Industry Background Mutual Fund

8/8/2019 Industry Background Mutual Fund

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INDUSTRY BACKGROUND

The mutual fund industry started in India in a small way with the UTI Act creating what waseffectively a small savings division within the RBI. Over a period of 25 years this grew fairlysuccessfully and gave investors a good return, and therefore in 1989, as the next logical step,

public sector banks and financial institutions were allowed to float mutual funds and theirsuccess emboldened the government to allow the private sector to foray into this area. Theinitial years ofthe industryalso saw the emerging years of the Indian equity market, when anumber of mistakes were made and hence the mutual fund schemes, which invested in lesser-known stocks and at very high levels, became loss leaders for retail investors. From those days totoday the retail investor, for whom the mutual fund is actually intended, has not yet returned tothe industry in a big way. But to be fair, the industry too has focused on bringing in the largeinvestor, so that it can create a significant base corpus, which can make the retail investor feelmore secure.

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. The history of mutual funds in Indiacan be broadly divided into four distinct phases.

The history of mutual funds in India can be broadly divided into distinct phases.

PHASE 1 (1964 1987) GROWTH OF UTI

UTI sole player in the industry, created by an Act ofParliament ,1963

The first product launched by UTI was Unit Scheme 1964

UTI creates products such as ULIP (1971), MIPs, Children Plans (1986), Offshore Funds etc.

MASTERSHARE (1987) 1st Diversified Equity Investment Schemein India.

INDIA Fund 1st Indian offshore fund launched in August 1986.

PHASE 2 (1987 1993) ENTRY OF PUBLIC SECTOR FUNDS

In 1987 Public Sector Banks and FIs got permission to set up MF.

SBI mutual fund was the first non -UTI mutual fund, set up in November 1987

This was followed by Canbank MF, LIC MF, Indian Bank MF, BOI MF, GIC and PNB MF

In 1993, Mutual Fund Industry was open to private players.

SEBI got its regulatory powers in 1992

PHASE 3 (1993-1996) EMERGENCE OF PRIVATE FUNDS


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In 1993, Mutual Fund Industry was open to private players.

SEBIs first set of regulations for the industry formulated in 1993

Significant innovations, mostly initiated by private players

PHASE 4 (1996-1999) GROWTH AND SEBI REGULATION

Implementation of new SEBI regulations led to rapid growth

Bank mutual funds were recast as per SEBI guidelines

UTI came under voluntary SEBI supervision.

Dividends made tax free in 1999.

Mutual funds assets in mid-2002 were app. 1,00,000 crore

During this phase, both SEBI and AMFI launched investor awareness programmes.

PHASE 5 (1999-2004) EMERGENCE OF A LARGE AND UNIFORM INDUSTRY

UTI ACT REPEALED IN FEBRUARY 2003.

AUM by end of 2005 app. INR 1,50,000 crore

Rapid growth, significant increase in corpus of private players

Tax break offered created arbitrage opportunities

Bond funds and liquid funds registered highest growth

PHASE 6 FROM 2004 ONWARDS: CONSOLIDATION AND GROWTH

Mergers andAcquisitions witnessed

Alliance MF acquired by Birla Sunlife

Sun F&C by Principal PNB Mutual fund

Standard Chartered acquired by IDFC

THE FOLLOWING GRAPH INDICATES YHE GROWTH OF ASSETS OVER THE

YEARS:


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INDUSTRY PROFILE

The mutual fund industry is a lot like the film star of the finance business. Though it is perhapsthe smallest segment of the industry, it is also the most glamorous in that it is a young industrywhere there are changes in the rules of the game everyday, and there are constant shifts andupheavals.

The mutual fund is structured around a fairly simple concept, the mitigation of risk through thespreading of investments across multiple entities, which is achieved by the pooling of a numberof small investments into a large bucket. Yet it has been the subject of perhaps the most elaborateand prolonged regulatory effort in the history of the country.

