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  1. 1. MUTUAL FUND Presented by: Suhaib Azeem Khan Aligarh Muslim University A.M.U
  2. 2. MUTUAL FUNDS <ul><li>A mutual fund is a common pool of money into which investors place their contributions that are to be invested in different types of securities in accordance with the stated objective. </li></ul><ul><li>A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. </li></ul><ul><li>The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. </li></ul><ul><li>The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. </li></ul><ul><li>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 low cost. </li></ul>
  3. 3. HISTORY OF MUTUAL FUND <ul><li>Mutual fund in world </li></ul><ul><li>Uncertainty of the origin of mutual fund : </li></ul><ul><li>Some cite that the close ended investment company launched first mutual fund in the Netherland in 1822 by king William first. </li></ul><ul><li>Other point to a Dutch merchant named Adriaan Van Ketwich whose investment trust created in 1774 may have give it. </li></ul><ul><li>The Boston Personal Property Trust, formed in 1893 was the first close ended mutual fund in U.S. </li></ul><ul><li>The creation of Alexander fund in Philadelphia in 1907 was an important step in the evolution toward what we know as the modern mutual fund </li></ul>
  4. 4. CONT’D… <ul><li>History of MF’s can be discussed in two parts : </li></ul><ul><li>1) Emergence through public players; and </li></ul><ul><li>2) Emergence through private players </li></ul>
  5. 5. PHASES OF MUTUAL FUND EMERGENCE <ul><li>History of mutual funds in India can be divided into 5 important phases: </li></ul><ul><li>Phase I . 1963-1987 </li></ul><ul><li>UTI sole market player, created by an Act of parliament in 1963. </li></ul><ul><li>US 64 even today the single largest mutual fund scheme. </li></ul><ul><li>UTI created a number of products e.g. monthly income plans, </li></ul><ul><li>children’s plan, </li></ul><ul><li>Equity oriented schemes and offshore funds during this period . </li></ul><ul><li>UTI managed assets of Rs.6700 cr. at the end of this phase.   </li></ul>
  6. 6. CONT’D … <ul><li>Phase II. 1987-1993 (Entry of Public Sector Funds) </li></ul><ul><li>Public sector banks and financial institutions entered the mutual funds industry. </li></ul><ul><li>SBI mutual fund was the first non-UTI MF to be set up in 1987. </li></ul><ul><li>Significant shift from deposits to MF. </li></ul><ul><li>Most funds were growth oriented ,closed-ended funds. </li></ul><ul><li>AuM of UTI grew to Rs.38,247cr. and public sector funds Rs.8750cr . </li></ul>
  7. 7. CONT’D… <ul><li>Phase III 1993-1996 . (Entry of Private Sector Funds) </li></ul><ul><li>In 1993,the mutual funds industry was open to private sector players both Indian and foreign. </li></ul><ul><li>SEBI’s first set of regulations were formulated. </li></ul><ul><li>Regulation revised in 1996. </li></ul><ul><li>Significant innovation in servicing, product design and information disclosure. </li></ul><ul><li>  </li></ul><ul><li>Phase IV 1996-1999 (Entry of Private Sector Funds) </li></ul><ul><li>Implementation of new SEBI regulation. </li></ul><ul><li>Rapid asset growth . </li></ul><ul><li>Bank mutual funds were recast according to the SEBI recommended structure. </li></ul><ul><li>UTI came under voluntary SEBI supervision. </li></ul>
  8. 8. CONT’D… <ul><li>Phase V 1999-2003 </li></ul><ul><li>Marked by very rapid growth in MF industry. </li></ul><ul><li>Increase in market share of private players. </li></ul><ul><li>AUM crossed Rs.100,000cr. </li></ul><ul><li>Bond funds and liquid funds registered the highest growth(nearly 60% of assets). </li></ul><ul><li>UTI share dropped to nearly 50%. </li></ul>
  9. 9. ADVANTAGES OF MUTUAL FUNDS <ul><li>Portfolio diversification: It enables him to hold a diversified investment portfolio even with a small amount of investment like Rs. 2000/-. </li></ul><ul><li>Professional management: The investment management skills, along with the needed research into available investment options, ensure a much better return as compared to what an investor can manage on his own. </li></ul><ul><li>Reduction/Diversification of Risks: The potential losses are also shared with other investors. </li></ul><ul><li>Reduction of transaction costs: The investor has the benefit of economies of scale; the funds pay lesser costs because of larger volumes and it is passed on to the investors. </li></ul><ul><li>Wide Choice to suit risk-return profile: Investors can chose the fund based on their risk tolerance and expected returns. </li></ul>
  10. 10. DISADVANTAGES OF MUTUAL FUNDS <ul><li>No control over costs: The investor pays investment management fees as long as he remains with the fund, even while the value of his investments are declining. He also pays for funds distribution charges which he would not incur in direct investments. </li></ul><ul><li>No tailor-made portfolios: The very high net-worth individuals or large corporate investors may find this to be a constraint as they will not be able to build their own portfolio of shares, bonds and other securities. </li></ul><ul><li>Managing a portfolio of funds: Availability of a large number of funds can actually mean too much choice for the investor. So, he may again need advice on how to select a fund to achieve his objectives. </li></ul><ul><li>Delay in redemption: It takes 3-6 days for redemption of the units and the money to flow back into the investor’s account. </li></ul>
