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CONTENTS
y INTRODUCTION
y MEANING AND IMPORTANCE
y STAKE HOLDERS OF MUTUAL FUND
y MUTUAL FUND CYCLE
y CLASSIFICATION OF MUTUAL FUND
y BENEFITS OF MUTUAL FUND
y SEBI GUIDELINES
y MUTUAL FUND IN INDIA
y CONCLUSION
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INTRODUCTION
Of late, Mutual funds have become a hot favorite of millions of people all
over the world. The driving force of Mutual Funds is the safety of principal
guaranteed , plus the added advantage of capital appreciation together with
the income earned in the form of interest or dividend. People prefer mutual
fund than bank deposits, life insurance and even bonds because with a little
money, they can get into the investment game. One can own a string of blue
chips like ITC, TISCO, and Reliance etc. through mutual funds.
Thus Mutual Funds act as a gateway to enter into big companies hither to in
accessible to an ordinary investor with his small investment.
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MEANING
A Mutual Fund is a financial intermediary that pools the savings of investors
for collective investment in a diversified portfolio of securities.
In other words, 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 numberof units owned by them. Thus a Mutual Fund is the most suitable investment
for the common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively lower cost.
Thus Mutual Fund is a collective savings schemes. It plays an important role
in mobilizing and channelizing the same for productive ventures in the Indian
economy.
Definition
The Security Exchange Board of India (SEBI) Mutual Fund regulation, 1993
defines A Mutual Fund as a fund established in the form of a trust by a
sponsor, to raise money 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 & Brigham F. Eugene Unit trusts are
Corporations which accepts dollars from savers and then use these dollars to
buy stocks, long term bonds, short term debt instruments issued by business
or Govt. units; these corporations pool funds and these reduce risk by
diversification.
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IMPORTANCE
Owing to the size, operating economics and ability to commit large sum of
money for long periods, the mutual funds enjoy ample resources at their
disposal by mobilizing resources of the investors. The mutual fund with theexpert and experienced management cadre can secure large varieties of high
yielding Blue chip securities and show better results to the investing public.
Therefore the investors now prefer investing their resources in various mutual
fund schemes, than managing themselves.
y Ordinary investor who applies for share in a public issue of any
company is not assured of any firm allotment. But Mutual Fund, those
subscribe to the capital issue made by companies get firm allotment ofshares. Mutual funds later sell these shares in the share market and to
the promoter of the company at a much higher price. Hence mutual
fund helps develop confidence among the investors.
y Mutual fund creates awareness among urban rural middle class people
about the benefits of investment in the capital market through profitable
and safe avenues. Therefore mutual fund could be able to mop up a
large amount of the surplus funds available with the people.
y Lastly, another notable thing is that Mutual Funds are controlled andregulated by SEBI and hence are considered safe. Due to all the
benefits the importance of Mutual Fund has been increasing.
STAKEHOLDERS
The Sponsor
Any corporate body, which initiates the launching of a mutual Fund, is
referred to as the Sponsor. According to the SEBI norms, the sponsorshould have professional competence, financial soundness and a general
reputation for fairness and integrity in business transactions. The sponsor
appoints trustees, an asset management company and custodians in
compliance with the regulations.
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The Trustees
Person who hold the property of the mutual fund in trust for the benefit of the
unit holders are called Trustees.
Functions:
y Keeping under its custody all the property of the mutual fund schemes
administered by the mutual fund.
y Furnish all the information to unit holders as well as to SEBI about the
mutual fund schemes.
y Appoint an asset management company for the purpose of floating the
mutual fund schemes.
y Supervise the collection of any income due to be paid to the scheme.
The Custodians
Any agency that keeps custody of the securities that are bought by the mutual
fund managers under the various schemes is called the custodians.
Functions:
y
Safe keeping of securities.y Participating any clearing system on behalf of the client to effect
deliveries of the securities
y Ensuring delivery of scrip only on receipt of payment and payment
only upon receipt of scrips.
y Arranging for proper registration or record of securities.
Asset Management Company (AMC)
The investment manager of a mutual fund is technically known as Asset
Management Company and is appointed by the sponsor or the Trustees. The
AMC manages the affairs of the mutual fund. It is responsible for operating
all the schemes of the fund and can act as the AMC of only one Mutual fund.
With the permission of the SEBI, it can also operates as an under writer.
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MUTUAL FUND CYCLE
INVESTORS MUTUAL FUND
Pull their money with
Passed back to Invests in
Generates returns
RETURNS SECURITIES
TYPES OF MUTUAL FUNDS
CONSTITUTION INVESTMENT SPECIAL SCHEMES
Open-ended Scheme Equity Based Schemes Tax Savings
Close-ended- Scheme Debt Based Schemes Sector Specific
Interval Scheme Balance Scheme Index Schemes
Money Market Scheme
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BY CONSTITUTION
1. OPEN-ENDED SCHEMES
The units offered by these schemes are available for sale or
repurchase on any business day at NAV based price. Hence the unit capital of
the schemes keeps changing each day because the schemes itself buys and
sells units from investors. Such schemes thus offer very high liquidity to
investors and are becoming increasingly popular in India. The investor of an
open-ended fund can any moment redeem his existing unit.
