Introduction A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

The money collected & 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 holders in proportion to the number of units owned by them (pro rata) shares instruments. The income earned through these investments and its unit the capital appreciation realized by the scheme. Thus, a Mutual Fund is the most suitable investment for the common person as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy

Anybody with an investible surplus of as little as a few thousand rupees can

A mutual fund is the answer to all these situations. It appoints professionally

qualified and experienced staff that manages each of these functions on a 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 transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a

exploits economies of scale in all three areas - research, investments and

20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual banks.

funds collectively manage almost as much as or more money as compared to

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

The income earned through these investments and the capital appreciation owned by them. Thus, a Mutual Fund is the most suitable investment for the professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

common person as it offers an opportunity to invest in a diversified,

THE SECURITY AND EXCHANGE BOARD OF INDIA (Mutual Funds) form of a trust to raise money through the sale of units to the public or a including money market instruments."

REGULATIONS,1996 defines a mutual fund as a " a fund establishment in the section of the public under one or more schemes for investing in securities,

Mutual Funds have been a significant source of investment in both government and corporate securities. It has been for the decades the monopoly of the state with UTI being the key player with invested funds exceeding Rs. 300 bn. (US $ 10 bn.). The state owned insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies. Banks - mainly state owned too have established Mutual Funds (MFs). Foreign participation in mutual funds and asset management companies permitted on a case-by-case basis. Structure of the Indian mutual fund industry The Indian mutual fund industry is dominated by the Unit Trust of India, which has a total corpus of Rs700bn collected from more than 20 million investors. The UTI has many funds/schemes in all categories i.e. equity, ended. The Unit Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. Most of while legally incorrect, is true for all practical purposes. its investors believe that the UTI is government owned and controlled, which,

balanced, income etc with some being open-ended and some being closed-

The second largest category of mutual funds is the ones floated by nationalized Management floated by the State Bank of India are the largest of these. GIC AMC floated by the LIC are some of the other prominent ones. Some of the AMCs operating currently are:
Name of the AMC Alliance Capital Asset Management (I) Private Limited Birla Sun Life Asset Management Company Limited Bank of Baroda Asset Management Company Limited Bank of India Asset Management Company Limited Can bank Investment Management Services Limited Cholamandalam Cazenove Asset Management Company Limited Dundee Asset Management Company Limited DSP Merrill Lynch Asset Management Company Limited Escorts Asset Management Limited First India Asset Management Limited GIC Asset Management Company Limited IDBI Investment Management Company Limited Indfund Management Limited ING Investment Asset Management Company Private Limited J M Capital Management Limited Jardine Fleming (I) Asset Management Limited Kotak Mahindra Asset Management Company Limited Kothari Pioneer Asset Management Company Limited Jeevan Bima Sahayog Asset Management Company Limited Morgan Stanley Asset Management Company Private Limited Punjab National Bank Asset Management Company Limited Reliance Capital Asset Management Company Limited State Bank of India Funds Management Limited Shriram Asset Management Company Limited Sun F and C Asset Management (I) Private Limited Sundaram Newton Asset Management Company Limited Tata Asset Management Company Limited Credit Capital Asset Management Company Limited Templeton Asset Management (India) Private Limited Unit Trust of India Zurich Asset Management Company (I) Limited Nature of ownership Private foreign Private Indian Banks Banks Banks Private foreign Private foreign Private foreign Private Indian Private Indian Institutions Institutions Banks Private foreign Private Indian Private foreign Private Indian Private Indian Institutions Private foreign Banks Private Indian Banks Private Indian Private foreign Private foreign Private Indian Private Indian Private foreign Institutions Private foreign

banks. Can bank Asset Management floated by Canara Bank and SBI Funds AMC floated by General Insurance Corporation and Jeevan Bima Sahayog

Recent trends in mutual fund industry The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early

nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff

and generally chose to transfer staff from the parent organizations. The

performance of most of the schemes floated by these funds was not good. Some bail out these AMCs by paying large amounts of money as the difference bad. Most of these AMCs have not been able to retain staff, float new schemes plans of continuing the activity in a major way.

schemes had offered guaranteed returns and their parent organizations had to between the guaranteed and actual returns. The service levels were also very etc. and it is doubtful whether, barring a few exceptions, they have serious

The experience of some of the AMCs floated by private sector Indian

companies was also very similar. They quickly realized that the AMC business

is a business, which makes money in the long term and requires deeppocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others and there is general restructuring going on.

