FINANCIAL TRANSACTIONS

Financial Transactions (Part 1)

• Definition: Financial transactions in mutual funds involve various processes and mechanisms, including application forms, transaction slips, purchase and redemption cycles, and account statements.
• Details: Mutual funds involve a large number of financial transactions on a daily basis, including purchases, redemptions, dividend pay-outs, and payment of commission to distributors.

Key Concepts

• Application Form: The application form provides required information about an investor and is used for the first-time investment in a mutual fund. It captures investor information, including personal details, bank account information, and investment preferences.
• Transaction Slip: A transaction slip is used for subsequent transactions, such as redemptions, additional purchases, and switches. It has a pre-printed folio number and is signed by the investor to validate the transaction.
• Purchase Transactions: Mutual fund units can be purchased during the New Fund Offer (NFO) or after the scheme opens for ongoing offer. Fresh purchases are made by submitting an application form, while additional purchases can be made using a transaction slip.
• Redemption Transactions: Redemption refers to an investor's request to return their investments in a fund. Redemption can be specified in terms of units or amount, and the proceeds are paid to the investor within the stipulated time period.
• Entry and Exit Loads:
  • Entry Load: A percentage of the Net Asset Value (NAV) of the unit, charged when an investor buys units. (Abolished by SEBI as of August 1, 2009)
  • Exit Load: A percentage of the NAV, charged when an investor redeems units, reducing the redemption price.
• Account Statements:
  • Statement of Accounts (SoA): A proof of investment sent to investors after a fresh purchase transaction, showing the amount, price, and units.
  • Consolidated Account Statement (CAS): A statement that consolidates all transactions across multiple schemes and folios, providing a comprehensive view of an investor's holdings.

Financial Transactions (Part 2)

• Statement of Accounts (SoA): Issued to investors whenever there is a transaction in a folio, with a dispatch date not later than 5 working days from the date of the transaction.
• SoA Frequency: Issued every month if there is a transaction in a folio during the month, or annually if there are no transactions in a six-month period.
• SoA Alternatives: Soft-copy of the account statements can be sent to the investors' registered e-mail address instead of physical statements.
• Systematic Transactions: SoAs are dispatched to unit holders once every quarter, within 10 working days of the end of the respective quarter.

Consolidated Account Statement (CAS)

• CAS Purpose: To create one record for all financial assets of every individual, with AMCs/RTAs sharing requisite information with Depositories on a monthly basis.
• CAS Generation: Depositories generate and dispatch a single CAS for investors with mutual fund investments and demat accounts, based on PAN.
• CAS Frequency: Sent to investors through email on a monthly basis if there is a transaction, or on a half-yearly basis if there are no transactions.
• CAS Details: Includes holding details and is dispatched by depositories or AMCs/RTAs, with a grievance redressal mechanism in place.

Switch Transactions

• Switch Definition: A redemption and purchase transaction rolled into one, with the redeeming scheme called the source scheme and the purchasing scheme called the target scheme.
• Switch Benefits: Saves time and effort for investors, with the transaction put through by the RTA in the books and funds credited to the scheme's account.
• Switch Charges: AMCs may or may not charge loads for switch transactions, with no exit load typically charged for switching within options of the same scheme.

Systematic Transactions

• Systematic Investment Plan (SIP): A facility to make periodic or recurring purchases in mutual fund schemes, with a minimum investment usually of Rs 500.
• Systematic Withdrawal Plan (SWP): A facility for periodic or recurring redemptions, allowing unit holders to withdraw sums from an existing scheme at periodic intervals.
• Systematic Transfer Plan (STP): A facility for periodic redemption from one scheme and investment into another scheme of the same fund, allowing unit holders to transfer fixed sums at specified intervals.

Turn-around-times for Financial Transactions

• SEBI Mandated Timelines: Summarized in Table 14.2, with specific timelines for various transactions, including redemption, purchase, and switch transactions.

FINANCIAL TRANSACTIONS (Part 3)

• Service provided by Mutual Funds: Various services are provided by mutual funds, including NAV calculation and disclosure, unit allotment, dividend dispatch, and account statement dispatch.
• Turn-Around-Time (TAT): The TAT is the time taken to complete a financial transaction. For example:
  • NAV calculation and disclosure: on a daily basis
  • Unit allotment or refund: within 5 business days of closure of NFOs
  • Dividend dispatch: within 15 days from the record date
  • Redemption/re-purchase cheques dispatch: within 3 working days from the date of receipt of transaction request
• Key Concepts:
  • NAV (Net Asset Value): The market value of a mutual fund's assets minus its liabilities, divided by the number of outstanding units.
  • NFO (New Fund Offer): A new mutual fund scheme that is open for subscription for a limited period.
  • ELSS (Equity-Linked Savings Scheme): A type of mutual fund that provides tax benefits to investors.
  • T-30 and B-30 locations: Locations with lower penetration of mutual funds, as identified by the Association of Mutual Funds in India (AMFI).
  • CAS (Consolidated Account Statement): A statement that provides a consolidated view of an investor's holdings across all mutual fund schemes.
  • SoA (Statement of Accounts): A statement that provides details of an investor's transactions and holdings in a mutual fund scheme.

Role of RTA in Commission Payment

• RTA (Registrar and Transfer Agent): An entity that provides registry and transfer agency services to mutual funds.
• Commission Payment: The payment of commission to distributors by mutual funds.
• Key Activities:
  • Determining average assets for payment of trail commission
  • Determining if a transaction is sourced from T-30 or B-30 locations
  • Determining claw backs and reversals, if any
  • Determining inflows from SIP transactions made by new investors to the mutual fund industry

Sample Questions

• The application form for a fresh purchase of mutual fund units has to be signed by all joint holders.
• A transaction slip is usually used when the investor knows his own folio number.
• Information provided by a mutual fund investor in an application form is recorded by R&T agents under the allotted folio number.
• Exit load has the effect of reducing the redemption amount for the investors.
• Investors can redeem their mutual fund units at a price based on the Net Asset Value.
• The preferred mode for an existing investor to make an additional purchase in the same scheme is transaction slip.
• The facility that allows investors to move funds periodically from one scheme to another is STP (Systematic Transfer Plan).
• The entity responsible for calculating the commission payable to mutual fund distributors is Registrar and Transfer Agent.
• Entry load in mutual funds has been abolished by SEBI.