2. CLOSE-ENDED SCHEMES
The unit capital of a close-ended product is fixed as it makes a
onetime sale of fixed number of units. These schemes are lunched with an
Initial Public Offer (IPF) with a stated maturity period, after which the units
are fully redeemed at NAV linked price. In the interim, investors can buy or
sell units on the stock exchanges where they are listed. Unlike open-ended
schemes, the unit capital in close ended schemes usually remains unchanged.
After an initial close period, the scheme may offer direct repurchase facility
to the investors. Closed ended schemes are usually are more illiquid as
compared to open -ended schemes and hence trade at a discount to the NAV.
This discount tends towards the NAV closed to the maturity date of the
scheme.
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equity funds fluctuates with market value of the underlying stock with are
influenced by external factors such as social, political as well as economic.
Equity schemes can be further divided in to two categories. These are
y General purpose
y Sector Specific
GENERAL PURPOSE
The investment objective of general purpose Equity schemes do not
restrict them to invest in specific industries or sectors; they thus have a
diversified portfolio of companies across a large spectrum of industries.
While they are exposed to equity price risks, diversified general-purpose
equity funds seek to reduce the sector or stock specific risks through
diversification. They mainly have market risk exposure.
SECTOR SPECIFIC
These schemes restricts their investing to one or more pre-defined sector i.e.
technology sector. Since they depend upon the performance of selected sector
only, these schemes are inherently more risky than general purpose schemes.
They are suited for informed investors who wish to take a view and risk on
the concerned sector.
2. DEBT BASED SCHEMES
These schemes are commonly called Income Schemes; invest in
fixed income securities such as corporate bonds and debentures and
Government securities. The price of these schemes tends to be more stable
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compared with equity schemes and most of the returns to the investors are
generated through dividends or steady capital appreciation. These schemes
are ideal for conservative investors or those who are not in a position to take
higher equity risks, such as retired individuals. However as compared to
money market schemes they do have a higher price fluctuation risk and
compared to a Gilt fund they have a higher credit risk.
3. BALANCED FUNDS
These schemes are commonly called as hybrid schemes. The funds
invest in both equities and bonds. By investing in a mix of this nature,
balanced funds seek to attain the objective of income and moderate capital
appreciation and ideal for investors with a conservative and long-term
orientation.
SPECIAL SCHEMES
1. INDEX SCHEMES
An Index fund tracks the performance a specific stock market index. The
objective is to match the performance of the stock market by tracking an
index that represents the overall market. The funds invest in shares that
constitutes the index and in the same portion as a index. The BSE sensex and
the NSE nifty are being increasing used as benchmarks for Index Funds in
India. Since these schemes mirror an index, there is no active management
and hence they are called passive funds. Their performance is closed linked
to that of the underlying index. Such schemes are best suited for investors
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who would like an equity exposure but are not comfortable with active
management by their fund of their fund by fund manager.
2. TAX SAVING SCHEAMS
Generally called as Equity Linked Saving Schemes (ELSS). Investors
have been given tax concessions to encourage them to participate in equity
markets special schemes like ELSS. Investment in these schemes entitles the
investor to claim an income tax rebate. This investment usually has lock-in
period before the end of which funds cant be withdrawn. The maximum
amount the investor can invest in fund to get the tax benefit is Rs 10,000.
3. REAL ESTATE FUNDS
Specialized Real Estate Funds would invest in real estate directly, or
may found real estate developers or lend to them directly or by shares of
housing finance companies or may even by their securitized assets. They may
be in form of Growth Fund or Income Fund.
TYPES OF RETURNS EXPECTED FROM A MUTUAL FUND
Mutual Funds give returns in two ways.
y Capital Appreciation
y Dividend Distribution
CAPITAL APPRECIATION
An increasing value of the units of the fund is known as capital
appreciation. As the value of individual securities in the fund increases, the
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funds unit price increases. An investor can book a profit by selling the units
at prices higher than the price at which he brought the units.
DIVIDEND DISTRIBUTION
The profit earned by the fund is distributed among unit holders in the
form of dividends. Dividend distribution again is of two types. It can either
be reinvested in the fund or can be on-paid to the investor.
MUTUAL FUNDS IN INDIA
The end of millennium marks 42 years of existence of Mutual Fundsin this country. The ride through these 42 years has not been smooth.
Investors opinion is still divided. While some are for Mutual Fund others are
against it.
UTI commences its operation 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 in
to existence during a period marked by great political and economic
uncertainty in India. With war on the borders and economic turmoil that
depressed the financial market, entrepreneurs were hesitant to enter capital
market.
