This article is written by Richa Singh of Faculty of Law, Aligarh Muslim University. In this article, she has discussed the meaning of mutual funds and its working in India along with the regulations by which it is managed in the country.
The Indian industry of mutual funds is evolving continuously. There are several Indian industries bodies which are investing in investor education. Investing in Mutual funds is still considered a risky option. The types of mutual fund options available to an investor make it one of the most flexible and comprehensive investments that are helpful for the people who are willing to invest.
The regulations of RBI and SEBI on mutual funds make it a safer option to maximize your profits and invest money in something useful.
Concept of mutual funds in India
The name itself suggests that a ‘Mutual fund’ is like an investment channel that helps several investors to combine their resources to purchase stocks, bonds, and other securities for their earnings.
These combined funds which are referred to as Assets Under Management (AUM) are then invested in a mutual fund company’s manager who has expertise in it. The mutual fund company is called as an Asset Management Company (AMC).
This combined underlying holding of the fund is called the ‘portfolio’ and each investor owns some portion of this portfolio and this portion which the person holds is in the form of units.
History of mutual funds in India
- In India, the industry dealing with mutual funds was established in the year 1963 with the development of the Unit Trust of India (UTI) which was an initiative of the Indian government and the Reserve Bank of India.
- The SBI Mutual Fund became the first NON-UTI mutual fund in India in the year 1987.
- The year 1993 heralded a new era in this industry of mutual funds as it was marked by the entry of private companies.
- The SEBI Mutual Fund Regulations came into being in 1996 after the passing of the Securities and Exchange Board of India (SEBI) Act of 1992.
- After this, the Mutual fund companies have extended and grown exponentially with the help of foreign institutions setting companies in India through joint ventures and properties.
- The Association of Mutual Funds in India (AMFI), a non-profit organization, was founded in 1995 as the industry developed. It was formed with the objective of promoting healthy and ethical marketing practices in the mutual fund industry of India.
- SEBI has made the certificate of AMFI mandatory for all those who are engaged in marketing mutual fund products.
Objective of mutual funds
The objectives of mutual funds are as follows:
- It helps in generating an additional source of income other than the general earnings.
- It helps in financing some of the future needs a person dreams of, such as buying a home, post-retirement plans, education of children and their education, legacy planning, etc.
- It can help in increasing the savings a person possesses.
- It is useful in reducing tax liabilities.
- It helps in protecting your savings from inflation.
What is a mutual fund?
A mutual fund is a commercial product that invests in stocks or bonds.
A mutual fund is a pool of investment which is managed professionally for the purpose of purchasing various securities and culminating them into a strong portfolio that will give you attractive returns over and it will be above the risk-free returns which are currently being offered by the market.
If you own a mutual fund then it is like getting a slice of an apple. Just like that the investors get units of the fund which are in proportion to their investments.
For example, if there is a mutual fund that has total assets of $5000 and someone invests $500, he/she will receive 10% units of that fund.
Mutual funds meaning
- Mutual Fund is like a financial vehicle that consists of all the money collected from different investors in securities such as stocks, bonds, and assets.
- It is operated by money managers who allocate the fund’s assets and produce income for the fund’s investors.
- It gives investors access to diversified portfolios at a low price.
- It is divided into several kinds of categories on the basis of investment objectives, kinds of securities they invest in, and the type of return they are expecting.
- It charges annual fees known as expense ratio or in some cases commissions.
How mutual funds work in India
- The working of mutual funds in India is the same as that of the USA. These funds are regulated by SEBI in India.
- In order to start funding, the starters need to have at least 5-year experience in the financial industry.
- He should have maintained a net worth for 5 years after he gets registered.
- A minimum start-up capital of about Rs. 500 million and Rs. 200 million is required for open-ended and close-ended schemes respectively.
- SEBI registration is compulsory. After it, the sponsor should form a trust to hold all the assets of the fund either by appointing a new company or by choosing any existing Asset Management Company (AMC).
- The trust’s job is to overlook the funds and it should be done considering the best interests of the shareholders.
- The Asset Management Company manages the portfolio of the fund and then shares the information with the shareholders.