The Indian mutual fund industry is one of the fastest growing sectors in the Indian capital andfinancial markets. The mutual fund industry in India has seen dramatic improvements in quantityas well as quality of product and service offerings in recent years. Mutual funds assets undermanagement grew by 96% between the end of 1997 and June 2003 and as a result it rose from8% of GDP to 15%.


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The industry has grown in size and manages total assets of more than $30351 million. Of thevarious sectors, the private sector accounts for nearly 91% of the resources mobilized showingtheir overwhelming dominance in the market. Individuals constitute 98.04% of the total numberof investors and contribute US $12062 million, which is 55.16% of the net assets undermanagement.

Steady growth of mutual fund business in India in the four decades from 1964, when UTI was setup is given in the table on the next page:

Period (Year)

Aggregate

Investment

In Crores of

Rupees

Period

(Year)

Aggregate Investment

In Crores of

Rupees

1964-69 65 1992-93 46988.02

1969-74 172 1993-94 61301.21

1974-79 402 1994-95 75050.21

1979-84 1261 1995-96 81026.521986-87 4563.68 1996-97 80539.00

1987-88 6738.81 1997-98 68984.00

1988-89 13455.65 1998-99 63472.00

1989-90 19110.92 1999-00 107966.10

1990-91 23060.45 2000-01 90587.00

1991-92 37480.20 2001-02 94571.00

Mutual Fund Industry in its true spirit rooted in a free market and oriented towards competitivefunctioning with the dedicated goal of service to the investors can be said to have settled in India

only in 1993. However the industry took its roots much earlier with the setting up of the UnitTrust in India (UTI) in 1964 by the Government of India. During the last 36 years, UTI hasgrown to be a dominant player in the industry with assets of over Rs.72, 333.43 Crores as onMarch 31, 2000. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963.In 1987 public sector banks and insurance companies were permitted to set up mutual funds andaccordingly since 1987, 6 public sector banks have set up mutual funds. Also the two Insurancecompanies LIC and GIC established mutual funds. Securities Exchange Board of India (SEBI)formulated the Mutual Fund (Regulation) 1993, which for the first time established acomprehensive regulatory framework for the mutual fund industry. Since then several mutualfunds have been set up by the private and joint sectors.

WHAT ARE MUTUAL FUNDS?

CONCEPT

A Mutual Fund is a trust that pools the savings of a number of investors who share a commonfinancial goal. The moneythus collected is then invested in capital market instruments such asshares, debentures and other securities. The income earned through these investments and thecapital appreciations realized are shared by its unit holders in proportion to the number of units


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owned by them. Thus, a Mutual Fund is the most suitable investment for the common man as itoffers an opportunity to invest in a diversified, professionally managed basket of securities at arelatively low cost.

DEFINITION

Mutual funds are collectivesavings and investmentvehicles where savings of small (orsometimes big) investors are pooled together to invest for their mutual benefit and returnsdistributed proportionately. Pooling of money ensures that small investors get the benefit ofadvice and expertise that is normally available only to very large investors.

A mutual fund is an investment that pools your money with the money of an unlimited numberof other investors. In return, you and the other investors each own shares of the fund. The fundsassets are invested according to an investment objective into the funds portfolio of investments.

Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also called capitalappreciation funds.


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Mutual Funds are investment companies that make investments on behalf of individuals andinstitutions that share common financial goals. The suitability of a particular mutual fund for anindividual investor depends on the type and nature of the funds investments and amount ofdiversification.

Funds are rated widely as to risk and return, and such ratings can be used to establish a matchwith investor goals and suitability.

Mutual Funds schemes are managed by respective Asset Management Companies sponsored byfinancial institutions, banks, private companies or international firms. The biggest Indian AMCis UTI while Alliance, Franklin Templeton etc are international AMCs.

