As a result, you buy one share at a price
1000 × 1.01 = 1010 rubles
and get 100,000 / 1010 = 99 shares.
A year later, you decide to redeem the shares, that is, to withdraw the money. Share during this time has risen in price to 1326 rubles 4 kopecks. With a 1% discount, you will sell your 99 units for
99 × 1326.4 × 0.99 = 130,000 rubles.
Your income will be:
130,000 - 100,000 = 30,000 rubles.
What tax must be paid on this income?
It depends on when you bought the shares, how quickly you decided to sell them and how much you earned from them.
If you bought shares of open mutual funds after January 1, 2014, owned them for more than three years and the income received was less than 3 million rubles a year, you do not need to pay personal income tax.
In other cases, you will have to deduct tax, the amount of which will depend on your total income for the year. If you earn, including on investments, up to 5 million rubles, personal income tax will be 13%. From the amount of income that turns out to be more than 5 million rubles, it will be necessary to deduct 15% to the tax. You can read more about the personal income tax rate in the text “What taxes does an investor pay”.
Let's assume that your income for the year turned out to be within 5 million rubles, and we will continue the previous example:
Your tax will be
30,000 × 13% = 3900 rubles.
As a result you will get
130,000 - 3900 = 126,100 rubles.
For the year, the actual return after taxes will be
(126,100 - 100,000) / 100,000 = 26%.
Suppose you redeem the shares not in a year, but in 3 years and receive 190,000 rubles upon sale. Income in the amount of 90,000 rubles is not taxed. And your actual return will be
(190,100 - 100,000) / 100,000 = 90%
for 3 years, or an average of 30% per year.
Where can I buy and sell shares?
You can buy shares directly from the management company, from an agent organization (most often it is a bank) or through a broker on the stock exchange. In the same way, you can sell shares.