Mutual Funds

S.R.DeepikaAssistant ProfessorDepartment of BBA

Kristu Jayanti College

What is a Mutual Fund?

• A mutual fund is a trust that pools the savings of a number of investors

(unit holders) who share a common financial goal

• The money pooled is invested in shares, debt securities, money-market

securities or a combination of these.

• Income earned through these investments and the capital appreciation

realized is shared by its unit holders in proportion to the number of units

owned by them.

• A mutual fund is the most suitable investment scope for common people

as it offers an opportunity to invest in a diversified, professionally

managed basket of securities at a relatively lower cost.

How Mutual Fund Operates?

Benefits of investing in a Mutual Fund

• Access to professional money managers

• Diversification

• Liquidity

• Tax efficiency

• Low transaction costs

• Transparency

• Well-regulated industry

• Convenience of small investments

• Sponsor – A person or the corporate body which initiates the launch

of a mutual fund. As per SEBI, the sponsor should have at least 5 yrs

of experience in the financial services Industry and should contribute

40% of the AMC net worth.

• Trustee - The sponsor appoints the trustees who look after the trust

and they are the owners of the mutual fund property and assets.

They take responsibility of investors' funds and their interests.

Trustees oversee the functioning of the fund and ensure that the unit

holders' interests are protected and they get their due returns.

• Asset Management Company (AMC) - The AMC is appointed by Trustees.

Company which actually manages the investors money and takes the decision

of investing the money. AMC does the fund management and charges a fee

for their services which is borne out of the investors. The AMC has to be

approved by the SEBI

• Custodian - This entity has the responsibility of holding investors' physical

and financial assets on their behalf and to perform the transactions initiated

by the AMC. These transactions can be receipt and delivery of securities,

income collection, dividend distribution, etc.

• Registrar and transfer agents (RTA) – They carry out all the clerical work

like processing of applications, processing KYC of investors, issuing units

certificates, sending refunds, etc. E.g.: Reliance, UTI, Axis mutual funds

have chosen Karvy as their RTA.

Types of Mutual Funds – By Structure

• Open-ended Schemes - These funds buy and sell units on a continuous

basis and, hence, allow investors to enter and exit as per their

convenience. Do not have a fixed maturity. The key feature is liquidity.

• Closed-ended Schemes - Unlike in open-ended funds, investors cannot

buy the units of a closed-ended fund after NFO period is over. This means

that new investors cannot enter, nor can existing investors exit till the term

of the scheme ends.

• Interval Schemes - combines the features of open-ended and close-ended

schemes

Types of Mutual Funds – Investment Objective

• Growth or Equity Schemes are high risk funds and their returns are linked

to the stock markets. They are best suited for investors who are seeking

long term growth.

• Debt / Fixed Income Schemes These Funds invest in fixed income

securities like corporate bonds, debentures. They are best suited for the

medium to long-term investors who are averse to risk and seeking regular

and steady income.

Cont…

• Balanced Schemes - These funds invest both in equity shares and

debt (fixed income) instruments and strive to provide both growth

and regular income. They are ideal for medium- to long-term

investors willing to take moderate risks.

• Liquid / Money Market Schemes - These funds invest in highly

liquid money market instruments and provide easy liquidity. They

are ideal for Corporates, institutional investors and business houses

who invest their funds for very short periods.

Others• Tax Saving Funds - These funds offer tax benefits to investors. Opportunities

provided under this scheme are in the form of tax rebates under section 80 C of the

Income Tax Act, 1961. They are best suited for investors seeking tax rebate and

looking for long term growth

• Sector Funds - These funds invest primarily in equity shares of companies in a

particular business sector or industry. While these funds may give higher returns,

they are riskier as compared to diversified funds

• Index Funds - These funds invest in the same pattern as popular stock market

indices like CNX Nifty Index and S&P BSE Sensex. NAV of such schemes rise and

fall in accordance with the rise and fall in the index.

• Fund of Funds Schemes - Fund of Funds invests in other mutual fund schemes. A

traditional mutual fund comprises a portfolio of shares, but a Fund of Funds

comprises a portfolio of different mutual fund schemes.

The History of Mutual Funds

• Historians are uncertain of the origins of investment funds; some

cite the closed-end investment companies launched in the

Netherlands in 1822 by King William I as the first mutual funds,

while others point to a Dutch merchant named Adriaan van

Ketwich whose investment trust created in 1774 may have given

the king the idea.

