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INTRODUCTION MUTUAL FUNDS- AN OVERVIEW: A Mutual Fund is a trust that pools the savings of a number of Investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market Instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units held by them. Thus a mutual fund is the most suitable for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an invest able surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. A Mutual Fund is the ideal investment vehicle for today.s complex and modern financial scenario. Markets for Equities, Bonds and other Fixed Income Instruments, real estate, derivatives and other assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and the time to keep track of events, understand their implications and act speedily. An Individual also finds it difficult to keep track of ownership of his assets, brokerage, dues and bank transactions etc. A Mutual Fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of Scale in all three areas- Research, Investments and Transaction Processing. While the concept of coming together to invest money collectively is not new, the mutual funds in their present form are a 20th century Phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally there are thousands of mutual funds with different investment objectives. Today, mutual funds, collectively manage almost as much as or more money as compared to banks. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre-specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most of the countries, these sponsors need approval from a regulator, SEBI. SEBI looks at he records of the Sponsor and its financial strength in granting approval to the fund for commencing operations. A sponsor then hires an. Asset Management Company. to invest the funds according to the investment objective. It also hires equity to the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders of the fund. In the Indian concept, the sponsors promote the AMC also, in which it holds a majority stake. In many cases a Sponsor can hold a 100% stake in the AMC eg. IL&FS is the sponsor of IL&FS AMC, which has floated different Mutual fund schemes and also acts as an asset manager or the funds collected under the schemes. History of mutual funds in India The history of mutual funds in India can be broadly divided into 5 important phases. First Phase: 1963-87 Initial Development phase (Unit Trust of India) In 1963, UTI was established by an Act of Parliament and given a monopoly. UTI commenced its operations from July 1964 .The impetus for establishing a formal institution came from the desire to increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during a period marked by great political and economic uncertainty in India. The first and still one of the largest schemes, launched by UTI was Unit Scheme 1964. UTI created a number of products such as monthly income plans, children’s plans, equity-oriented schemes and offshore funds during this period. The total asset under management for the year 1987-88 was 6,700 crores. Second Phase: 1987-93 (Entry of Public Sector Funds) Second phase witnessed the entry of mutual funds sponsored by state owned banks and financial institutions. With the opening up of the economy, many public sector and financial institutions were allowed to establish mutual funds. In November 1987 the State Bank of India established the first non-UTI mutual fund-SBI Mutual Fund. This was followed by Canbank Mutual Fund (launched in December, 1987), LIC Mutual Fund (1989), and Indian Bank Mutual Fund (1990) followed by Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. These mutual funds helped enlarge the investor community and the invest able funds. During this period, investors were shifting away from bank deposits to mutual funds. Most funds were growth-oriented closed-ended funds. From 1987 to 1992-93, the fund industry expanded nearly seven times in terms of Assets under Management. The total asset under management considering both UTI and Public Sector was 47,004. Third Phase: 1993-96 (Emergence of Private Funds) A new era in the mutual fund industry began with the permission granted for the entry of private sector funds in 1993, both Indian and Foreign. Also Government launched a series of measures aimed at the financial sector as a part of the economic liberalization and reform process. This included the setting up of the Securities and Exchange Board of India (SEBI) as a regulatory body for the financial sector including Mutual Funds, which issued the SEBI Mutual Fund Regulations in January 1993. During the year 1993-94, five private sector mutual funds launched their schemes followed by six others in 1994-95. Fourth Phase: 1996-1999 (SEBI Regulations for Mutual Funds) More investor friendly regulatory measures have been taken both by SEBI to protect the investor and by the Government to enhance investors. returns. A comprehensive set of regulations for all mutual funds operating in India was introduced with SEBI (MutualFund), 1996. These regulations set uniform standards for all funds and will eventually be applied in full to Unit Trust of India as well, even though UTI is governed by its own UTI Act. In 1999 Union Government Budget took a big step in exempting all mutual funds dividends from income tax in the hands of investors. 1999 marks the beginning of a new phase in the history of the mutual fund industry in India, a phase of significant growth in terms of both amounts mobilized from investors and assets under management. Fifth Phase: 1999-2002 This phase was marked by very rapid growth in the industry, and significant increase in market shares of private sector players. Assets crossed Rs. 1,00,000. The tax break offered to mutual funds in 1999 created arbitrage opportunities for a number of institutional players. Bond funds and liquid funds registered the highest growth in this period, accounting for nearly 60% of the assets. UTI.s share of the industry dropped to nearly 50% MEANING & DEFINITIONS OF MUTUAL FUND: Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having received it, make investments with the money Via an AMC. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, You own part of the overall fund. The beauty of mutual funds is that anyone with an invest able surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments. A Mutual Fund is an investment tool that allows small investors access to a well diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. In simple words, a mutual fund is a trust, which collects the savings from small investors, invest them in government securities and earn through interest, dividends and capital gains. For instance, if one has Rs. 1000 to invest, it may not fetch much on its own. But, when it is pooled with Rs. 1000 each from a lot of other people, then, one could create a .big fund. large enough to invest in wide varieties of shares and debentures on a commanding scale and thus, to enjoy the economies of large scale operations. DEFINITIONS: The SEBI, 1993 defines a Mutual Fund as .a fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations.. According to Weston J. Fred and Brigham, Eugene, unit trusts are . Corporations which accept dollars from savers and then use these dollars to buy stocks, long term bonds and short term debt instruments issued by business or government units; these corporations pool funds and thus reduce the risk of diversification.. OPERATION OF THE FUND: A mutual fund invites the prospective investors to join the fund by offering various schemes so as to suit to the requirements of categories of investors. The resources of individual investors are pooled together and the investors are issued units/shares for the money invested. The amount so collected is invested in capital market instruments like treasury bills, commercial papers, etc. For managing the fund, a mutual fund gets an annual fee of 1.25% of funds managed at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds exceed Rs. 100 cores , the fee is only 1%. The fee cannot exceed 1%. Offcourse, regular expenses like custodial fee, cost of dividend warrants, fee for registration, the asset management fee etc are debited to the respective schemes. These expenses cannot exceed 3% of the assets in the respective schemes. These expenses cannot exceed 3% of the assets in the respective schemes each year. ORGANISATION OF A MUTUAL FUND: The formation and operations of Mutual Funds in India is solely guided by SEBI (Mutual Funds) Regulations, 1993, which came into force on 20th January, 1996, through a notification on 9th December, 1996, these Regulations make it mandatory for Mutual Funds to have a three-tier structure of : 1. A Sponsor Institution to promote the Fund. 2. A team of Trustees to oversee the operations and to provide checks for the efficient, profitable and transparent operations of the fund and 3. An Asset Management Company (AMC) to actually deal with the funds. Sponsoring Institution: The Company, which sets up the mutual fund, is called the Sponsor. SEBI has laid down certain criteria to be met by the sponsor. The criterion mainly deals with adequate experience, good past track record, net worth etc. ,[object Object]

