INTRODUCTION TO MUTUAL FUNDS INTRODUCTION TO MUTUAL FUNDS Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time. One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the nature of stock market. This is where mutual funds come to the rescue. A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as “Unit holders”. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities market before it can collect funds from the public.
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INTRODUCTION TO MUTUAL FUNDSINTRODUCTION TO MUTUAL FUNDS
Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and
are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not
a wise option, as in real terms the value of money decreases over a period of time.
One of the options is to invest the money in stock market. But a common investor is not
informed and competent enough to understand the nature of stock market. This is where mutual
funds come to the rescue.
A mutual fund is a group of investors operating through a fund manager to purchase a
diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to
invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds
with much lower trading costs than if they tried to do it on their own. Mutual fund issues units to
the investors in accordance with quantum of money invested by them. Investors of mutual funds
are known as “Unit holders”.
The profits or losses are shared by the investors in proportion to their investments. The
mutual funds normally come out with a number of schemes with different investment objectives,
which are launched from time to time. A mutual fund is required to be registered with Securities
and Exchange Board of India (SEBI) which regulates securities market before it can collect
funds from the public.
Investments may be in stocks, bonds, money market securities or some combination of
these. Those securities are professionally & efficiently managed on behalf of the shareholders,
and each investor holds a pro rata share of the portfolio entitled to any profits when the securities
are sold, but subject to any losses in value as well.
DEFINNITIONDEFINNITION
“Mutual fund is vehicle that enables a
number of investors to pool their money and
have it jointly managed by a professional
money manager.”
WHAT IS MUTUAL FUNDS..???WHAT IS MUTUAL FUNDS..???
A Mutual Fund is a pool of money, collected from investors, and is invested according to certain
investment objectives. 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 then invested in capital market
instruments such as shares, debentures and other securities. The 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. Mutual Fund companies are known as asset management
companies. They offer a variety of diversified schemes. Mutual Fund acts as investment
companies. They pool the savings of investors and invest them in a well-diversified portfolio of
sound investments. The following diagram shows their working of mutual fund.
WORKING OF THE MUTUAL FUND
MYTHS ABOUT MUTUAL FUNMYTHS ABOUT MUTUAL FUN DD
1. Mutual Funds invest only in shares.
2. Mutual Funds are prone to very high risks/actively traded.
3. Mutual Funds are very new in the financial market.
4. Mutual Funds are not reliable and people rarely invest in them.
5. The good thing about Mutual Funds is that you don’t have to pay attention to them.
FACTS ABOUT MUTUAL FUNDSFACTS ABOUT MUTUAL FUNDS
1. Equity Instruments like shares form only a part of the securities held by mutual funds.
Mutual funds also invest in debt securities which are relatively much safer.
2. The biggest advantage of Mutual Funds is their ability to diversify the risk.
3. Mutual Funds are there in India since 1964. Mutual Funds market is very evolved in
U.S.A and is there for the last 60 years.
4. Mutual Funds are the best solution for people who want to manage risks and get good
returns
5. The truth is as an investor you should always pay attention to your mutual funds and
continuously monitor them. There are various funds to suit investor needs, both as a long
term investment vehicle or as a very short term cash management vehicle.
HISTORY OF THE INDIAN MUTUAL FUND HISTORY OF THE INDIAN MUTUAL FUND
The mutual fund 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 . The history of mutual funds in India
can be broadly divided into four distinct phases:
FIRST PHASE – 1964-87: Unit Trust of India (UTI) was established on 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. At the end of 1988 UTI had Rs.6, 700 crores of assets
under management.
SECOND PHASE – 1987-1993 (PUBLIC SECTOR FUNDS): SBI Mutual Fund was the
first non- UTI Mutual Fund established in June 1987 followed by 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 47000 crores.
THIRD PHASE – 1993-2003 (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 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. 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 total assets of Rs. 1, 21,805 crores.
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 second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. With the
bifurcation of the UTI which had in March 2000 more than Rs.76, 000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector funds,
the mutual fund industry has entered its current phase of consolidation and growth. As at the
end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores
under 421 schemes.
CHARACTERISTICS OF A MUTUAL FUND CHARACTERISTICS OF A MUTUAL FUND
The following are the characteristics of the mutual funds:-
VARIETYVARIETY
There are 5 basic type of mutual funds namely equity, bond, hybrid, money market and
GILT. So investor has a wide variety of schemes to choose from according to its
convenience such as risk and return factor etc .Investor also gets a variety in time as well
for how much period he would like to invest if he is a short term investor he would invest
in money market funds or if he is a long term investor he would invest in other
diversified funds.
LIQUIDITYLIQUIDITY
Some mutual funds are required by law to redeem shares on a daily basis, fund shares are
very liquid investment. Most mutual funds also continually offer new shares to investors,
and many fund companies allows shareholders to transfer money or make exchanges
from one fud to another within the same fund family. Mutual funds process sales,
redemptions, and exchanges as a normal part of daily business activity.
ACCESSIBILITY AND AFFORDABILITYACCESSIBILITY AND AFFORDABILITY
Mutual fund shares are available through a variety of sources. Investors can purchase
fund shares either with the help of an investment professionals such as broker, financial
planner, bank representative’s etc. Many Mutual funds can be purchased directly from
fund companies but in this case investor is required to do their own research to determine
which funds meet their need.