- The funds are invested in various sectors like IT, real estate, etc.
- In case one sector is unable to perform well then the others will compensate for it and average out the loss suffered.
- The fund managers will send the account statements quarterly to the investors. The financial reports of the fund are also sent to the investors so that they can monitor how the fund is performing.
- Mutual fund investment is flexible in nature and it can be done in many ways as the minimum investment amount is Rs. 500.
- An investor can invest offline, online, directly or through fund managers.
- It provides easy liquidity to investors as one can easily encash the money at the time of need.
- There is a transparency in the investment making since it is under the SEBI guidelines.
- A monthly report is shared by investors to make the investment more transparent.
- A load fund charges commission on the purchase and sometimes at the time of sale. But no-loan funds are free from commissions.
- MF Utility (MFU) is an application that connects investors to banks, fund houses, KYC registration agencies, registrars, etc.
- MF Utility is a shared service initiated by Amfi subsidiary MF Utilities India. It’s a transaction aggregation portal that enables consumers to invest in multiple schemes in the fund market.
- It’s a free-of-cost service for those who sign up with the utility.
- The existing investments of investors will not be migrated. After the creation of Common Account Number (CAN), MFU will map the existing folios of investors across all the fund houses to the CAN, based on their Permanent Account Number (PAN) and the pattern.
- All the transactions submitted through Mutual Fund Utility are then forwarded to the respective Asset Management Company (AMC). No change is there in its processing or brokerage.
- For availing the facilities of MF Utility, an investor needs to get himself a CAN number by submitting the CAN registration form. Then, the investors will be provided the login access to MF Utility.
- KYC compliance is required for CAN creation.
- The CAN provides a lot of facilities to the investors and distributors. In order to avail the MF Utility facilities, a CAN number is required.
- The CAN is not transferable and in case of eventualities, the holders have to request the transmission with MFU India.
Structure of mutual fund in India
- Mutual Funds have a 3-tier system in India.
- The 1st tier is the Sponsor, 2nd tier is Public trust and the 3rd tier is Asset Management Company.
- A sponsor is a person who establishes a mutual fund and is associated with another corporation.
- It is necessary for a sponsor to seek approval from the Securities and Exchange Board of India.
- After the approval, the sponsor has to make the Public Trust as per the Indian Trusts Act, 1882.
- The Trust itself cannot enter into any contract as it does not have any legal identity. So, for that purpose trustees are appointed to act on behalf of the Trust.
- The instrument of Trust must be in the form of a deed agreement between the Sponsor and the trustees of that mutual fund under the Indian Registration Act, 1908.
- After that, the Trust gets registered with SEBI leading to the creation of the fund.
- The trust, when registered, is known as a mutual fund.
- The sponsor and trust are two separate entities.
- The Trust acts as an internal regulator of the mutual fund. Its main task is to check whether the money is managed properly or not as per the objectives.
- Then the Trustees appoint an Asset Management Company (AMC) to manage the collected money through the mutual fund.
- The approval of SEBI is required for AMCs.
- The Board of Directors of an AMC has at least 50% of independent directors.
- The AMC functions under the control and supervision of its Board of Directors, SEBI and the directions of the Trust.
- AMC floats new schemes in the name of the Trust and manages these schemes by selling and buying securities.
- For this purpose, the AMC needs to follow the guidelines given by the SEBI as per the agreement signed between the company and the Trust.
Types of mutual funds
Mutual fund types can be classified as:
Based on Asset Class
- Equity Funds
- These funds, primarily, invest in stocks.
- They invest the money collected from different investors into shares of different companies.
- The performance of these shares determines the returns or losses in the market.
- These funds come with quick growth. So, the risk is comparatively higher in investing money in these funds.
- Debt Funds
- They invest in fixed-income securities such as bonds, securities, treasury bills, etc.
- They have fixed maturity date and interest rates.
- They are good for a small but regular income and risk involvement is also minimal.
- Money Market Funds
- They are for the investors who trade money in the money market ( also known as capital market or cash market).
- Usually, they are run by the government, corporations or banks by issuing securities like bonds, T-bills, etc.
- The fund manager invests the money and disburses regular dividends in return.
