What is AMFI - Association of Mutual Funds in India

What is AMFI? And What are its Role, Objective & Importance?

Learn what is AMFI – Association of Mutual Funds in India: As an investor, there are many institutions set up in the market to ensure that you are informed and at the same time to also protect your rights.

One such institution is the Association of Mutual Funds in India (AMFI). So What is AMFI and what exactly does AMFI do? Moreover, why AMFI was set up? We answer these questions in this article.

What is AMFI – Association of Mutual Funds in India?

What is AMFI | Trade Brains

The mutual fund industry took birth in India with the formation of  Unit Trust India (UTI) in 1963. Other players entered the market only in 1987. But despite this, the industry suffered from preconceived norms of it being a risky and ambiguous investment due to lack of information.

In order to combat these myths, the Association of Mutual Funds in India (AMFI) was incorporated on 22nd August 1995

The AMFI is a non-profit government organization that acts as the primary regulator under the SEBI. One of its major functions is to keep the investors informed about the Mutual Fund market and protect the interest of investors.

Currently, it comprises 43 member Asset Management Companies (AMC) that are registered with SEBI.

We have seen many cases where investors’ money is misused. In the case where the AMC does not follow transparency norms or if the investor is facing trouble in dealing with his fund house the next step would be to inform the AMFI which has been set up for the protection of investors’ interest. 

The AMFI maintains high standards of operation and ensures that investors are well informed. One of the important means through which AMFI does this is by updating their website with important information pertaining to mutual funds. Even the advertisements put forth by AMFI ensure that the investors are informed about the risks associated with mutual funds.

Since its formation, it has set various regulations in order to ensure that ethics and transparency are maintained in the mutual fund industry.

What are the Objectives of the AMFI?

The Association of Mutual Funds in India (AMFI) has several objectives. Some of them are mentioned below:

  • Ensures that mutual funds operate under a uniform set of ethical and professional standards.
  • Once the standards are defined, AMFI also encourages and ensures that AMC’s and mutual funds follow and maintain them in the due course of business. 
  • They also assist all the parties involved like distributors, advisories, agents, asset management companies, and other bodies to comply with their guidelines. 
  • AMFI receives guidance from SEBI and works closely with them on matters concerning mutual funds.
  • They represent the government, Finance ministry, RBI, and SEBI on all matters that relate to the mutual fund industry.
  • It also distributes information on mutual funds as investments and also conducts research, workshops on different funds. They also conduct the nationwide investor awareness program.
  • It also takes disciplinary action in the case of a violation of the code of conduct.
  • They safeguard the interests of investors. AMFI has introduced a facility through which investors can put forth grievances or register complaints against fund managers or any fund houses.
  • They also safeguard the interests of AMCs.

ALSO READ

How to Buy Mutual Funds Online in India?

What is the ARN and Why is it important to investors?

There are many entities we may come in contact with before investing in mutual funds. These include agents, brokers, and other intermediaries. But how do we know which of these are credible? This is where the ARN comes into play. ARN stands for AMFI Registration Number.

AMFI only authorizes those who are qualified to sell the funds to prospective buyers. If any fund manager, broker agent, or any other company wants to deal with mutual funds they have to get a permit from AMFI to do so. This will be provided to them by AMFI in the form of ARN.

Fund houses and other intermediaries who acquire the ARN from AMFI are credible and have the professional knowledge required to invest in mutual funds. It is a legal offense if anyone sells or recommends mutual fund units to investors without the ARN license. 

It only issues the ARN on the clearance of the National Institute of Securities Market (NISM) certification which is valid for three years. The NISM is a training institute that offers certifications related to the securities market.

It is very important for investors to ensure that the third-party agents or intermediaries have an ARN before investing.

Closing Thoughts

The Indian mutual fund industry has grown in leaps and bounds. In the 90s a very small fraction of the population invested in mutual funds. The awareness of these investment schemes has grown significantly. Today even the youth take part in these investments thanks to the efforts of institutions like AMFI. Happy Investing!

What is Mutual Fund? Definition, Types, Benefits & More.

A mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, bonds etc.

When you purchase a share in the mutual fund, you have a small stake in all investments included in that fund. Hence, by owning a mutual fund, the investor participates in gains or losses of all the companies in the fund. For instance, you can take a mutual fund as a basket of investments. When you purchase a share of that mutual fund, you are buying one share of this basket and hence has an ownership in the all the investments in one such basket.

how mutual funds work

Image source: Corporatefinanceinstitute.com

Major Types of Mutual Funds:

Based on Asset Class

  1. Equity FundsThese funds invest the amassed money from investors in equities i.e. the stocks of different companies. The associated risks for these funds are comparatively higher as they invest in the market. However, they also provide higher returns.
  2. Debt Funds: These funds invest in debt instruments like bonds, securities, fixed income assets, the company’s debentures etc. They provide a safer investment option for investors looking for small regular returns with low risk.
  3. Hybrid Funds: As the name suggests, Hybrid or balanced funds invests in both equity and debt instruments like stocks, bonds etc. This ratio can be variable or fixed depending on the fund. This fund helps to bridge the gap between entirely equity or debt fund and suitable for investors looking to take higher risk than debt funds in order to get bigger rewards.
  4. Money Market Funds: These funds invest in liquid instruments such as bonds, T-bills, certificate of deposits etc. The risks associated with these funds are relatively low and suitable for short-term investments, less than 12 months.

