How do Mutual Funds work?

Summary

In this video, Karthik Rangappa shares his personal journey in fund management and the lessons learned along the way. He reflects on his early experience managing money for families, including the challenges faced in obtaining a PMS license. The video introduces mutual funds as a large-scale money management service and explains how Asset Management Companies (AMCs) manage various mutual fund schemes to help clients achieve financial goals. The video also outlines the structure of an AMC, highlighting the roles of the fund sponsor, trustees, fund managers, and other key players. This serves as an introduction to mutual funds and their workings.

Takeaways

• 😀 In 2009, the speaker had trading experience and aspired to manage other people's money, which is a common goal for many new traders.
• 😀 The initial approach involved convincing people to open trading and demat accounts, where the speaker and his partner would manage the funds and invest them on behalf of clients.
• 😀 The process included understanding clients' financial goals and risk appetite, creating personalized portfolios for each client, and managing their investments.
• 😀 The arrangement involved a 10% management fee from the profits earned through investment, ensuring the speaker's incentive aligned with clients' financial growth.
• 😀 On the first Saturday of every month, the speaker would send detailed reports to clients on the activities and performance of their investments.
• 😀 The dream was to manage the finances of at least 100 families, but after being informed by a friend, the speaker learned about the requirement of a PMS (Portfolio Management Scheme) license by SEBI.
• 😀 Due to the inability to obtain the necessary license or network, the venture was shut down, ending the speaker's short experience with money management.
• 😀 The speaker shared this experience to highlight that there are various ways to manage funds, with mutual funds being one prominent option.
• 😀 Mutual funds are managed by Asset Management Companies (AMCs) that pool money from many investors and create diverse investment portfolios managed by fund managers.
• 😀 An AMC's structure includes a fund sponsor, a trust company, board of trustees, and an investment manager (AMC), who together ensure the proper management of mutual funds and compliance with SEBI regulations.

Q & A

What was the initial business model that Karthik Rangappa and his partner were trying to establish?

Karthik and his partner aimed to manage other people's money by helping them open trading and demat accounts, manage their investments, and provide regular reports on the portfolio's performance. They positioned themselves as professional fund managers and worked closely with clients to understand their financial goals and risk appetite.

Why did Karthik and his partner need to shut down their business venture?

Karthik and his partner had to shut down their venture because they were informed that the services they were offering fell under a Portfolio Management Scheme (PMS) as defined by SEBI. To continue providing such services, they would need a PMS license, which they were unable to obtain due to a lack of the necessary network.

What is the role of an Asset Management Company (AMC) in managing mutual funds?

An Asset Management Company (AMC) manages mutual funds by creating and overseeing different investment schemes. The AMC is responsible for managing the funds, ensuring compliance with regulations, and balancing the risk and return for investors. They appoint fund managers, analysts, and other professionals to run the mutual fund house.

How are mutual fund schemes structured?

Mutual fund schemes are structured as portfolios managed by fund managers. Each scheme is designed to match the financial goals and risk appetites of investors. The investor chooses a scheme based on their specific financial objectives, and the AMC oversees the management of the scheme's assets.

What is the significance of the fund sponsor in an AMC's structure?

The fund sponsor is the entity that expresses interest in starting an AMC. The sponsor sets up the trust, appoints the board of trustees, and ensures that the AMC operates in the best interest of its clients. The sponsor plays a key role in the governance and regulation of the AMC.

What role does the trust play in an AMC's structure?

The trust ensures that the AMC carries out its duties in the right spirit and in the best interests of the clients. It is formed by the fund sponsor and is responsible for overseeing the AMC's operations, ensuring that it adheres to all necessary regulations.

What is the role of the Chief Investment Officer (CIO) and fund managers within an AMC?

The Chief Investment Officer (CIO) and fund managers are responsible for the day-to-day management of the mutual funds. They decide on the investment strategies, asset allocation, and ensure that the funds are managed in line with the scheme's objectives and in compliance with regulatory guidelines.

What is an RTA (Register and Transfer Agent), and what services do they provide to an AMC?

An RTA is a service provider that manages the interaction between the AMC and the unit holders (investors). Their services include issuing folios, transferring units, and ensuring smooth communication between the AMC and its clients.

What does SEBI do in relation to the functioning of AMCs?

SEBI (Securities and Exchange Board of India) dictates the rules and regulations under which AMCs must operate. SEBI ensures that AMCs function transparently, comply with legal requirements, and protect the interests of investors.

What are the key differences between the services Karthik offered and those provided by a mutual fund?

Karthik's service was a personalized money management offering, where he worked with individual families to create tailored portfolios based on their specific needs. In contrast, a mutual fund, managed by an AMC, offers a standardized investment scheme for a broader group of investors, balancing risk and return to meet general financial goals.