- They are good for short-term plans and are relatively less risky.
- Hybrid Funds
- They are also known by the name Balanced Funds.
- They are a mix of bonds and stocks, thereby, bridging the gap between Debt Funds and Equity Funds.
- There is no fixed ratio. It may be variable or fixed.
- They are good for the investors who are ready to take high risks rather than holding to lower but regular income.
Based on Structure
- Open-Ended Funds
- These funds do not have any issue regarding the time period or the number of units.
- An investor can trade funds and exit whenever he likes at the current Net Asset Value.
- This is the reason for the constant changing of its unit capital with new entries and exits.
- They may also stop taking in the investors due to management or other problems.
- Close-Ended Funds
- Their unit capital is fixed and they cannot sell more than a pre-agreed number of units.
- They may be deadlines to buy units.
- The specific maturity period is there and fund managers are open to diverse fund sizes.
- SEBI mandates that investors under this fund type should be given either the repurchase option or listing on stock exchanges in order to exit.
- Interval Funds
- These funds have the characteristics of both Open and Close-Ended Funds.
- They have a specific time to purchase and exit the scheme and it should be done at intervals only.
- No transactions will be permitted, under this type of fund, for at least 2 years.
- These are suitable for those investors who want to have a lump amount of savings for an immediate goal.
Based on Investment goals
- Growth Funds
- These put a huge portion in shares and growth sectors.
- They are suitable for those who have a surplus of money to invest in riskier plans or they have some positive belief in the scheme.
- Income Funds
- They distribute the money in a mix of bonds, certificates of deposits and securities.
- They have historically earned investors better returns than deposits.
- They are best suited for investors who are risk-averse from a 2-3 years perspective.
- Liquid Funds
- They also belong to the debt-fund category as they invest in debt instruments with a tenure up to 91 days.
- The maximum amount you can invest is Rs. 10 Lakhs.
- The difference between liquid funds and debt funds is the calculation of the Net Asset Value (NAV).
- NAV of liquid funds is calculated considering all the 365 days including Sundays but others are calculated considering business days only.
- Tax-Saving Funds
- Equity Linked Saving Scheme is gaining popularity these days as it serves double benefits as well as save on taxes in the lowest lock-in period of 3 years.
- They make you earn non-taxed returns from 14-16%.
- They are best suited for long-term investments by salaried investors.
- Aggressive Growth Funds
- They are a bit risky and are designed to make steep monetary benefits.
- They should be chosen as per the beta (a tool to gauge the movement of the fund in the market).
- Capital Protection Funds
- They are to protect your principal amount.
- In order to serve this purpose, they earn relatively small.
- The fund manager invests the amount in bonds and the rest in equities.
- The incurrence of loss is nil.
- You need at least 3 years to safeguard the money you invested and the returns will be taxable.
- Fixed-Maturity Funds
- In order to bring down the tax burden, investors go for this funding scheme.
- If an investor is uncomfortable taking the debt market risks, Fixed Maturity Funds provide a great opportunity.
- They have a fixed maturity period which could range from 1 month to 5 years.
- The fund manager puts the investment for the same time period to receive accrual interest at the time of maturity.
- Pension Funds
- This fund type is for those who want to put away some amount of their income to secure their financial needs after retirement.
- They can solve many problems like medical emergency, children’s weddings, etc.
- Relying only on savings is not recommended though.
Based on Risks
- Very Low-Risk Funds
- These are liquid funds and are short-termed (1 month to 1 year).
- They are not risky at all.
- These are low-return funds (6% at best)
- They are useful in fulfilling small financial needs and in securing their money until then.
- Low-Risk Funds
- When a currency depreciates or any unexpected national crisis is going on then investors don’t want to take risk of investing money in riskier funds.
- In such situations, putting money either in one or in a combination of liquid, ultra-short-term, etc. is recommended.
- Returns will be somewhere between 6-8%.
- Investors are allowed when valuations of the fund become stable.
- Medium-Risk Funds
- They are neither very risky nor very safe as the risk factor is of medium level.
- The fund manager invests a portion in debt and the remaining in equity funds.
- The average money that one can make out of this is 9-12% and the NAV is not very volatile.