The already existing companies found it difficult to raise fresh capital,as investors does not respond adequately to new issues. Earnest efforts were
required to channelize savings of the community in to productive uses in
order to speed up the process of industrial growth.
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The then Finance Minister, T.T krishnamachary set up the idea
of a unit trust that would be open to any person or institution to purchase the
units offered by the trust. However, this institutions as we see it, is intended
to cater to the needs of individual investors and even among them as far as
possible, to those whose means are small.
His ideas took the form of the Unit Trust of India, an intermediary
that would help to fulfill the twin objectives of mobilizing retails savings and
investing those savings in the capital market and passing on the benefits so
accrued to the small investors.
UTI commenced its operation from July 1964 with a view to
encouraging savings and investment and participation in the income, profits
and gains accruing to the Corporation from the acquisition, holding,
management and disposal of securities. Different provisions of the UTI Act
laid down the structure of management. Scope of business, power and
functions of the Trust as well as accounting, disclosures and regulatory
requirement for the trust.
One thing is certain; the fund industry was here to stay. The industry
was one entity show till 1986 when the UTI monopoly was broken, when SBI
and Canada Bank Mutual Fund entered the arena. This was followed by the
entry of others like BOI, LIC, and GIC; etc, sponsored by public sector
Banks.
The period in 1986-1993 can be termed as the public sector mutual
funds (PMFs).
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From one player in 1985 the number increased to 8 in 1993. The party didnt
last long. When the private made its debut in 1993-94, the stock market was
booming.
The opening of the asset management business to private sector in
1993 saw international players like, Morgan Stanley, Jardine Fleming, JP
Morgan, George Soros and Capital International, along with the host of
domestic player join the party . But for the equity funds the period of 1994-96
was one of the worst in the history of mutual fund.
SEBI GUIDELINES (2001-02) RELATING TO MUTUAL FUND
y A common format is prescribed for all Mutual Fund schemes to
disclose their entire portfolio an half yearly basis ,so that the investors
can get mining full information on the deployment of funds . Mutual
Funds are also required to disclose the investment in various types of
instruments and percentage of investment in each script to total NAV,
illiquid and Non Performing Assets, investment in derivatives and in
ADRs and GDRs.
y To enable the investor to make informed investment decisions, Mutual
Funds have been directed to fully revise and update offer document and
memorandum at least once in 2 years
y Mutual Funds are also required to
1. Bring uniformity in disclosures of various categories of
advertisements, with a view to ensuring consistency and
comparability across schemes of various Mutual Funds
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2. Reduce initial offer period from a maximum of 45 days to 30
days.
3. Dispatch Statements Of Account once the maximum subscription
amount specified in the offer document is received, even before
the closure of the issue
4. Invest in mortgaged backed securities of investment grade given
by Credit Rating Agency
5. Identify and make provisions for the non performing assets (NPA)
according to criteria for classification of NPAs and treatment of
income accrued on NPAs and to disclose NPAs in half yearly
portfolio reports.
6. Disclose information in a revised format on unit capital, reserves,
performance in terms of dividends and rise / fall in NAV during
the half yearly period, annualized yields over the last 1,3,5 years
in addition to percentage of management fees , percentage of
recurring expenses to net assets, investment made in associate
companies for their services and details of large holdings since
their operation.
7. Declare their NAV and sell or repurchase prices of all schemes
updated daily on regular basis on the AMFI website by 8:00 pm
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and declare NAVs of their close ended schemes on every
Wednesday
y The format for unaudited half yearly results for mutual funds has been
revised by SEBI. These results are to be published before the expiry of
one month from the close of each half year as against two months
period provided earlier. These results.
y All the schemes by mutual funds shall be launched within six months
from the date of the letter containing observations from SEBI on the
scheme offer document. Otherwise, afresh offer document along with
filling fees shall be filed with SEBI.
y Mutual funds are required to disclose large unit-holdings in the
schemes, which are over 25% of the NAV.
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CONCLUSION
The mutual funds have been operating for the last twelve years in India. Of
late, mutual funds find their going very tough. Most of the funds are not able
to collect the targeted amount from small investors. The mutual fund industry
has to face many problems also. Some of them are:
y Disparity between NAV and listed price.
y No uniformity in the calculation of NAV.
y Lack of transparency
y Poor investor servicing.
y Too much dependence on outside agencies.
y Investors Psychology.
y Absence of qualified sales force.
If mutual funds ensure good returns, quick liquidity and safety and create a
good rapport with the investor s, their future will be very bright. they act as a
via media between bank deposits and share in the sense it involves a higher
risk than a bank deposits and share in the sense it involves a higher risk than
a bank deposits and hence better return , but a lower risk than a share and
hence more safety . it is time for the Mutual funds to act as a Mutual
Friends by creating good rapport with the investors by rendering efficient
and prompt services . No doubt, there is a bright future for Mutual funds in
India.