Sponsor must have at least 5-year track record of business interest in the Financial Markets.Trustees: Trustees are the people with long experience and good integrity in the respective fields carry the crucial responsibility in safeguarding the interests of the investors. For this purpose, they monitor the operations of the different schemes. They have wide ranging powers and they can even dismiss AMC with the approval of SEBI. The Indian Trust Act governs them. Rules regarding appointment of the Trustees are: ,[object Object]

There must be at least 4 members in the Board of Trustees and at least 2/3rd of the members of the Board of Trustees must be independent.

Trustees of one Mutual Fund cannot be a Trustee of another Mutual Fund, unless he is an independent trustee in both cases, and has the approval of both the Boards.Rights of Trustees: ,[object Object]

All mutual Fund Schemes floated by the AMC have to be approved by the Trustees.

Trustees can seek information from the AMC on the operations andcompliance of the Mutual Fund, with the provisions of the trust Deed,investment management agreement and the SEBI Regulations. ,[object Object],Asset Management Company: The AMC actually manages the funds of the various schemes. The AMC employs a large number of professionals to make investments, carry out research &to do agent and investor servicing. In fact, the success of any Mutual Fund depends upon the efficiency of this AMC. The AMC submits a quarterly report on the functioning of the mutual fund to the trustees who will guide and control the AMC. The AMC is usually a private limited company, in which the sponsors and their associations or joint venture partners are shareholders. The AMC has to be registered by SEBI and should have a minimum Net worth of Rs.10 cores all times. The role of the AMC is to act as the Investment Manager of the Trust along with the following functions: ,[object Object],provision of the Trust Deed and Regulations ,[object Object]

Funds shall be invested as per Trust Deed and Regulations.Restrictions on the AMC.s: ,[object Object],Trustees. ,[object Object]