- High-Risk Funds
- This fund type is suitable for those investors who are aiming for high returns with no risk-aversion.
- These need active fund management.
- Regular performance reviews are compulsory in these type of funds as they are highly volatile.
- The expected return percentage is 15% and more.
Specialized Mutual Fund Types
- Sector Funds
- These are theme-based mutual funds and they invest in one specific sector.
- The risk factor is high as the investment is made only in one sector.
- The sector-trends must be considered while investing in such funds and if decline starts then you should exit immediately.
- They are not always risky, they also offer great returns.
- There are some areas like pharma, IT, banking, etc. which have witnessed huge growth in the investment sector and proved to be promising as well.
- Index Funds
- These are best suited for passive investors.
- Money is put in an index and is not managed by a fund manager.
- In this fund type, the identification of stocks and the corresponding ratio is considered and then the money invested is put in a similar proportion and in similar stocks.
- They cannot outdo the market and that’s why not much popular in India.
- Funds of Funds
- These are multi-manager mutual funds and diversified in nature.
- They put money in diverse fund categories.
- It involves buying a single fund that can invest in many funds.
- Like this, it achieves diversification as well as save on costs.
- Emerging Market Funds
- Investing in an emerging market is considered to be a risky option as it has given negative returns too.
- India is itself an emerging market and in order to gain high returns, investors often fall prey to market levites.
- In a long-term perspective, they are helpful and contribute to the growth of the country.
- International Funds
- It is for investors who want to spread their investment to other countries.
- This fund helps them in getting good returns.
- The concentration of International fund is solely on the foreign market.
- Global Funds
- Global funds are different from those of International funds.
- It includes both – investment markets worldwide and investment in your home country.
- They are quite risky as it goes through different policies, approach, variations, market, etc.
- Investing in this market has historically given high long-term returns and acts as a break against inflation.
- Real Estate Funds
- Investing in real estate comes with high risk and people avoid investing in these.
- An investor just puts his money in an already established real estate companies indirectly, making him a participant in the investment.
- It is a long-term investment.
- It negates risk factors in purchasing a property and has the liquidity to some extent.
- Commodity-Focused Stock Funds
- It is suitable for investors who can easily take risks and looking to diversify their portfolio.
- They give a chance to invest in multiple and diverse trades.
- Returns are not periodic.
- It is either based on the performance of the stock company or the commodity itself.
- The only mutual fund which can invest directly in India is gold.
- Market Neutral Funds
- This is for the investors who want protection from unfavourable market tendencies and it offers good returns as well.
- This is useful for small investors also.
- They come with better risk-adaptability.
- Inverse Funds
- It is best suited for investors who are looking for diversified trades and have a high-risk appetite.
- No periodic returns are there.
- Returns are based either on the commodity of the performance of the company with which stocks are invested.
- Asset Allocation Funds
- These are greatly flexible funds as they combine debt, equity, and gold in a ratio.
- They are helpful in regulating the equity-debt distribution.
- It requires great expertise in allocating and in choosing the stocks and bonds from the fund manager.
- Gift Funds
- These funds can be gifted to anyone to secure their financial needs in the future.
- Exchange-Traded Funds
- It is from the Index funds family.
- It is a fund type which is bought and sold on exchanges.
- It has unlocked a world of investment prospects.
- It gives investors exposure to stock markets and specialized sectors.
- It can be traded in real-time and it falls and rises many times a day.
The term “regulation” means a rule or directive made and controlled by an authority.
- Mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
- In 1996, SEBI formulated the Mutual Fund Regulation.
- SEBI is additionally the apex regulator of capital markets and its intermediaries.
- The issuance and trading of capital market instruments also come under the purview of SEBI.
- Along with SEBI, mutual funds are regulated by RBI, Companies Act, Stock exchange, Indian Trust Act and Ministry of Finance.
- RBI acts as a regulator of Sponsors of bank-sponsored mutual funds, especially in the case of funds offering guaranteed returns.
- In order to provide a guaranteed returns scheme, a mutual fund needs to take approval from RBI.
- The Ministry of Finance acts as a supervisor of RBI and SEBI and appellate authority under SEBI regulations.