A TYPICAL MUTUAL FUND HAS THE FOLLOWING CONSTITUENTS

ALL OF THE ABOVE CONSTITUENTS ARE EXPLAINED AS FOLLWS:

1. 1. FUND SPONSOR


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A sponsor is any person who, acting alone or in combination with another body corporate,establishes a MF. The sponsor of a fund is similar to the promoter of a company. In accordancewith SEBI Regulations, the sponsor forms a trust and appoints a Board of Trustees, and alsogenerally appoints an AMC as fund manager. In addition, the sponsor also appoints a custodianto hold the fund assets. The sponsor must contribute at least 40% of the net worth of the AMC

and possess a sound financial track record over five years prior to registration.

1. TRUSTEESThe MF or trust can either be managed by the Board of Trustees, which is a body of individuals,or by a Trust Company, which is a corporate body. Most of the funds in India are managed byBoard of Trustees. The trustees being the primary; guardians of the unit holders funds andassets, a trustee has to be a person of high repute and integrity. The trustees, however, do notdirectly manage the portfolio securities. The portfolio is managed by the AMC as per the definedobjectives, accordance with Trust Deed and SEBI (Mutual Funds) Regulations.

1.

3.

ASSET MANAGEMENT COMP

ANY (AMC)

The AMC, which is appointed by the sponsor or the trustees and approved by SEBI, acts like theinvestment manager of the trust. The AMC functions under the supervision of its own Board ofDirectors, and also under the direction of the trustees and SEBI. AMC, in the name of the trust,floats and manages the different investment schemes as per the SEBI Regulations and as perthe Investment Management Agreement signed with the Trustees.

1. 4. OTHERSApart from these, the MF has some other fund constituents, such as custodians andde

positorie

s, bank

s, tran

sfer

agen

tsand

di

stri

butors. The custodian is appointed for safekeeping of securities and participating in the clearing system through approved depository. The

bankers handle the financial dealings of the fund. Transfer agents a responsible for issue andredemption of units of MF. AMCs appoint distributors of brokers who sell units on behalf of theFund, and also serve as investment advisers. Besides brokers, independent individuals are alsoappointed as agents for the purpose of selling fund schemes to investors. The regulationsrequire arms length relationship between the fund sponsors, trustees, custodians and AMC.

MUTUAL FUND CLASSIFICATION

1) OPEN ENDED AND CLOSE ENDED FUNDS

a) OPEN ENDED FUNDS

y In an open ended fund, investors can buy and sell units of the fund, at NAV relatedprices, at any time, directly from the fund.

y Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, in the initialoffer period. After a pre-specified period say 30 days, the fund is declared open forfurther sales and repurchases


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y Investors receive account statements of their holdings,y The number of outstanding units goes up and downy The unit capital is not fixed but variable.

b) CLOSE ENDED FUNDS

y A closed -end fund is open for sale to investors for a specified period, after which furthersales are closed.

y Any further transactions happen in the secondary market (stock exchange) where closed-end funds are listed.

y The price at which the units are sold or redeemed depends on the market prices, whichare fundamentally linked to the NAV.

y The number of units of closed ended funds remains unchanged.y The unit capital is fixed because of one time sale.

2) LOAD AND NO LOAD FUNDS

y Load is the one time fee payable by the investor to allow the fund to meet initial issueexpenses including brokers/agents/distributors commissions, advertising and marketingexpenses.

y Funds that charge front end (entry) load, back end (exit), or deferred loads are calledLOAD funds.

y IF the investors objective is to get the benefit of compounding his initial investment byreinvesting and holding his investment for a very long term, then, a no front load fund ispreferable.

3) TAX EXEMPT AND NON EXEMPT FUNDS

y When a fund invests in tax exempt securities, it is called a tax exempt fund.y In India any income received by mutual fund is tax free.y After 1999 budget, all dividend income received from MF is tax free in hands of the

investor. But all funds other than open ended equity funds have to pay a dividenddistribution tax.

ySo in India, open end equity oriented mutual fund schemes are tax exempt InvestmentAvenue, while other funds are taxable for distributable income.

y After 2005 budget, repurchase transaction for equity oriented schemes are subject toSecurities Transaction Tax.