They can be credited with introducing many new practices such as new

product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry to upgrade itself and service levels of organizations like competition provided by these. UTI have improved dramatically in the last few years in response to the

Performance of Mutual Fund India Let us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or rather to those who believed in savings, to park their money in UTI Mutual Fund. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely

understood, and of course investing was out of question. But yes, some 24 beginning of liberalization of the industry in 1992. This good record of UTI

million shareholders were accustomed with guaranteed high returns by the became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization.

The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let figures. From Rs. 67bn. the Assets under Management rose to Rs. 470 bn. in

me concentrate about the performance of mutual funds in India through March 1993 and the figure had a three times higher performance by April in India declined when stock prices started falling in the year 1992. Those

2004. It rose as high as Rs. 1,540bn. The net asset value (NAV) of mutual funds days, the market regulations did not allow portfolio shifts into alternative further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market.

investments. There was rather no choice apart from holding the cash or to

The performance of mutual funds in India suffered qualitatively. The 1992

stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020

percent of their net asset value. The measure was taken to make mutual funds

the key instrument for long-term saving. The more the variety offered, the quantitative will be investors. At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and don'ts of mutual funds. Market Trends

COMPARISION OF MUTUAL FUNDS WITH OTHER INSTRUMENT

A lone UTI with just one scheme in 1964 now competes with as many as 400 odd products and 34 players in the market. In spite of the stiff competition and losing market share, Last six years have been the most turbulent as well as exiting ones for the industry. New players have come in, while others have innovation is now pass with the game shifting to performance delivery in

decided to close shop by either selling off or merging with others. Product fund management as well as service. Those directly associated with the fund even the regulators have become more mature and responsible.

management industry like distributors, registrars and transfer agents, and

The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as the debt markets, now flexing their muscles. Fund managers, by their selection criteria for stocks the new generations of private funds, which have gained substantial mass, are have forced corporate governance on the industry. Rewarding honest and reward created where the corporate sector is more transparent then before.

transparent management with higher valuations has created a system of risk-

Funds have shifted their focus to the recession free sectors like

pharmaceuticals, FMCG and technology sector. Funds performances are

improving. Funds collection, which averaged at less than Rs100bn per annum over five-year period spanning 1993-98 doubled to Rs210bn in 1998-99. In the current year mobilization till now have exceeded Rs300bn. Total collection

for the current financial year ending March 2000 is expected to reach Rs450bn.

What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funds rather than public sector mutual funds. Indeed private MFs saw a net inflow of Rs. 7819.34 Crore during the first nine public sector funds.

months of the year as against a net inflow of Rs.604.40 Crore in the case of

MUTUAL FUNDS ADVANTAGES: The benefits on offer are many with good post-tax returns and reasonable safety being the hallmark that we normally associate with them. Some of the other major benefits of investing in them are: Number of available options Mutual funds invest according to the underlying investment objective as specified at the time of launching a scheme. So, we have equity funds, debt funds, gilt funds and many others that cater to the different needs of the investor. The availability of these options makes them a good option. While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of security that aimed at the time of making investments. Money market funds offer the liquidity that desired by big investors who wish to park

surplus funds for very short-term periods. The only pertinent factor here is that the fund has to selected keeping the risk profile of the investor in mind while equity funds are a good bet for a long term, they may not find favor with corporate or High Net worth Individuals (HNIs) who have short-term needs. Diversification Investments spread across a wide cross-section of industries and sectors and so the risk is reduced. Diversification reduces the risk because not all stocks move because the products listed above have different risks associated with them. So,

in the same direction at the same time. One can achieve this diversification through a Mutual Fund with far less money than one can on his own. Professional Management Mutual Funds employ the services of skilled professionals who have years of

experience to back them up. They use intensive research techniques to analyze to come up with the figures for performance that determine the suitability of any potential investment. Potential of Returns Returns in the mutual funds are generally better than any other option in any horizon and stay put in the chosen fund for the duration. Equity funds can