• Ketwich probably theorized that diversification would increase the

appeal of investments to smaller investors with minimal capital.

• The name of Ketwich's fund, Eendragt Maakt Magt, translates to

"unity creates strength".

Cont…

• The first mutual fund outside the Netherlands was the Foreign &

Colonial Government Trust, which was established in London in

1868

• MFs were introduced in U.S. in the 1890s

• The early funds were generally closed – end type with a fixed

number of shares

• The first open-end mutual fund was established on 1924 by the

Massachusetts investors trust

Evolution of Mutual Fund in India

• The history of mutual funds in India can be broadly

divided into four distinct phases

– First Phase - 1964-1987

– Second Phase - 1987-1993 (Entry of Public Sector Funds)

– Third Phase - 1993-2003 (Entry of Private Sector Funds)

– Fourth Phase - since February 2003

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.

• 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.

• At the end of 1988 UTI had Rs. 6,700 crores of assets under

management.

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 and Life Insurance Corporation of India (LIC) and General

Insurance Corporation of India (GIC).

• SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987

followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual

Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank

of Baroda Mutual Fund (Oct 92).

• LIC established its mutual fund in June 1989 while GIC had set up its mutual

fund in December 1990.

• At the end of 1993, the mutual fund industry had assets under management

of Rs. 47,004 crores.

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

funds. 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.

• The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996.

• The industry now functions under the SEBI (Mutual Fund) Regulations

1996.

Cont…

• The number of mutual fund houses went on increasing,

with many foreign mutual funds setting up funds in

India and also the industry has witnessed several

mergers and acquisitions.

• As at the end of January 2003, there were 33 mutual

funds with total assets of Rs. 1,21,805 crores. The Unit

Trust of India with Rs. 44,541 crores of assets under

management was way ahead of other mutual funds.

Fourth Phase - since February 2003

• 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” with assets

under management of Rs. 29,835 crores as at the end of January 2003,

• The Specified Undertaking of Unit Trust of India, functioned under an

administrator appointed by GOI, outside of SEBI’s purview, until it was

eventually liquidated in 2008

• The Government asked the SBI, PNB, BOB and LIC to step in as sponsors

of the second part, now called UTI Mutual Fund under SEBI’s

regulations

Cont…

• Currently, 44 AMCs are operating in India and

these comprise private sector companies, joint

ventures (including those with foreign entities),

bank-sponsored, etc.

• The industry has a tiered structure with the top 7

AMCs having 70% of the industry Asset under

Management [AUM].

AMFI

• The Association of Mutual Funds in India (AMFI) is 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 Asset Management Companies, was incorporated on August 22,

1995, as a non-profit organisation.

• As of now, all the 44 Asset Management Companies that are registered

with SEBI, are its members.

Objectives of AMFI

1. To define and maintain high professional and ethical standards in all

areas of operation of mutual fund industry.

2. To recommend and promote best business practices and code of

conduct to be followed by members and others engaged in the activities

of mutual fund and asset management including agencies connected or

involved in the field of capital markets and financial services.

3. To interact with the Securities and Exchange Board of India (SEBI) and to

represent SEBI on all matters concerning the mutual fund industry.

4. To represent the Government, Reserve Bank of India and other bodies

on all matters relating to the Mutual Fund Industry.

Cont…

5. To undertake nation wide investor awareness programme so as to

promote proper understanding of the concept and working of

mutual funds

6. To disseminate information on Mutual Fund Industry and to

undertake studies and research directly and/or in association with

other bodies.

7. To take disciplinary actions (cancellation of ARN) for violations of

Code of Conduct.

8. To protect the interest of investors/unit holders

Scope of Mutual Fund

• Maintain strict financial discipline and look for quality investments

• Maintaining total fund to expense ratio

• Market behaviour of the scrips they hold

• Their strength in taking calculated risk to hold certain category of

securities

• Their balancing capacity to have diversified mix of scrips in their basket

• The capacity of fund managers to hold liquid assets to meet the investors

claims on time

• Clean and transparent operations

• Courage to handle the situation in times of turbulence

Mutual Fund & Economy

• Since 2004, India has been amongst the fastest growing

market for mutual fund. The growth pattern of mutual

fund industry grew at 29 per cent CAGR as against the

global average 4 per cent.

• Mutual funds have become a very popular channel of

investment for the salaried middle class Indian

population