4) CLASSIFICATION ON THE BASIS OF INVESTMENT OBJECTIVE


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1. i. EQUITY FUNDSThose funds which invest only in equity shares and undertake the associated risk;

1. ii. INCOME FUNDSThose funds which invest in securities which will earn high income;

1. iii. GROWTH FUNDSThose funds which invest in growth oriented securities so as to assure appreciation in their valuein the long run;

1. iv. LIQUID FUNDSThose funds which specialize in investing in short- term money market instruments withemphasis on liquidity with a low rate of return;

1. v. SPECIAL FUNDSThose funds which invest only in specialized channels like (a) gold and silver, (b) a specificcountry (Japan Fund, India Fund, etc.), (c) a specific category of companies (Technology Fund);

1. vi. INDEX-LINKED FUNDS


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Those funds which invest only in those shares which are included in the market indices and inthe same proportion. They move with the market index;

1. vii. LEVERAGED FUNDSLeveraged funds are those which increase the size of the value of the portfolio and benefit theshareholders by gains exceeding the cost of the borrowed funds;

1. viii. REAL ESTATE FUNDSuch funds are meant for the real estate ventures.

1. ix. BALANCED FUNDSThose which divide their investments between equity shares and bonds in order to meet theobjectives of safety, growth, and regularity of income;

1. x.HEDGE FUNDSFunds that buy shares whose prices are likely to go up and sell short, shares whose prices areexpected to go down; and finally.

1. xi. OFFSHORE FUNDSThese specialize in investing in foreign companies.

WHAT IS NET ASSET VALUE (NAV)?

The share ice of the mutual fund is based on its net asset value (NAV) per share, which is foundby subtracting from the market value of the portfolio the mutual fun liabilities and the dividingby the number of mutual fund shares issued.

That is:


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In August 1994, SEBI had formed a six-member committee to suggest disclosure practices andstandardized procedures for computation of net asset values for mutual fund schemes. Thecommittee finalized its report on 12 December 1995 and the same was released on 1 January1996.

REGULATING AGENCIES OF MUTUAL FUNDS

y SEBI ( Established in 1992 by an Act of Parliament)?y Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1996y SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign

countryy Bank-sponsored mutual funds were jointly regulated by SEBI and RBIy Subsequently it has been clarified that all MFs being primarily capital market players,

come under the regulatory umbrella of SEBI.y RBI regulates the money and government securities market where the mutual funds

invest but the not the MMMF.y

Liquid funds which invest in money market instruments are now governed by SEBIalone. ( Money Market Mutual Funds are now regulated by SEBI)?y If a bank-sponsored mutual fund offers a guarantees, it requires RBI permissiony All schemes of UTI are now under UTIMF, are managed by a UTI AMC and under

purview of the SEBIy SEBI regulates Share Registrars, Custodians, Mutual Funds, Stock Exchanges and share

brokers. But it does not regulate Non Banking Finance companies.

1. 1. WHAT IS THE ROLE OF MINISTRY OF FINANCE IN MUTUAL FUNDREGULATIONS?

yThe finance ministry is the supervisor of both the RBI and SEBI

y Aggrieved parties can make appeals to the MoF on the SEBI rulings relating to mutualfunds

y AMCs has to file its annual statements with Registrar of Companies ( RoC)1. 2. WHAT IS AMFI AND WHAT ARE ITS OBJECTIVES?

AMFI is an industry association, incorporated in 1995, is not an SRO, so it can just issueguidelines to members. It cannot enforce regulations.

Objectives

y To promote the interests of mutual funds and unit holders.y To set ethical, commercial and professional standards in the industry.y To increase public awareness of the mutual fund industry.


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y To develop a cadre of well trained distributorsAMFI is governed by a board of directors elected frommutual funds and is headed by a full timechairman.

1.

3.