AMC.s cannot take up any activity that is in conflict with the activities of the mutual funds.Registrars and Transfer Agents: The Registrars and Transfer Agents are responsible for the investor servicing functions, as they maintain the records of investors in the mutual funds. They process investor applications , record details provided by the investors on application forms, send out periodical information on the performance of the mutual fund; process dividend pay-out to the investors; incorporate changes in information as communicated by investors; and keep the investor record up to date, by recording new investors and removing investors who have withdrawn their funds. Custodian: Custodians are responsible for the securities held in the mutual fund’s portfolio. They discharge an important back-office function, by ensuring that securities that are bought are delivered and transferred to the books of mutual funds, and that funds are paid-out when mutual fund buys securities. They keep the investment account of the mutual fund, and also collect the dividends and interest payments due on the mutual fund investments. Custodians also track corporate actions like bonus, issues, right offers, offer for sale, buy back and open offers for acquisition. ORGANISATION OF A MUTUAL FUND: There are many entities involved and the diagram below illustrates the Organisational set up of a mutual fund: Composition of Indian Mutual Fund Industry: Unit Trust of India Bank sponsored Bank of Baroda AMC Bank of India AMC Canbank Investment Management Services Ltd. Punjab National Bank AMC Ltd. SBI Funds Management Ltd. Indfund Management Ltd. Institutions: General Insurance Corporation AMC IDBI Principal Asset Management Co. Jeevan Bima Sahayog Asset Management Co. Ltd. Private Sector: 1. India Benchmark AMC Ltd. Cholamandalam AMC Ltd. Escorts AMC Ltd. J.M. Capital Management Co. Ltd. Kotak Mahindra AMC Ltd. Shriram AMC Ltd. 2. Joint Venture .Predominantly Indian Birla Sun Life AMC Pvt. Co. Ltd. DSP Merrill Lynch Investment Mangers (India) ltd. HDFC AMC Ltd. Sundaram Newton AMC Tata TD Waterhouse Asset Management Private Ltd. 3. Joint Ventures .Predominantly Foreign Alliance Capital Asset Management (India) Pvt. Ltd. Standard Chartered Asset Management Co. Pvt. Ltd. ING Investment Management (India) Pvt. Ltd. JM Asset Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Prudential ICICI Management Co. Ltd. Templeton Asset Management (I) Pvt. Ltd. ROLE OF MUTUAL FUNDS IN THE FINANCIAL MARKET Indian financial institutions have played a dominant role in assets formation and intermediation, and contributed substantially in macroeconomic development. In this process of development Indian mutual funds have emerged as strong financial intermediaries and are playing a very important role in bringing stability to the financial system and efficiency to resource allocation. Mutual funds play a crucial role in an economy by mobilizing savings and investing them in the capital market, thus establishing a link between savings and the capital market. The activities of mutual funds have both short-and long-term impact on the savings and capital markets, and the national economy. Mutual funds, thus, assist the process of financial deepening and intermediation. They mobilize funds in the savings market and act as complementary to banking; at the same time they also compete with banks and other financial institutions. In the process stock market activities are also significantly influenced by mutual funds. There is thus hardly any segment of the financial market, which is not (directly or indirectly) influenced by the existence and operation of mutual funds. However, the scope and efficiency of mutual funds are influenced by overall economic fundamentals: the interrelationship between the financial and real sector, the nature of development of the savings and capital markets, market structure, institutional arrangements and overall policy regime. Regulatory Aspects of Mutual Fund Schemes of mutual fund: ,[object Object]

Every mutual fund shall along with the offer document of each scheme pay filing fees.

The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor.

No one shall issue any form of application for units of a mutual fund unless the form is accompanied by the memorandum containing such information as may be specified by the Board.

Every close ended scheme shall be listed in a recognized stock exchange within six months from the closure of the subscription.

The asset management company may at its option repurchase or reissue the repurchased units of a close-ended scheme.

A close-ended scheme shall be fully redeemed at the end of the maturity period.quot;
Unless a majority of the unit holders otherwise decide for its rollover by passing a resolutionquot;
. ,[object Object], (I) If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub-regulation (ii) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation ,[object Object],INVESTMENT OBJECTIVES AND VALUATION POLICIES: ,[object Object]

Provided that moneys collected under any money market scheme of a mutual fund shall be invested only in money market instruments in accordance with directions issued by the Reserve Bank of India.

The mutual fund shall not borrow except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit holders.

The mutual fund shall not advance any loans for any purpose.

The Net Asset Value of the scheme shall be calculated and published at least in two daily newspapers at intervals of not exceeding one week.

