HARESH RHARESH RASSISTANT PROFESSORASSISTANT PROFESSOR

DEPARTMENT OF COMMERCEDEPARTMENT OF COMMERCECHRIST UNIVERSITYCHRIST UNIVERSITY

Mutual funds are a type of investment that

takes money from many investors and uses it to make investments based on a stated investment objective.

Each shareholder in the mutual fund participates proportionally (based upon the number of shares owned) in the gain or loss of the fund.

What are Mutual Funds?

MF Operation Flow Chart

The idea of Mutual Fund first came from a Dutch

Merchant Abraham van Ketwich back in 1774 offered on the market a diversified pooled security specifically designed for citizens of modest means.

In 1822, that idea was further developed. In 1822, the concept of Investment Diversification was properly incorporated in the mutual funds.

The Mutual Funds Concept came in Switzerland in 1849 and thereafter in Scotland in the 1880s. After being popular in Great Britain and France, Mutual fund concept traveled to U.S.A in the 1890s.

History of MF’s

The enactment of two British laws, the Joint

Stock Companies Acts of 1862 and 1867, permitted investors to share in the profits of an investment enterprise and limited investor liability to the amount of investment capital devoted to the enterprise.

Shortly thereafter, in 1868, the Foreign and Colonial Government Trust was formed in London.

In 1920s and 1930s, the Mutual Fund

popularity reached a new high. There was record investment done in mutual funds. But, before 1920s,the mutual funds were not like the modern day mutual funds.

The modern day mutual funds came into existence in 1924, in Boston. Massachusetts Investors Trust introduced the Modern Mutual Funds and the funds were available from 1928.

The stock market crash of 1929 and resulting

Great Depression put an temporary end on the mutual fund industry.

That is until the creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act of 1933, and the enactment of the Securities Exchange Act of 1934. These events saw several important safeguards designed to protect investors put in place.

MF industry in India started in 1963 with the

formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India.

First Phase - 1964-1987 Unit Trust of India (UTI) was established in

1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India.

History of Mutual Funds in India

Second Phase - 1987-1993 (Entry of Public Sector Funds)1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks, LIC and GIC.SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India, Bank of Baroda Mutual Fund. LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.In the year 1992, Securities and exchange Board of India (SEBI) Act was passed.

. In 1978 UTI was de-linked from the RBI and

the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.

The first scheme launched by UTI was Unit Scheme 1964(US 64). At the end of 1988 UTI had Rs. 6,700 crores of assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

Fourth Phase - since February 2003

On 31st August 2002, the government decided to split the Unit Trust of India into two.In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India. The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations.The mutual fund industry has entered its current phase of consolidation and growth.

Dedicated to developing the Indian Mutual

Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders.

AMFI, the association of SEBI registered mutual funds in India of all the registered AMC’s, was incorporated on August 22, 1995, as a non-profit organisation.

Association of Mutual Funds in India (AMFI)

MF’s follow a 3-tier structure.

SPONSOR TRUSTEE AMC

MUTUAL FUNDS : STRUCTURE IN INDIA

Sponsor is the person who either alone or in

association with another corporate body, establishes a mutual fund. Sponsor is an entity which sets up the Mutual Fund’s organisational structure.

UTI Mutual Fund is promoted by the four of the largest Public Sector Financial Institutions as sponsors, viz., State Bank of India, LIC, Bank of Baroda and Punjab National.

Sponsor

The mutual fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the sponsor. The trust deed is registered under the Indian Registration Act, 1908.

Trust

Trustee is usually a company (corporate body) or a

Board of Trustees (body of individuals). The main responsibility of the trustee is to

safeguard the interest of the unit holders and ensure that the AMC functions in the interest of investors and in accordance with the SEBI(Mutual Funds) Regulations, 1996, the provisions of the trust deed and the offer documents of the respective schemes.

At least 2/3rd of the directors of the Trustee are independent directors who are not associated with the sponsor in any manner.

Trustee

A Mutual Fund is established as a ‘Trust’ by

the Sponsor. Continuing with our example, HDFC Mutual Fund has been created as a Trust.

A Trustee is appointed to ensure that the Trust carries out its operations under the regulatory requirements and also has an oversight into the activities of the AMC. HDFC Trustee Company Limited is the Trustee of HDFC Mutual Fund.

Asset Management Company(AMC) – is

generally a public limited company which is appointed by the Trustee to manage the funds of the Mutual Funds. HDFC Asset Management Company is an AMC appointed by HDFC Trustee Company Limited to manage the funds of HDFC Mutual Fund.

The AMC is generally owned by the Sponsor. It is the AMC which takes care of day to day fund management of a Mutual Fund.

Asset Management Company

Custodian – All securities held by a mutual

fund are kept with the Custodian. Registrar & Transfer Agent – Are

responsible for the administrative aspects associated with the mutual funds such as processing applications, issuing statements etc.

Auditors – One of the most important part of

a mutual fund organisation structure are its Auditors who should be reputed enough to safeguard the interest of mutual fund holders. It is important to note that the auditors of a Mutual Fund must be different from the auditors of the AMC (as required by SEBI).

To manage investor’s money on a day to day

basis. The responsibility of preparing the Offer

Document lies with the AMC.(The Offer Document (OD) is a legal document and investors rely upon the information provided in the OD for investing in the mutual fund scheme.)

Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC.

Responsible for the acts of its employees and service providers.

ROLE OF AMC

Fund – denotes mutual fund or any of its

schemes. Unit Holder– the owner of units or shares of a

mutual fund. NFO – New fund offer – MFs are offered for the

first time to investors in an NFO. NAV (Net Assets Value) – NAV is the value per

unit at current market prices computed as net assets divided by units outstanding.

Other Terminologies in MF

Professional Management Portfolio Diversification Reduction in transaction costs Liquidity Convenience Flexibility Tax Benefits Transparency Stability to the stock market Equity Research Protection of Interest of Investors

Benefits of MFs

Mutual funds offer investors an affordable way to

diversify their investment portfolios. Mutual funds allow investors the opportunity to

have a financial stake in many different types of investments.

These investments include: stocks, bonds, money markets, real estate, commodities, etc…

Individually, an investor may be able to own stock in a few companies, a few bonds, and have money in a money market account. Participation in a mutual fund, however, allows the investor to have much greater exposure to each of these asset classes.

Why do People Invest in Mutual Funds?

Most mutual funds are professionally

managed by an investment expert known as a portfolio manager.

This individual makes all of the buying and selling decisions for the fund.

There are thousands of different mutual funds in the United States.

This provides investors with many options to help them achieve their investment objectives.

Continued

An open-end fund is one that is available for

subscription all through the year and is not listed on the stock exchanges. The majority of mutual funds are open-end funds. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the fund's Net Asset Value.

Open-End Funds

In India, this type of scheme has a stipulated

maturity period and investors can invest only during the initial launch period known as the NFO (New Fund Offer) period.

Usually the redemption is also specified which means that they terminate on specified dates when the investors can redeem their units.

Close-ended Funds