WH

AT ARE TH

E RIGH

TS OF TH

E INVESTORS IN RESP

ECT OF SERVICESTANDARDS THAT THEY CAN EXPECT FROM MFS?

y Investors are entitled to receive dividends declared in a scheme within 30 days.y Redemption proceeds have to be sent to investors within 10 daysy If an investor fails to claim the dividend or redemption proceeds he has the rights to claim

it up to a period of 3 years from the due date at the then prevailing NAV. After 3 years hewill be paid at NAV applicable at the end of 3rd year.

y Mutual funds have to allot units within 30 days of the closure of the issue and also openthe scheme for redemption, if it is an open -ended scheme.

y Mutual funds have to publish their half yearly results in at least one national daily andpublish their entire portfolios, at least once in 6 months. Such disclosure should be donewithin 30 days from 6 monthly account closing dates of the fund

y Trustees will have to ensure that any information having a material impact on the unitholders investments should be made public by the mutual fund

y If 75% of the unit holders so decide, 1)The scheme can be wound up 2)Meeting of unitholders can be called 3)Appointment of the AMC of the mutual fund can be terminated

y If there is any change in the fundamental attributes of the scheme, the unit holders haveto be notified through a letter. They also have a right to repurchase at NAV without anyload, before such change is effected.

y Unit holders have the right to inspect certain documentsy Unit holders have the right to receive the complete statement of the schemey

Portfolio before the expiry of one month from the close of each half year.

1. 4. WHAT ARE THE LIMITATIONS TO INVESTORS RIGHT?y Investors cannot sue the trust as they are not distinct from the trusty Investors cannot lodge complaints against the trustees (with the Registrar of Public

Trusts) or the AMC (with the CLB).y Investors can lodge complaints with SEBI for non-compliance.y Investors cannot be compensated if the performance of the fund is below expectations.y There are no legal remedies for to a prospective investor. Only after his investment in the

scheme he becomes eligible for the earlier mentioned right.

GUIDELINES FOR MUTUAL FUNDS AS PER SEBI

SEBI regulations clearly state that all funds and schemes operational under them would be boundby their regulations. SEBI has recently taken following steps for the regulation of mutual funds:

1. I. FORMATION


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Certain structural changes have also been made in the mutual fund industry, as part of which,mutual funds are required to set up asset management companies with fifty percent independentdirectors, separate board of trustee companies, consisting of a minimum fifty percent ofindependent trustees and to appoint independent custodians. This is to ensure an arms lengthrelationship between trustees, fund managers and custodians, and is in contrast with the situation

prevailing earlier in which all three functions were often performed by one body which wasusually the sponsor of the fund or a subsidiary of the sponsor .

Thus, the process of forming and floating mutual funds has been made a tripartite exercise byauthorities. The trustees, the asset management companies (AMCs) and the mutual fundshareholders form the three legs. SEBI guidelines provide for the trustees to maintain an armslength relationship with the AMCs and do all those things that would secure the right ofinvestors.

With funds being managed by AMCs and custody of assets remaining with trustees, an elementof counter-balancing of risks exists as both can keep tabs on each other.

1. II. REGISTRATIONIn January 1993, SEBI prescribed registration of mutual funds taking into account track record ofa sponsor, integrity in business transactions and financial soundness while granting permission.This will curb excessive growth of the mutual funds and protect investors interest by registeringonly the sound promoters with a proven track record and financial strength. In February 1993,SEBI cleared six private sect9r mutual funds viz. 20th Century Finance Corporation, IndustrialCredit& Investment Corporation of India, Tata Sons, Credit Capital Finance Corporation, CeatFinancial Services and Apple Industries.

1.

III.

DOCUMENTS

The offer documents of schemes launched by mutual funds and the scheme particulars arerequired to be vetted by SEBI. A standard format for mutual fund prospectuses is beingformulated.

1. IV. CODE OF CONDUCTMutual funds have been required to adhere to a code of advertisement.

1. V. ASSURANCE ON RETURNSSEBI has introduced a change in the Securities Control and Regulations Act governing themutual funds. Now the mutual funds were prevented from giving any assurance on the land ofreturns they would be providing. However, under pressure from the mutual funds, SEBI revisedthe guidelines allowing assurances on return subject to certain conditions. Hence, only thosemutual funds which have been in the market for at least live years are allowed to assure amaximum return of 12 per cent only, for one year. With this, SEBI, by default, allowed publicsector mutual funds an advantage against the newly set up private mutual funds.