- Mutual funds can appeal to the Ministry of finance on the SEBI rulings.
Who regulates mutual funds in India
- Primarily, mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
- A mutual fund should have the approval of RBI in order to provide a guaranteed returns scheme.
- The Ministry of Finance acts as a supervisor of RBI and SEBI and appellate authority under SEBI regulations.
- The Association of Mutual Funds in India (AMFI) has been made to develop this Mutual Fund Industry of India on professional and ethical lines and to enhance and maintain standards in all areas with a view to protect and promote the interests of mutual funds and their unitholders.
Advantages of mutual funds
- It offers you professional management. Through mutual funds, investors get access to the professional money managers who have expertise and experience in the field of buying, selling and monitoring investments by the investors.
- It helps you in holding a wide variety of shares at a much lower price than you really could own by yourself. If one investment in the Fund decreases in value that does not mean that the other will also be decreased, it may increase as well. By holding shares in the market you can take advantage of the changing environment in the industry. It helps in diversification.
- It gives opportunities to the small investors to take part in the professional asset management and they can have low investment minimums.
- Most of the mutual funds allow investors to deal with shares on any business day. Many funds provide you with an automatic purchase program. It is according to the convenience of the investors and helps them in gaining the best out of the money invested.
Mutual fund benefits
There are various benefits of investing in Mutual Funds, such as:
- The higher level of diversification since the basket of a portfolio will be aimed at spreading the investment in order to offer protection against concentration risks.
- They provide regular liquidity as shareholders of open-ended funds and unit investment trusts may sell their holdings back to the fund at regular intervals at a price equal to the NAV of the fund’s holdings.
- Managed by professional investors who have rich experience in investment and can understand the nerves of the market.
- Since mutual funds are regulated by a Government body i.e. AMFI in India, it offers protection and comfort to the investors before considering investment opportunity.
- All mutual funds are required to report the same level of information to the investors which makes it relatively easier for comparison in case of diversification.
- These funds provide regular reports of their performance and are also easily available on the internet to understand past trends as well as the strategies implemented.
Investing mutual funds in India
- After submitting an application form along with a cheque or bank draft at the branch office or designated Investor Service Centres (ISC) of mutual Funds or Registrar & Transfer Agents one can invest in mutual funds.
- Investment can also be made online through the websites of the respective mutual funds.
- One may also invest through a Mutual Fund Distributor registered with AMFI or choose to invest directly.
- A Mutual Fund Distributor can be – an individual or a non-individual entity e.g. Banks etc.
Association of mutual funds in India
The Association of Mutual Funds in India has been established to develop the industry of Mutual funds in India. Its aim is to make this industry on professional, ethical and healthy lines. This is done to enhance this industry and maintain standards so that the interests of the shareholders are promoted and protected.
AMFI was incorporated on 22nd August 1995 as a non-profit organization.
It is an association of SEBI registered mutual funds in India of all the registered Asset Management Companies.
Who can apply for registration?
Only the below mentioned people can apply for the AMFI Registration Number (ARN).
- Any postal agent.
- The minimum age for obtaining ARN is 18 years.
- Any class III and above and equivalent, retired government official or semi-government official who has served for not less than 10 years.
- Retired teachers with not less than 10 years of service.
- Retired banking officers with not less than 10 years of experience.
- Any agent or intermediary who is engaged in the distribution of financial products such as FD agent, insurance agent, etc. But it must be registered with any other regulator of Financial Services.
- Appointed business correspondents by banks.
- Persons who are 50 years of age or above.
- Any other person including students who have NISM Certificate by passing the NISM V-B exam.
- No distributor should have more than one ARN card.
Requirements for registering with AMFI
- They need to submit a self-attested copy of identity proof and address proof as stated in KYC application form.
- For new cadre distributors, a self-attested copy of the NISM certificate is required.
- If the person is a student then he needs to submit the Certificate of passing the exam NISM series V-B.
Allotment of ARN
- After the proper scrutiny of the documents a photo identity card which contains a unique ARN, Employee Unique Identity Number (EUIN) indicating validity period would be issued to the applicant.