  11. 11. CONSTITUTION OF MUTUAL FUNDS IN INDIA <ul><li>The constitution are designed to safeguard investors, check speculative activities of mutual funds & ensuring financial discipline through transparency & fair play. </li></ul><ul><li>SEBI ( Mutual Fund ) regulation require a four tier system to organize Mutual Fund. i.e. </li></ul><ul><li>- Sponsor </li></ul><ul><li>- Trustee </li></ul><ul><li>- Asset Management Company </li></ul><ul><li>- Custodian </li></ul>
  12. 12. SPONSORS <ul><li>Who thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI), which is the market regulator and also the regulator for mutual funds. </li></ul><ul><li>SEBI checks a persons integrity , experience in the financial sector, his </li></ul><ul><li>networth etc. </li></ul><ul><li>Sponsor is to contribute 40 per cent of the net worth of AMC. </li></ul><ul><li>Mutual fund is created by sponsor as a trust under Indian Trust act 1982. </li></ul><ul><li>Sponsor appoints a trustee. </li></ul>
  13. 13. TRUSTEES <ul><li>A trustee is a person who holds the property of Mutual Fund in trust for the benefit of unit holders. </li></ul><ul><li>A company is appointed as trustee to manage the mutual fund with approval of SEBI. </li></ul><ul><li>To ensure fair dealing at least 75 per cent of trustees are to be independent of the sponsors. </li></ul><ul><li>The trustee role is not to manage money. Their job is only to see , whether the money is being managed as per stated objectives. </li></ul>
  14. 14. CONT’D … <ul><li>It is duty of trustee is to provide information to unit holders as well as to SEBI about mutual fund schemes. </li></ul><ul><li>Trustees are to appoint AMC to float the schemes. </li></ul><ul><li>It is trustees duty to observe & ensures that AMC is managing schemes in accordance with the trust deed . </li></ul>
  15. 15. ASSET MANAGEMENT COMPANY (AMC) <ul><li>The sponsor or trustees appoint an AMC, also known as ‘Investment Manager’, to manage the affair of mutual fund. </li></ul><ul><li>The AMC’s Board of Directors must have at least 50% of Directors who are independent directors. </li></ul><ul><li>The AMC has to be approved by SEBI. The AMC functions under the supervision of it’s Board of Directors, and also under the direction of the Trustees and SEBI. </li></ul><ul><li>It is the AMC, which in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities. </li></ul>
  16. 16. CONT’D… <ul><li>In order to do this the AMC needs to follow all rules and regulations prescribed by SEBI. </li></ul><ul><li>Whenever the fund intends to launch a new scheme, the AMC has to submit a Draft Offer Document to SEBI. This draft offer document, after getting SEBI approval becomes the offer document (OD) of the scheme. </li></ul><ul><li>The Compliance Officer has to sign the Due Diligence Certificate in the offer document. </li></ul>
  17. 17. CUSTODIANS <ul><li>A custodian’s role is safe keeping of securities and also keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested. </li></ul><ul><li>The Custodian is appointed by the Board of Trustees. </li></ul><ul><li>SEBI requires that each mutual fund shall have a custodian who is not in any way associated with AMC. </li></ul>
  18. 18. <ul><li>TYPES OF MUTUAL FUNDS </li></ul><ul><li>1.)BY STUCTURE </li></ul><ul><li>2.)BY NATURE </li></ul><ul><li>3.)BY INVETSMENT OBJECTIVE </li></ul><ul><li>4.)OTHERS SCHEMES AND PLANS </li></ul>
  19. 19. BY STRUCTURE: <ul><li>1. Open-ended Funds </li></ul><ul><li>An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (&quot;NAV&quot;) related prices. The key feature of open-end schemes is liquidity. </li></ul><ul><li>2. Closed-ended Funds </li></ul><ul><li>These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unit holder and other market factors. </li></ul><ul><li>3. Interval Funds </li></ul><ul><li>Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. </li></ul>
  20. 20. BY NATURE: <ul><li>1. Equity fund </li></ul><ul><li>These funds invest a maximum part of their corpus into equities holdings. </li></ul><ul><li>The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. </li></ul><ul><li>2. Debt funds </li></ul><ul><li>The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. </li></ul><ul><li>These funds ensure low risk and provide stable income to the investors. </li></ul>
  21. 21. CONT’D … <ul><li>3. Balanced funds: </li></ul><ul><li>They are a mix of both equity and debt funds. </li></ul><ul><li>They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. </li></ul><ul><li>These schemes aim to provide investors with the best of both . Equity part provides growth and the debt part provides stability in returns. </li></ul>