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As per basic tenets of investment, it can be justifiably argued that investments in the capitalmarket carried a certain amount of risk, and any investor investing in the markets with an aim ofmaking profit from capital appreciation, or otherwise, should also be prepared to bear the risks ofloss.

VI.

MINIMUM CORP

US

The current SEBI guidelines on mutual funds prescribe a minimum s art-up corpus of Rs.50crore for a open-ended scheme, and Rs.20 crore corpus r closed-ended scheme, failing whichapplication money has to be refunded.

The idea behind forwarding such a proposal to SEBI is that in the past, the minimum corpusrequirements have forced AMCs to solicit funds from corporate bodies, thus, reducing mutualfunds into quasi-portfolio management outfits. In fact, the Association of Mutual Funds in India(AMFI) has repeatedly appealed to the regulatory authorities for scrapping the minimum corpusrequirements.

1. VII. INSTITUTIONALISATIONThe efforts of SEBI have, in the last few years, been to institutionalize the market by introducing proportionate allotment and increasing the minimum deposit amount to Rs.5000 etc. Theseefforts are to channel the investment of individual investors into the mutual funds.

1. VIII. INVESTMENT OF FUNDS MOBILISEDIn November 1992, SEBI increased the time limit from six months to nine months within whichthe mutual funds have to invest resources raised from the latest tax saving schemes. The

guideline was issued to protect the mutual funds from the disadvantage of investing funds in thebullish market at very high prices and suffering from poor NA V thereafter.

1. IX. INVESTMENT IN MONEY MARKETSEBI guidelines say that mutual funds can invest a maximum of 25 per cent of resourcesmobilized into money-market instruments in the first six months after closing the funds and amaximum of 15 per cent of the corpus after six months to meet short term liquidity requirements.Private sector mutual funds, for the first time, were allowed to invest in the call money marketafter this years budget.

As SEBI regulations limit their exposure to money markets, mutual funds are not major playersin the call money market. Thus, mutual funds do not have a significant impact on the call moneymarket. SEBI also conclude that mutual funds were not responsible for the unprecedentedshooting up of call money rates.

Some funds exceeded their limits in an effort to improve their sagging net asset values(NAVs).Usually, funds can early only about 9-12 per cent. Thus, the prospect of earning morethan 40 per cent may have been tempting,


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1. X. VALUATION OF INVESTMENTSEBI should work in tandem with the Institute of Chartered Accountants of India (ICAI) to takeup a fresh look at mutual fund regulations enacted in 1993. The valuation of investments, a keyaspect of fund accounting, as on balance sheet date, needs review, SEBI regulations 1993, give

discretionary powers to the fund managers as far as the valuation of the investment portfolio onthe balance sheet date is concerned, There are no accounting standards or guidelines prescribedby the ICAI for the valuation of a mutual funds investment portfolio.

The mutual funds are clearly taking advantage of this situation and valuing the portfolio at costof acquisition. The subsequent depreciation or appreciations in the investment portfolio are notaccounted for. Thus, the mutual funds may be able to show profits in the balance sheet even ifthere is severe erosion in the value of the investment portfolio. This erosion in the values of theinvestment portfolios is clearly seen in the net asset values (NA V) as on the balance sheet date.But the accounts of the mutual funds do not reveal the same.

The objective of the accounting in case of a mutual fund should be besides showing details ofincome, expenses, assets and liabilities, has to reveal the true value of the fund. The value of thefund is already reflected in, its NAV and the balance sheet is expected to be in consonance withthis value. This requires that the investment portfolio be calculated at market values, providingfor any depreciation or appreciation. .

The transparent and well understood declaration or Net Asset Values (NAVs) of mutual fundschemes is an important issue in providing investors with information as to the performance ofthe fund. SEBI had warned some mutual funds earlier of unhealthy market practices, and iscurrently working on a common format for calculating the net asset values (NAVs) of mutualfunds, which are done in various ways by them at present.