The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors.TYPES OF MUTUAL FUNDS: Broadly Mutual Funds are classified into: ,[object Object],The open-ended schemes do not have a fixed maturity and are open for subscription the whole year. One can buy and sell units at the NAV related prices to the Mutual funds. These schemes are normally not listed on the stock exchanges and can be redeemed directly to the Mutual Fund. ,[object Object],The closed ended schemes can be bought and sold on the stock exchange subsequent to the initial subscription through the public offer. One can stay invested in the scheme for a stipulated period ranging from 2 to 15 years. Generally, the close-ended schemes are traded at a discount to their NAV in the stock exchange. On the basis of investments objective, there are five different types of schemes: ,[object Object],Majority of the corpus of such a scheme is invested in equities and equity related instruments. This kind of scheme is for those investors who are not risk averse and are willing to hold on to their investment for a long period of time, caring little for volatility. In such schemes, dividend may or may not be declared. ,[object Object],The Fund Manager of such schemes invests a substantial portion of their fund in fixed income securities like debentures, bonds and money market instruments. This kind of scheme is ideal for risk averse investors who are interested in steady income. ,[object Object],Fund Manager of such funds invests in both equity as well as debt markets in the proportion as that highlighted in the prospectus. The objective of such a scheme is to provide both growth and income by distributing a part of the income and capital gains they earn. Such a scheme is suitable for investors who want long-term returns without taking the entire risk of the equity market. ,[object Object],These are schemes with very low risks. They invest in Zero risk or safer, short term instruments like treasury bills, certificates of deposit, Commercial Paper and inter-bank call money. The objective of these schemes is to provide liquidity and moderate income and also preserve the capital. ,[object Object],The objective of such a scheme is to provide tax benefits to the investors. Two types of schemes fall under this head. 1. ELSS (Equity Linked Savings Schemes: A Fund Manager of such a scheme invests primarily in stocks. An important feature of this scheme is that there is a lock-in period of three years from the date of investment. During this period unit holders are prohibited from trading, pledging and transferring the units. Repurchase is permitted only after three years. 2. Pension Schemes: A unit holder in a Pension Scheme can avail of a tax rebate of 20 per cent for investments up to Rs 60,000 (tax saving of Rs 12,000). Benefits of investing in Mutual Funds: ,[object Object]

Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Such a spread would not have been possible without their assistance.

Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyse the markets and economy to pick good investment opportunities.

An investor with a limited amount of fund might be able to invest in only one or two stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified at the same time taking advantage of the position it holds. Also in cases of liquidity crisis where stocks are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs.

Transparency and interactivity:

Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Mutual Funds clearly layout their investment strategy to the investor.

Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at their market value. Over and above this the units can be directly redeemed to the Mutual Fund as and when they announce the repurchase.

The large amounts of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk / return profile.

All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.

Investors can exchange their units from one scheme to another, which cannot be done in other kinds of investments. Income units can be exchanged for growth units depending upon the performance of the funds.

The pooling of funds from a large number of customers enables the fund to have large funds at its disposal. Due to these large funds, mutual funds are able to buy cheaper and sell dearer than the small & medium investors. Thus, they are able to get better market rates and lower rates of brokerage. So, they provide better yields to their customers. They also enjoy the economies of scale and reduce the cost of capital market participation. The transaction costs of large investments are quite lower than that of small investments. All the profits are passed on to the investor in the form of dividends and capital appreciation. Mutual funds have a return ranging from 12-17% p.a.

Renders expertise service at lower costs:

The management of the fund is generally assigned to professionals who are well trained and have adequate experience in the field of investment. The investment decisions of these professionals are backed by informed judgement and experience. Thus, investors are assured of quality services in their best interest. The fee charged by the mutual funds is 1%.

Risks of investment in Mutual Funds:

Mutual funds are not free from risks as the funds so collected are invested in stock markets, which are volatile in nature and are not risk free. The following risks are generally involved in mutual funds

In general, there are many kinds of risks associated with every kind of investment on shares. They are called market risks. These market risks can be reduced, but not completely eliminated even by a good investment management. The prices of shares are subject to wide price fluctuations depending upon market conditions over which nobody has control. The various phases of business cycle such as

Boom, Recession, Slump and Recovery affects the market conditions to a larger extent.

There are certain risks inherent in the scheme itself. For instance, in a pure growth scheme, risks are greater. It is obvious because if one expects more returns as in the case of a growth scheme, one has to take more risks.

Whether the mutual fund makes money in shares or loses depends upon the investment expertise of the Asset Management Company (AMC). If the investment advice goes wrong, the fund has to suffer a lot. The investment expertises of various funds are different and it is reflected on the returns, which they offer to the investors.

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