  22. 22. BY INVESTMENT OBJECTIVE: <ul><li>1.Growth Funds </li></ul><ul><li>The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities. </li></ul><ul><li>2. Income Funds </li></ul><ul><li>The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. </li></ul>
  23. 23. CONT’D… <ul><li>3. Balanced Funds </li></ul><ul><li>Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities. </li></ul><ul><li>4. Money Market Funds </li></ul><ul><li>The aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper etc. </li></ul>
  24. 24. OTHER SCHEMES <ul><li>1. Tax Saving Schemes </li></ul><ul><li>Some times the investors investing their money in the mutual funds to get some tax benefits. </li></ul><ul><li>2. Index Schemes </li></ul><ul><li>BSE Sensex or the NSE 50. </li></ul><ul><li>Sector Specific Schemes </li></ul><ul><li>Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks,etc. </li></ul>
  25. 25. OTHER PLANS OF MUTUAL FUND <ul><li>Unit-Linked Plan (ULIP) </li></ul><ul><li>Unit-linked plan offers the interesting option of combining protection as well as tax advantages with the attractive prospects of investing in  equities. </li></ul><ul><li>It works on a minimum premium basis and not on a sum assured one. </li></ul><ul><li>Investor decide the amount contributed at regular intervals. </li></ul><ul><li>ULIP offers cover till needs are fulfilled, beyond that it becomes an investment avenue. </li></ul>
  26. 26. CONT’D… <ul><li>Fixed Maturity Plans (FMPs) </li></ul><ul><li>The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. </li></ul><ul><li>The tenure can be of different maturities, ranging from one month to five years. </li></ul><ul><li>FMPs can be compared to Fixed Deposits of a bank. While a Fixed Deposit offers a 'guaranteed' return, returns in FMPs are only 'indicative'. </li></ul><ul><li>The fund house fixes a 'target amount' for a scheme. </li></ul>
  27. 27. CONT’D… <ul><li>Monthly Income Plans (MIPs) </li></ul><ul><li>MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments. </li></ul><ul><li>MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor. </li></ul><ul><li>These are generally monthly, quarterly, half-yearly and annual options. </li></ul>
  30. 30. LIST OF MUTUAL FUND COMPANIES IN INDIA <ul><li>Some of the popular firms that deal in mutual funds in India are: </li></ul><ul><li>Reliance Mutual Funds </li></ul><ul><li>HDFC </li></ul><ul><li>Birla Sun Life </li></ul><ul><li>Deutsche Bank </li></ul><ul><li>ING </li></ul><ul><li>HSBC </li></ul><ul><li>ICICI Prudential </li></ul><ul><li>LIC </li></ul>
  31. 31. CONT’D .. <ul><li>JP Morgan </li></ul><ul><li>Kotak Mahindra </li></ul><ul><li>JM Financial </li></ul><ul><li>State Bank of India (SBI) </li></ul><ul><li>Sahara Mutual Funds </li></ul><ul><li>Tata </li></ul><ul><li>UTI </li></ul><ul><li>Standard Chartered </li></ul>
  32. 32. TOP MUTUAL FUNDS IN INDIA <ul><li>Reliance Mutual Fund </li></ul><ul><li>HDFC Equity Fund </li></ul><ul><li>ICICI Prudential Fund </li></ul><ul><li>SBI Mutual Fund </li></ul>
  33. 33. DISTRIBUTION CHANNELS <ul><li>Mutual Funds are primary vehicles for large collective investments, working on the principle of pooling funds. </li></ul><ul><li>Agents and distributors are a vital link between the mutual funds and investors. </li></ul><ul><li>Agents </li></ul><ul><li>Is a broker between the fund and the investor and acts on behalf of the principal. </li></ul><ul><li>He is not exclusive to the fund and also sells other financial services. This in a way helps him to act as a financial advisor. </li></ul><ul><li>Distribution Companies </li></ul><ul><li>Is a company which sells mutual funds on behalf of the fund. </li></ul><ul><li>It has several employees or sub-broker under it. </li></ul><ul><li>It manages distribution for several funds and receives commission for its services. </li></ul>
  34. 34. DISTRIBUTION CHANNELS <ul><li>Banks and NBFCs </li></ul><ul><li>Several banks, particularly private and foreign banks are involved in a fund distribution by providing similar services like that of distribution companies. </li></ul><ul><li>They work on commission basis </li></ul><ul><li>Direct Marketing </li></ul><ul><li>Mutual funds sell their own products through their sales officers and employees of the AMC. </li></ul><ul><li>This channel is normally used to mobilize funds from high net worth individuals and institutional investors. </li></ul>
  35. 35. METHODS OF PERFORMANCE EVALUATION <ul><li>Sharpe performance measure </li></ul><ul><li>Based on capital asset pricing model </li></ul><ul><li>Developed by william sharpe </li></ul><ul><li>Also known as shrpe index </li></ul><ul><li>S t = (R t - RFR) / D t </li></ul><ul><li>Treynor’s performance measure </li></ul><ul><li>Apply to all type of investors regardless of risk preference </li></ul><ul><li>T n = (R t - RFR) / B t </li></ul>
  36. 36. CONT’D… <ul><li>Jensen’s performance measure </li></ul><ul><li>Measure the absolute performance of portfolio </li></ul><ul><li>R j -RFR = A t + B t (R m - RFR) </li></ul>
  38. 38. THANKS