- After this, they can approach AMCs.
- Now, one can sell units of mutual fund schemes as given in SEBI Circular dated September 13, 2012.
Renewal of ARN
- An ARN must be renewed on or six months before the expiry date of the ARN.
- For this, you need to pass the V-B examination which is designed for new cadre distributors by NISM.
Mutual fund investment online
- Through the online portals go to the website of the AMCs in whose mutual fund you want to invest.
- Create a portfolio there in AMCs.
- The options you will get there are – “Direct” or “Through Distributors”.
- If you want to invest directly then click on ‘Direct’ option if you want to invest through distributors then click on ‘Through Distributors’ option.
- You need to fill the application form and select your option in both the cases if it is direct or through distributors.
- To make your investments you have to log in to AMCs.
Mutual Funds RBI
The Reserve Bank of India (RBI) was established in 1935 through the Reserve Bank of India Act, 1934. It is the apex bank of the country. Its function is to formulate and regulate monetary policies, thus, plays a key role in maintaining stability and ensure the smooth flow of credit in all the productive sectors of the country. It has prescribed a code of conduct for banking and financial systems within the country.
The guidelines of the RBI for Mutual Funds are as follows:
- The mutual funds which deals exclusively with the money market need to be registered with RBI and all the other schemes require registration with SEBI.
- RBI regulations for NRIs investing in India are:
- A mutual fund other than deposits and bank accounts must be invested in units of domestic mutual funds.
- All the other investments must be invested in units of money market mutual funds and domestic mutual funds in India.
- RBI supervises the operations of funds that are owned by banks.
- Any issue regarding the AMC’s ownership by banks is regulated by RBI.
Sebi guidelines for mutual funds
Mutual funds are regulated by the Securities and Exchange Board of India (SEBI). SEBI formulated the Mutual Fund Regulation in the year 1996.
These regulations and guidelines must be followed in order to set up a mutual fund and maintaining it.
How to get registered as a Mutual Fund?
- After an investor fills the application for registration as a mutual fund, the SEBI will guide him step-by-step after that.
- During the process of registration, all the replies are sent within 21 working days from the date of each communication.
- The total time required for registrations depends on how fast the communication is with the applicant of the fund.
The SEBI (Mutual Funds) Regulations, 1996
- As per Regulation 7 of the SEBI (Mutual Funds) Regulations, 1996, the following eligibility criteria is required for granting of a certificate of registration.
For the purpose of getting a certificate of registration, the following must be fulfilled by the applicant:
- The sponsor of the fund should have a soundtrack record and general reputation of fairness and integrity in all his business transactions.
The ‘sound track record’ means:
- The sponsor should have a business in the field of finance for not less than 5 years.
- In the preceding 5 years, the net worth is positive.
- The net worth in the previous year should be more than the contributed capital of that sponsor in the AMC.
- After providing for depreciation, interest, and taxes the sponsor has profits left in all the preceding years including the last year i.e. 5th year.
- The person who is applying for the fund is fit and proper.
- If there is already an existing fund, such funds should be in the form of trust and the board must have approved the trust deed for the same.
- The sponsor contributes or has contributed not less than 40% to the AMC. only the person who holds 40% or more of the net worth, shall be considered as a sponsor and will be allowed to fulfil the criteria specified in the regulation.
- The sponsor, any principal officer to be employed by a mutual fund or its Board of Directors should not have been guilty of fraud or any other offence which involves moral turpitude or any economic offence.
- The appointment of trustees should be according to the regulations.
- The appointment of Asset Management Company should also be in accordance with the regulations given.
- The appointment of the custodians to keep securities and perform various other functions, as may be authorized by the trust.
Important SEBI Regulations for mutual funds
- For a mutual fund, the AMC set up should consist of 50% independent directors, a separate board of trustees company with 50% independent trustees and independent custodians so that some distance can be managed between fund managers, custodians, and trustees.
- As AMC manages the funds and trustees hold the custody of all the assets. A balance must be maintained between them so that both can keep a check on each other.
- SEBI takes care of the Sponsor, financial soundness of the fund and probity of the business while granting permission.
- Mutual funds must adhere to the principles of advertisement.
