OVERVIEW OF MUTUAL FUND•A Mutual Fund is a trust that pools the savings of a number ofinvestors who share a common financial goal. The money thuscollected is then invested in capital market instruments such asshares, debentures and other securities.•The income earned through these investments and the capitalappreciation realized is shared by its unit holders in proportion tothe number of units owned by them. Thus a Mutual Fund is themost suitable investment for the common man as it offers anopportunity to invest in a diversified, professionally managedbasket of securities at a relatively low cost.
HISTORY OF MUTUAL FUND• First Phase – 1964-87 -Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. . The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.• Second Phase – 1987-1993 (Entry of Public Sector Funds) -SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), 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
Cont….• Third Phase – 1993-2003 (Entry of Private Sector Funds) Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. As at the end of January 2003, there were 33 mutual funds with 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.
Cont…• 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, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations• The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations
Types Of Mutual Fund Schemes:Mutual funds Schemes can be segregated into three heads –1. Schemes according to Maturity Period:A mutual fund scheme can be classified into open-ended scheme or close-endedscheme depending on its maturity period.Open-ended Fund/ SchemeOpen-ended schemes are those schemes where investors can redeem and buy newunits all throughout the year as per their convenience at NAV related prices.Close-ended Fund/ SchemeA close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fundis open for subscription only during a specified period at the time of launch of thescheme. Investors can invest in the scheme at the time of the initial public issue andthereafter they can buy or sell the units of the scheme on the stock exchanges wherethe units are listed.NOTE: SEBI Regulations stipulate that at least one of the two exit routes is provided tothe investor i.e. either repurchase facility or through listing on stock exchanges. Thesemutual funds schemes disclose NAV generally on weekly basis.
2. Schemes according to Investment Objective: Growth / Equity Oriented SchemeIncome / Debt Oriented SchemeBalanced FundMoney Market or Liquid FundGilt FundIndex FundsSector specific funds/schemesTax Saving Schemes
3. Load or no-load Fund:Mutual funds incur certain expenses such as brokerage, marketingexpenses, and communication expenses. These expenses are known as‘load’.A Load Fund is one that charges a percentage of NAV for entry orexit. That is, each time one buys or sells units in the fund, a chargewill be payable. This charge is used by the mutual fund formarketing and distribution expenses. Suppose the NAV per unit isRs.10. If the entry as well as exit load charged is 1%, then theinvestors who buy would be required to pay Rs.10.10 The investorsshould take the loads into consideration while making investmentas these affect their yields/returns. A no-load fund is one that doesnot charge for entry or exit. It means the investors can enter thefund/scheme at NAV and no additional charges are payable onpurchase or sale of units.
The table below summarizes the funds according to theirnature of risk – Nature of risk Categories of funds Low risk Money market funds G-Sec funds Moderate risk Income funds Short term plans Balanced funds High risk Index funds Growth funds Sector funds
ASSOCIATION OF MUTUAL FUNDS IN INDIAAssociation of Mutual Funds in India (AMFI) was incorporated on22nd August, 1995.(AMFI) modeled on the lines of a Self Regulating Organization(SRO) with a view to promoting and protecting the interest ofmutual funds and their unit-holders, increasing public awareness ofmutual funds, and serving the investor’s interest by defining andmaintaining high ethical and professional standards in the mutualfunds industryAssociation of Mutual Funds India has brought down theIndian mutual fund industry to a professional and healthy marketwith ethical lines enhancing and maintaining standards.It follows the principle of both protecting and promoting theinterests of mutual funds as well as their unit holders.
OBJECTIVES OF AMFIAMFI interacts with SEBI and works according to SEBIs guidelines inthe mutual fund industry.To recommend and promote best business practices and code ofconduct to be followed by members and others engaged in theactivities of mutual fund and asset management including agenciesconnected or involved in the field of capital markets and financialservices. Association of Mutual Fund of India do represent the Governmentof India, the Reserve Bank of India and other related bodies onmatters relating to the Mutual Fund Industry.It develops a team of well qualified and trained Agent distributors.It implements a programme of training and certification for allintermediaries and other engaged in the mutual fund industry.
Cont…….AMFI undertakes all India awareness programme for investors inorder to promote proper understanding of the concept and working ofmutual funds.Association of mutual fund of India also disseminate information onMutual Fund Industry and undertakes studies and research eitherdirectly or in association with other bodies.
Advantages of investing in a Mutual Fund• Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.5000/-.• Diversification We must spread our investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.).• Variety Mutual funds offer a tremendous variety of schemes.• Professional Management Qualified investment professionals who seek to maximize returns and minimize risk monitor investors money.