1. XI. INSPECTIONSEBI inspect mutual funds every year. A full SEBI inspection of all f the 27 mutual funds wereproposed to be done by the March 1996 to streamline their operations and protect the investorsinterests. Mutual funds are monitored and inspected by SEBI to ensure compliance with theregulations.

1. XII. UNDERWRITINGIn July 1994, SEBI permitted mutual funds to take up underwriting of primary issues as apart of

their investment activity. This step may assist the mutual funds in diversifying the business.

1. XIII. CONDUCTIn September 1994, it was clarified by SEBI that mutual funds shall not offer buy back schemesor assured returns to corporate investors. The Regulations governing Mutual Funds and PortfolioManagers ensure transparency in their functioning.


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1. XIV. VOTING RIGHTSIn September 1993, mutual funds were allowed to exercise their voting rights. Department ofCompany Affairs has reportedly granted mutual funds the right to vote as full-fledgedshareholders in companies where they have equity investments.

MUTUAL FUNDS OPERATIONS IN INDIA

Mutual funds le households an option for portfolio diversification and relative risk-aversionthrough collection of funds from the households and make investments in the stock and debtmarkets. Resources mobilized by mutual fund (UTI was the only mutual fund until 1987-88)grew at a steady rate until 1992-93; since then they showed some variations. Resourcesmobilized by a mutual fund which was just 0.04 per cent of GDP (at current market prices)during the period of 1970-71 to 1974-85 increased to 1.59 per cent during 1990-91 to 1992-93.Total resources mobilized as proportion of GDP declined to 1.12 per cent by 1994-95 butnevertheless remained positive. During the period from 1995-97, there was a net outflow of

funds form mutual funds, especially UTI, as a result of which the ratio turned negative. From1997-98 onwards, the ratio again turned positive and stood at 1.13 per cent during 1999-2000.

The mutual fund industry registered significant growth in the last few years. The ingestibleresources of mutual funds rose form Rs. 68,200 crore in 1998-99 to Rs. 1, 09,114 crore in 1999-2000. Net resource mobilization by mutual funds declined to Rs. 6,846 crore in April-December,2000 from Rs. 12,193 crore in the corresponding previous period. This was on account of thesteep increase in redemption/repurchase during this period. The outflow of funds viarepurchase/redemption constituted 88.7 per cent of gross resource mobilisation during April-December, 2000 compared with 66.0 per cent in the corresponding previous period. In the caseof public sector mutual funds, redemption/repurchase exceeded gross resource mobilization,

thereby making their net resource mobilization negative.

Scope for Development of Mutual Fund Business in India

A Mutual Fund is the most suitable investment for the common man as it offers an opportunity toinvest in a diversified, professionally managed basket of securities at a relatively low cost. Indiahas a burgeoning population of middle class now estimated around 300 million. A typical Indianmiddle class family can have liquid savings ranging from Rs.2 to Rs.10 Lacs today. Investmentsin Banks are liquid and safe, but with the falling rate of interest offered by Banks on Deposits, itis no longer attractive. At best a part can be saved in bank deposits, but what are the othersources of investment for the common man? Mutual Fund is the ready answer. Viewed in thissense globally India is one of the best markets for Mutual Fund Business, so also for Insurance business. This is the reason that foreign companies compete with one another in setting upinsurance and mutual fund business units in India. The sheer magnitude of the population ofeducated white collar employees provides unlimited scope for development of Mutual FundBusiness in India.

The alternative to mutual fund is direct investment by the investor in equities and bonds orcorporate deposits. All investments whether in shares, debentures or deposits involve risk. While


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risk cannot be eliminated, skillful management can minimize risk. Mutual Funds help to reducerisk through diversification and professional management. The experience and expertise ofMutual Fund managers in selecting fundamentally sound securities and timing their purchasesand sales help them to build a diversified portfolio that minimizes risk and maximizes returns

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