This article deals with ‘Investment Funds.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
- It is quite difficult for common people to understand economic concepts and invest in bonds and equity after doing full analysis of the market. For such people, there is an easy option to invest in Investment Funds which gather money from common people to invest in such securities and other projects and are managed by Fund Managers having expertise in financial matters.
- Fund Managers take money from investors and give them Units made with backing of investments .
- Later, Manager gets return from the investments in form of interest, dividend, charges etc. and distribute this return among Investors based on the share they have in Fund after cutting his fee.
1 . Mutual Funds
- Mutual Fund Manager is a financial intermediary.
- Mutual Fund Manager mops up money from group of investors to invest in different asset classes like shares, bonds etc. so as to generate returns for investors . In return, Manager will give Units backed by the assets to the Investors.
- When Mutual Fund manager will get returns in form of dividend and interest from the assets in which money of investors was invested, he will distribute it among investors in proportion of Units held by them.
- Each unit has fixed maturity period . After that time, Investor can return the unit & get back his initial investment /money.
Latest regarding Mutual Funds :Large number of Mutual Fund managers had invested money in bonds issued by IL&FS which suffered loss after the crisis. In fear, people stopped investing money in all Mutual Funds , hitting this sector very hard.
Types of Mutual Funds
It can be classified in many ways
1 . Portfolio Nature
|Equity Mutual Funds||Invest only in Equity|
|Debt Mutual Funds||Invest only in Debt instruments|
|Gilt Edged Mutual Funds||Invest only in Gilt Edged Bonds only ( and thus have very less return )|
2. Income & Risk
|Growth Fund||Eg : Equity (80%) & Debt (20%)|
|Balanced Fund||Eg : Equity : Debt = 50:50|
|Income Fund||Eg : Equity : Debt = 20:80|
2. Hedge funds
- Hedge fund is open to very limited range of very high net worth individuals (HNI) . One can say, it is private Mutual Fund for High Net worth Individuals
- Their only aim is to get maximum return in quickest time.
- HNI individuals will give money to Hedge Fund Manager who give back some units with promise of high returns . Hedge Fund Manager will then play in market to make money in different ways like investing in junk bonds, Arbitrage, Leverage, Short Selling etc.
- SEBI Regulations on hedge
- One can open Hedge Fund in India but in the scheme, each member must be paying atleast ₹1 crore .
- SEBI has placed strict norms on Hedge Funds.
- Examples of Hedge Funds Managers in India : Karvy Capital , Motilal Ostwald etc.
- Technically they are Alternate Investment Funds (AIF) Cat III.
Side Topic : Alternative Investment Funds
It is a technical classification under SEBI norms:
|AIF Category I||– They generate positive spill over effects on the economy. |
– Eg: Venture Capital Funds, Angel investors fund, SME Funds, social venture fund, Infrastructure funds.
– SEBI norms are easy on them.
|AIF Category II||Neither in Cat-1 nor in Cat-3 . E.g. Private Equity or debt fund.|
|AIF Category III||– They undertake excessive risk to generate high returns in short period of time. |
– E.g. Hedge Funds.
– SEBI norms are stricter on them, else they may destabilize the capital market.
3. REITs : Real Estate Investment Trusts
- They too are for High Networth Individual (HNI) and Minimum Investment in REITs can be ₹ 2 Lakh .
- REIT Fund Managers are regulated by SEBI .
- Fund Manager will give Units to investors and invest money in Real Estate Projects which are on verge of completion but are not getting loans from Banks or other NBFCs.
- When Real Estate Project Completes and start generating rent, they will get their share of rent from that which will be paid to investors based on proportion of Units held by him after cutting fee of Fund Manager.
- Infrastructure Investment Trust.
- Same as REITs with only difference that they invest in Infrastructure Projects like Airport, Highways, Ports , Gas Grid etc.
Benefits of REITs & InvITs
- Tried & tested in US, UK, Australia , Japan etc .
- Stressed developer gets new finance and save his project => Helps in completion of projects facing financial crunch.
- Will help in saving banks from NPAs .
- Provide new investment opportunity to people .
- They will help to channelize household savings towards nation building.
Note : RBI has allowed Banks to invest 10% of net owned funds in REITs & InvITs .
5 . Sovereign Wealth Fund
- These funds are sovereign in nature i.e. under the direct control of nation-state.
- Sovereign Wealth Funds are state owned investment funds, wherein country park it’s surplus budget . This money is later used in doing investments and earn more money in return .
- Examples : Abu Dhabi Investment Authority (ADIA)’s funds, Qatar Investment Authority (QIA), Saudi Arabia’s Public Investment Fund etc.
6. P Notes / Participatory Notes
- If a foreigner wishes to invest in India but does not want to go through the hassles of registering with SEBI, getting PAN card number, opening a DEMAT account etc. So, he will approach a SEBI registered foreign institutional investor (FII) such as Morgan Stanley, Citigroup or Goldman Sachs. He will pay them & instruct them to purchase particular shares and bonds on his behalf and store them in their Demat account. FII will give him P-Notes in return, and he will receive interest and dividend accordingly. He may also sell those P-notes to a third party. The P-Note holder also does not enjoy any voting rights in relation to security referenced by the P-Note.
- In simple terms, P-Notes are Offshore derivative Instruments that derive the value from the underlying Indian shares and bonds.
P-Notes are considered harmful to Indian economy because:
- P-note investors are not directly registered with SEBI, the identity of the actual investor and source of funds remain disguised . Hence, it may be allowing the ‘black money’ of India stashed away from India through ‘hawala’ to get invested back in the market. Again, ‘terrorist organisations’ might have been using this route, too.
- If P-Note owner sells his P-Notes to another foreign investor, Government of India will be deprived of taxes. (Compared to a scenario where Indian share owner is selling his shares to another Indian investor, then government gets securities transaction tax and capital gains tax on his profit).
=> Therefore, SEBI is tightening the control over P-Notes .