Based on Structure

  1. Open End Funds: The majority of mutual funds in India are open-end funds. These funds are not listed on the stock exchanges are available for subscription through the fund. Hence, the investors have the flexibility to buy and sell these funds at any time at the current asset value price indicated by the mutual fund.
  2. Closed-End Funds:- These funds are listed on the stock exchange. They have a fixed number of outstanding shares and operate for a fixed duration. The fund is open for subscription only during a specified period. These funds also terminate on a specified date. Hence, the investors can redeem their units only on a specified date.

types of mutual funds

(Image Credits: Kotak Securities)

Benefits of Mutual funds:

There are a couple of benefits in investing in a mutual fund.

For example, if there is an investor who wants to invest in stocks but has no time to analyze and create a portfolio. Then he can be benefited from the mutual fund. This investor just has to buy a mutual fund and hence, in a single purchase he gets an investment similar to purchasing the entire portfolio of stocks.

mutual funds trade brains5

The various benefits of investing in a mutual fund are described below:

  • A simple way to make a diversified investment: A mutual fund has a number of securities like stocks, bonds, fixed etc already in its portfolio. Therefore, buying a mutual fund is a simple way to make a diversified investment. Further, diversification also reduces risk which is an added benefit of buying a mutual fund.
  • Managed by a financial professional: The Fund manager or managers actively manage a mutual fund. They try to give the maximum returns to the investors using their professional expertise. Hence, those investors who don’t have time to invest by their own can get benefits from the expertise of these fund managers.
  • Allow investors to participate in a wide variety of investments: This is one of the greatest advantages of buying a mutual fund. There are a variety of mutual funds available to invest in equity fund (Index funds, growth funds, etc.), fixed income funds, income tax saver funds, balanced funds etc. An investor can easily select the best one which suits his strategy.
  • Investors can buy/sell/increase/decrease their mutual funds whenever they want: There is great flexibility to for the investors while investing in mutual funds. They can easily buy, sell, increase or decrease their investment in different funds within seconds. However, please note that it’s suggested to read the mutual fund prospectus carefully before subscribing as some mutual funds have an entry or exit-load.

If you are new to mutual fund investing and want to learn from scratch, I highly recommed you to check out this online course: Investing in Mutual Funds? A Beginner’s Course.

Which mutual fund to buy?

After understanding the benefits of a mutual fund, the next question is which mutual fund to buy? There is a variety of mutual funds available in the market which you can find online. These mutual funds have different ratings & rankings and you can choose a suitable mutual fund according to your goal. Here are the two few sites where you can search online:

Generally, you need to read the prospectus of a mutual fund which gives a wide variety of information about the fund. The fund prospectus has details like fee & charges, minimum investment amount, performance history, risks, and other particulars. Here are the few examples of mutual funds (provided by moneycontrol website):mutual funds trade brains2

Disadvantages of Mutual Funds:

Here are the few disadvantages of buying a mutual fund:

  • Fees and Expenses: There are a couple of possible fees in mutual funds like expense fee, exit fees etc which might reduce the overall returns.
  • No Insurance: There is no guarantee of success in the mutual funds. The mutual fund providing companies always state the following in the declaimer in their advertisements:
  • Mediocre Performance: On an average, a majority of mutual funds are not able to beat the market indices.
  • Loss of Control: The fund managers are responsible for buying and selling of the securities and you have no say in managing the portfolio. You are trusting someone else with your money when you invest in mutual funds.

mutual funds trade brains 1

How to make money by the mutual fund?

There are basically two ways to make money by a mutual fund –

  1. Appreciation: When the mutual fund appreciates i.e. when the fund grows in value. You can sell the mutual fund at the appreciated value and get a good return on your investment.
  2. Dividend Payment: Mutual funds also provide dividends to the investors when they receive the dividend from the companies they own in their portfolio. Please read the prospectus carefully if you are buying a mutual fund for dividend payments.

Also read: Growth vs Dividend Mutual Funds: Which one is better?

So, that’s all for the basics of the mutual fund. In the next post, I will describe how to buy a mutual fund.

In the meantime, if you need any help or have any doubts, feel free to comment below. I will be happy to help you.