- In the case of an open-ended scheme and closed-ended scheme, the minimum of 50 crores and 20 crores corpus is required as per the guidelines of SEBI.
- A mutual fund should invest the money raised for these savings schemes within 9 months.
- By this, the funds do not get invested in bullish markets and suffering from poor NAV also reduces.
- The maximum amount that a mutual fund can invest in the money market is 25% in the first 6 months after closing the funds and 15%of the corpus after six months so that short-term liquidity requirements can be met.
- SEBI checks mutual funds every year in order to make it in compliance with the regulations and guidelines.
Are Mutual funds allowed to do cryptocurrency trading?
Cryptocurrency is a digital currency that is not monitored by any central authority. It is a medium of exchange that uses cryptography for making and securing transactions and to manage new units. It has no legal sanction and is not backed by the government.
In the case of Tata Consultancy Services v. State of Andhra Pradesh , the Court stated that a commodity means a good of any kind which can be used or is an article of commerce. Hence, Cryptocurrency can be seen as a commodity. Allowing cryptocurrency in trading would mean to legalize commodity derivatives trading by mutual funds.
Advantages of using cryptocurrency for mutual funds
- The use of cryptocurrency in trading has multiple benefits as all the transactions as it gets recorded in a public ledger.
- It ensures secure legal transactions.
- It requires fewer efforts and promotes instant settlements.
RBI’s stand on the use of cryptocurrency in mutual funds
- At present, RBI does not consider cryptocurrencies good for investing in mutual funds.
- It regards it as a violation of the country’s existing foreign exchange norms.
- It comes with regulatory risks, hacking issues, scalability problems, etc.
- The sale of cryptocurrency is anonymous and it may be used in illegal financial transactions.
Will it be helpful to allow transactions using cryptocurrency in India?
- The use of cryptocurrency can be allowed only to some selected financial institutions such as mutual fund industry which have expertise in dealing with trades related to cryptocurrency.
- In India, the majority do not have access to internet services, in order to be at the safer side, the transactions in cryptocurrency should be allowed only to such organizations which can maximise their profit using this method.
- The RBI must set some strict KYC rules for this purpose.
- The transactions done through cryptocurrency can be taxed whenever it gets mined or transferred.
- After following all these steps the transactions in cryptocurrency can become safe in India.
Can NRIs Invest in Mutual Funds
In India, NRIs can invest in mutual funds and it can be done according to the preference of the investors. It can be made on a repatriable basis i.e. invested in units of domestic mutual funds or can be done on a non-repatriable basis i.e. in units of money market mutual funds and domestic mutual funds in India.
The RBI has granted permission to offer mutual funds schemes on repatriation basis but with the following terms & conditions:
- It should be made in accordance with the regulations mentioned in the Securities and Exchange Board of India.
- The NRI investor’s amount representing the investment should be received through banking channels or by debit to his FCNR/NRE account.
- A dividend and maturity proceeds of units represented by the net amount should be through banking channels or the FCNR/NRE account of the investor and is subject to payment of the applicable taxes on the same.
- The RBI has allowed making investments on a non-repatriable basis but with certain conditions. These funds should be given by debit to National Reconnaissance Officer (NRO).
- An NRI does not require any approval for investing in India.
- The UTIs/ Government securities can be sold or transferred to NRIs but it should be arranged through an authorized dealer.
- Only UTI can repurchase.
- If an NRO account is used in purchasing funds then it can be remitted abroad.
- NRIs are allowed to acquire shares of the units of domestic funds or Indian companies by the portfolio investment scheme.
- An overall of 5% paid-up share capital is there for each series of convertible stocks purchased by NRIs/OCBs.
- There is no ceiling for investing in domestic mutual funds.
- The approval from the RBI for units of Domestic mutual funds in India is value for 5 years from the date of issue and can be reviewed by a simple letter.
Mutual funds pave a way to maximize the earnings for future financial needs. The use of cryptocurrency should be allowed in mutual fund investments so that it becomes easier for investors to make instant transactions. The use of cryptocurrency, though, is illegal according to the Foreign norms of the country but it should be considered as it will help in developing the mutual fund industry in India.