each investment option for the potential of returns along with their risk levels

other avenue over a reasonable period. People can pick their investment outperform most other investments over long periods by placing long-term calls on fundamentally good stocks. The debt funds too will outperform other options such as banks. Though they are affected by the interest rate risk in general, the returns generated are more as they pick securities with different duration that have different yields and so are able to increase the overall returns from the Get Focused I will admit that investing in individual stocks can be fun because each company has a unique story. However, it is important for people to focus on where you put your hard-earned dollars and it should not take lightly. Efficiency By pooling investors' monies together, mutual fund companies can take advantage of economies of scale. With large sums of money to invest, they making money. Investing is not a game. Your financial future depends on

often trade commission-free and have personal contacts at the brokerage firms.

Ease of Use Can you imagine keeping track of a portfolio consisting of hundreds of stocks?

The bookkeeping duties involved with stocks are much more complicated than owning a mutual fund. If you are doing your own taxes, or are short on time, this can be a big deal.

Wealthy stock investors get special treatment from brokers and wealthy bank

account holders get special treatment from the banks, but mutual funds are non-discriminatory. It doesn't matter whether you have $50 or $500,000; you investment. Risk In general, mutual funds carry much lower risk than stocks. This is primarily riskier than individual stocks, but you have to go out of your way to find them. are getting the exact same manager, the same account access and the same

due to diversification (as mentioned above). Certain mutual funds can be

With stocks, one worry is that the company you are investing in goes bankrupt. With mutual funds, that chance is next to nil. Since mutual funds, holds would have to go bankrupt. typically hold anywhere from 25-5000 companies, all of the companies that it

I will not argue that you should not ever invest in individual stocks, but I do for the money that you really care about.

hope you see the advantages of using mutual funds and make the right choice

Drawbacks of Mutual Funds Mutual funds have their drawbacks and may not be for everyone: No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.

Fees and commissions: All funds charge administrative fees to cover their dayto-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you you buy shares in a Load Fund.

don't use a broker or other financial adviser, you will pay a sales commission if

Taxes: During a typical year, most actively managed mutual funds sell

anywhere from 20 to 70 percent of the securities in their portfolios. If your even if you reinvest the money you made.

fund makes a profit on its sales, you will pay taxes on the income you receive,

Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in managers. Index Funds, you forego management risk, because these funds do not employ

What is NAV?
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAVrelated prices. The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis.

What is Entry/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. (Note that units are allotted to an investor based on the amount invested and not on the basis of no. of units purchased). 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.

Are there any risks involved in investing in Mutual Funds?

Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures, bonds etc. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. Besides incase there is a sudden downturn in an industry or the government comes up with new a re gulation which affects a particular industry or company the fund can again be adversely affected. All these factors influence the performance of Mutual Funds. 49 Some of the Risk to which Mutual Funds are exposed to is given below: Market risk If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance. Non-market risk Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries. Interest rate risk Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively. Credit risk Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating.

What are the different types of Mutual funds?

Mutual funds are classified in the following manner: (a) On the basis of Objective Equity Funds/ Growth Funds Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds. 50 Diversified funds

These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors. Sector funds These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector. Index funds These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns. Tax Saving Funds These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. Debt/Income Funds These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor. Liquid Funds/Money Market Funds These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and shortterm fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods. 51 Gilt Funds These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk. Balanced Funds These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks. b) On the basis of Flexibility Open-ended Funds These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds. Close-ended Funds These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of

the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.

Regulatory Aspects Schemes of a Mutual Fund The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has filed with the Board.

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 make by the scheme in the shall fully redeemed at the end of the maturity period. "Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution".

listed securities of the group companies of the sponsor a close-ended scheme

The mutual fund and asset management company shall be liable to refund the application money to the applicants,-

(i) If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub-regulation (1);

(ii) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation (1). Rules Regarding Advertisement: The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false. General Obligations: The financial year for all the schemes shall end as of March 31 of each year.

Every mutual fund or the asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and the fund as specified in Eleventh Schedule.

Every mutual fund shall have the annual statement of accounts audited by an management company.

auditor who is not in any way associated with the auditor of the asset

Restrictions on Investments: A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset Management Company. grade by a credit rating agency authorized to carry out such activity under the