•TransparencyBeing under a regulatory framework, mutual funds have to disclosetheir holdings, investment pattern and all the information that can beconsidered as material, before all investors. SEBI acts as a watchdogand safeguards investors’ interests• LiquidityA distinct advantage of a mutual fund over other investments is thatthere is always a market for its unit/ shares. Its easy to get one’smoney out of a mutual fund. Redemptions can be made by filling aform attached with the account statement of an investor.
Risks Associated with Mutual Funds• Professional Management- Some funds don’t perform in the market, as their management is not dynamic enough to explore the available opportunity in the market.• Costs – The biggest source of AMC income is generally from the entry & exit load which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.• Dilution - Because funds have small holdings across different companies, high returns from a few investments often dont make much difference on the overall return.• Taxes - when making decisions about your money, fund managers dont consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale.
Taxing in mutual fund• Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds with less than 50% of assets in equities), are tax-free in the hands of the investor. A dividend distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund on the dividends declared by the fund. Long-term debt funds, government securities funds (G- sec/gilt funds), monthly income plans (MIPs) are examples of debt-oriented funds.
• Section 2(42A): Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset if the same is held for less than 12 months.• Section 10(38): Under Section 10(38) of the Act, long term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. Short-term capital gains on equity- oriented funds are chargeable to tax @10%, Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is less.
• Section 112: Under Section 112 of the Act, capital gains, not covered by the exemption under Section 10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:• Resident Individual & HUF -- 20% plus surcharge, education cess.• Partnership firms & Indian companies -- 20% plus surcharge.• Foreign companies -- 20% (no surcharge). Capital gains will be computed after taking into account the cost of acquisition as adjusted by Cost Inflation Index, notified by the central government.
Product Focus The performance of the fund in giving returns to its investors. The way in which that particular fund was marketed.Customer Ownership FocusSpecialized Product & Service Focus
Marketing Strategies:Direct marketing Personal Selling Telemarketing Direct mail Advertisements in newspapers and magazines Hoardings and Banners InternetSelling through intermediariesJoint Calls
CHALLENGES AND OPPORTUNITIES:• Assessing the needs of the investors;• Expanding the customer base;• Responding to investors needs;• Studying the macro environment;• Choosing the distribution network;• Finalizing strategies for publicity and advertisement;• Preparing offer documents and other literature;
• Getting feedback about sales;• Studying performance indicators about fund performance like NAV;• Sending certificates in time and other after sales activities;• Honoring the commitments made for redemptions and repurchase;• Paying dividends and other entitlements;• Creating positive image about the fund;• Spreading awareness about mutual funds;• Creating new markets for mutual funds.
LATEST TRENDS OF MUTUAL FUNDS IN INDIA• The recent trends since last year clearly suggest that the average investors have lost money in equity. People have now started opting for portfolio managers.• Entrance of multinational companies.• Professional expertise to manage funds worldwide.• Mutual funds in India now offer a wide range of schemes to choose.• Mutual funds are turned to be the most preferred choice worldwide for both small and big investors due to their numerous advantages which include diversification, professional management, potential of returns, efficiency and easy to use.
Assets Under Management (AUM)AUM is a term used by financial servicescompanies in the mutual fund, hedge fund, andmoney management, investmentmanagement, wealth management, and privatebanking businesses to gauge how much moneythey are managing. Many financial servicescompanies use this as a measure of successand comparison against their competitors.
Benefits Of Investing In Mutual Funds• Easy to buy and sell.• Investments can be made in lump sum or periodic payments (easy on the pocket).• Mutual fund industry in India is very well regulated and transparent.• Professional management - saves time, costs and reduces risk.• Diversification - to protect from downside risk.
How to choose a fund for investing?• Expense Ratio: Denotes the annual expenses of the funds, including the management fee and administrative cost. Lower expense ratio is better.• Sharpe Ratio: An indicator of whether an investments return is due to smart investing decisions or a result of excess risk. Higher Sharpe Ratio is better• Alpha Ratio: Measures risk relative to the market or benchmark index. For investors, the more positive an alpha is, the better it is.• R-squared: Measures the percentage of an investments movement that are attributable to movements in its benchmark index. A mutual fund should have a balance in R-square and ideally it should not be more than 90 and less than 80.
ASSOCIATION OF MUTUAL FUNDS ININDIAAssociation of Mutual Funds in India (AMFI) was incorporated on 22ndAugust, 1995.(AMFI) modeled on the lines of a Self Regulating Organization (SRO)with a view to promoting and protecting the interest of mutual fundsand their unit-holders, increasing public awareness of mutual funds, andserving the investor’s interest by defining and maintaining high ethicaland professional standards in the mutual funds industryAssociation of Mutual Funds India has brought down theIndian mutual fund industry to a professional and healthy market withethical lines enhancing and maintaining standards.It follows the principle of both protecting and promoting the interestsof mutual funds as well as their unit holders.