Mutual funds offer their many benefits and services at an affordable prices even a
small investor can purchase it and make huge profit.
ADVANTAGESADVANTAGES
Every investment has advantages and disadvantages. But it's important to remember that
features that matter to one investor may not be important to you. Whether any particular feature
is an advantage for you will depend on your unique circumstances. For some investors, mutual
funds provide an attractive investment choice because they generally offer the following
benefits.
PROFESSIONAL MANAGEMENT PROFESSIONAL MANAGEMENT
Mutual Funds provide the services of experienced and skilled professionals,
backed by a dedicated investment research team that analyses the performance and
prospects of companies and selects suitable investments to achieve the objectives of the
scheme. This risk of default by any company that one has chosen to invest in, can be
minimized by investing in mutual funds as the fund managers analyze the companies’
financials more minutely than an individual can do as they have the expertise to do so.
DIVERSIFICATIONDIVERSIFICATION
Mutual Funds invest in a number of companies across a broad cross-section of
industries and sectors. This diversification reduces the risk because seldom do all stocks
decline at the same time and in the same proportion. You achieve this diversification
through a Mutual Fund with far less money than you can do on your own
LOWLOW COSTSCOSTS
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial and
other fees translate into lower costs for investors.
TRANSPARENCYTRANSPARENCY
Investors get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion invested in
each class of assets and the fund manager's investment strategy and outlook.
FLEXIBILITYFLEXIBILITY
Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans; you can systematically invest or withdraw funds according
to your needs and convenience.
WELLWELL REGULATEDREGULATED
All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The
operations of Mutual Funds are regularly monitored by SEBI.
CONVENIENT ADMINISTRATION
Investing n in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and unnecessary follow up with
brokers and companies. Mutual Funds save your time and make investing easy and
convenient.
RETURN POTENTIAL
Over a medium to long-term, Mutual Funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
LIQUIDITY
In open-ended schemes, you can get your money back promptly at net asset value
related prices from the Mutual Fund itself. With close-ended schemes, you can sell your
units on a stock exchange at the prevailing market price or avail of the facility of direct
repurchase at NAV related prices which some close-ended and interval schemes offer you
periodically.
CHOICE OF SCHEMES
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
UNDERSTANDING AND MANAGING RISK
All investments whether in shares, debentures or deposits involve risk: share
value may go down depending upon the performance of the company, the industry, state
of capital market and the economy; generally, however longer the term, lesser the risk;
companies may default in payment of interest/principal on their deposits/bonds
debentures; the rate of interest on investment may fall short of the rate of inflation
reducing the purchasing power.
While risk cannot be eliminated, skillful management can minimize risk. Mutual
fund helps to reduce risk through diversification and professional management. The
experience and expertise of Mutual Fund managers in selecting fundamentally sound
securities and timing their purchases and sales help them to build a diversified portfolio
that minimize risk and maximizes returns.
TAX BENEFITSTAX BENEFITS
Last but not the least, mutual funds offer significant tax advantages. Dividends
distributed by them are tax-free in the hands of the investor. They also give you the
advantages of capital gains taxation. If you hold units beyond one year, you get the
benefits of indexation. This reduces your tax liability. What’s more, tax-saving schemes
and pension schemes give you the added advantage of benefits under Section 88. You
can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the
scheme in a year.
BASIC CONCEPTS OF MUTUAL FUNDBASIC CONCEPTS OF MUTUAL FUND
NAV (net asset value)
The Mutual Fund Net Asset Value or NAV is the total market value of all the assets,
including cash, held by the fund, after deducting its liabilities. The per unit NAV
represents the market value of one unit of the mutual fund. It is the price at which
investors can buy or redeem the mutual fund’s units.
NAV = Total value of the funds –
liabilities
No. of shares currently issued and
outstanding
ENTRY/ EXIT LOADENTRY/ EXIT LOAD
A Load is a charge, which the mutual fund may collect on entry and/or exit from a
fund. A load is levied to cover the up-front cost incurred by the mutual fund for
selling the fund. It also covers one time processing costs. Some funds do not charge any
entry or exit load. These funds are referred to as ‘No Load Fund’. Funds usually charge
an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%.
For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is
Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is
Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units.The units are allotted
to an investor based on the amount invested.
Let us now assume that the same investor decides to redeem his 761.6146 units. Let us
also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption
price per unit works out to Rs. 14.925.
The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.
FUND OFFER DOCUMENT:FUND OFFER DOCUMENT:
A Fund Offer document is a document that offers you all the information you could
possibly need about a particular scheme and the fund launching that scheme. That way, before
you put in your money, you're well aware of the risks etc involved. This has to be designed in
accordance with the guidelines stipulated by SEBI.
The prospectus must disclose following details:-
Investment objectives.
Risk factors and special considerations.
Summary of expenses.
Constitution of the fund.
Guidelines on how to invest.
Organization and capital structure.
Tax provisions related to transactions.
Financial information.
DIFFERENT TYPES OF FUNDS
Mutual funds come in many varieties. For example, there are index funds, stock funds,
bond funds, money market funds, and more. Each of these may have a different investment
objective and strategy and a different investment portfolio. Different mutual funds may also be
subject to different risks, volatility, and fees and expenses.
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations etc. The diagram below gives an overview into
the existing types of schemes in the Industry:
ON THE BASIS OF FLEXIBILITYON THE BASIS OF FLEXIBILITY