Mutual funds


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Mutual Funds.: Define, The History of Mutual Funds, Mutual Fund Operation Flow chart, Reasons to invest in mutual funds, Advantage & Dis-advanage o Mutual Funds, Classification of Mutual Fund Schemes

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Mutual funds

  1. 1. Mutual Funds Define Mutual Funds are financial intermediaries that collect the savings of investors and invest them in a large portfolios of securities such as money market instruments, corporate and government bonds and equity shares of Joint stock companies. A Mutual Fund is a trust registered with the Securities and Exchange Board of India (SEBI), which pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. This pooled income is professionally managed on behalf of the unit-holders, and each investor holds a proportion of the portfolio i.e. entitled not only to profits when the securities are sold, but also subject to any losses in value as well. The History of Mutual Funds First Phase 1964-87 Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec87), 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). LIC established its mutual fund in June
  2. 2. 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores. Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. 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 Act1963 UTI was bifurcated into two separate entities. One is the Specifi ed 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. With the bifurcation of the erstwhile UTI which had in March2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. Mutual Fund Operation Flow chart The following chart gives us operational flow of a Mutual Fund
  3. 3. Organisational Structure of MF : There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund: REASONS TO INVEST IN MUTUAL FUNDS For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because: Mutual Funds offer Diversification: The beauty of a mutual fund is that you can buy a mutual fund and obtain instant access to a hundreds of individual stocks or bonds. Otherwise, in order to diversify your portfolio, you might have to buy individual securities, which exposes you to more potential volatility. Mutual Funds are Professionally Managed
  4. 4. Many investors don’t have the resources or the time to buy individual stocks. Investing in individual securities, such as stocks, not only takes resources, but a considerable amount of time. By contrast, mutual fund managers and analysts dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund. Mutual Funds Come in Many Varieties A mutual fund comes in many types and styles. There are stock funds, bond funds, sector funds, target-date mutual funds, money market mutual funds and balanced funds. Mutual Funds Have Low Minimums Many mutual fund companies allow investors to get started in a mutual fund with as little as Rs. 2000/-. Salaried individuals also have the option of investing in a monthly savings plan. Systematic Investing and Withdrawals with Mutual Funds It is simple to invest regularly in a mutual fund. Money can be pulled directly from a bank account and invested directly in the mutual fund. On the other hand, money can be regularly withdrawn from a mutual fund and be deposited into a bank account. There are generally no fees for this service. Mutual Funds Offer Automatic Reinvestment An investor can easily and automatically have capital gains and dividends reinvested into their mutual fund without sales load or extra fees. Mutual Funds Offer Transparency Mutual fund holdings are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for. As an investor, you get updates on the value of your units, information on specific investments made by the mutual fund and the fund manager's strategy and outlook. Mutual Funds Are Liquid If you want to sell your mutual fund, the proceeds from the sale are available the day after you sell the mutual fund. Mutual Funds Have Audited Track Records
  5. 5. A mutual fund company must maintain performance track records for each mutual fund and have them audited for accuracy, which ensures that investors can trust the mutual fund’s stated returns. Safety of Investing in Mutual Funds If a mutual fund company goes out of business, mutual fund shareholders receive an amount of cash that equals their portion of ownership in the mutual fund Dis-advantages of mutual funds 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 indirect investments. 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. 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. Delay in redemption: It takes 3-6 days for redemption of the units and the money to flow back into the investor’s account. Difficulty in Selecting a Suitable Fund Scheme: Many investors find it difficult to select one option from the plethora of funds/schemes/plans available. For this, they may have to take advice from financial planners in order to invest in the right fund to achieve their objectives. No Customized Portfolios: The portfolio of securities in which a fund invests is a decision taken bythe fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a const raint in achieving their financial objectives. Advantages of mutual funds/ 10 Reasons to invest in Mutual fund..
  6. 6. Diversification can reduce your overall investment risk by spreading your risk across many different assets . With a mutual fund you can diversify your holdings both across companies (e.g. by buying a mutual fund that owns stock in 100 different companies) and across asset classes (e.g. by buying a mutual fund that owns stocks, bonds, and other securities). When some assets are falling in price, others are likely to be rising, so diversification results in less risk than if you purchased just one or two investments. Choice: Mutual funds come in a wide variety of types. Some mutual funds invest exclusively in a particular sector (e.g. energy funds), while others might target growth opportunities in general. There are thousands of funds, and each has its own objectives and focus. The key is for you to find the mutual funds that most closely match your own particular investment objectives. Liquidity is the ease with which you can convert your assets--with relatively low depreciation in value--into cash. In the case of mutual funds, it's as easy to sell a share of a mutual fund as it is to sell a share of stock (although some funds charge a fee for redemptions and others you can only redeem at the end of the trading day, after the current value of the fund's holdings has been calculated). Low Investment Minimums: Most mutual funds will allow you to buy into the fund with as little $1,000 or $2,000, and some funds even allow a "no minimum" initial investment, if you agree to make regular monthly contributions of $50 or $100. Whatever the case may be, you do not need to be exceptionally wealthy in order to invest in a mutual fund. Salaried individuals also have the option of investing in a monthly savings plan. Convenience: When you own a mutual fund, you don't need to worry about tracking the dozens of different securities in which the fund invests; rather, all you need to do is to keep track of the fund's performance. It's also quite easy to make monthly contributions to mutual funds and to buy and sell shares in them. Low Transaction Costs: Mutual funds are able to keep transaction costs -- that is, the costs associated with buying and selling securities -- at a minimum because they benefit from reduced brokerage commissions for buying and selling large quantities of investments at a single time. Of course, this benefit is reduced somewhat by the fact that they are buying and selling a large
  7. 7. number of different stocks. Annual fees of 1.0% to 1.5% of the investment amount are typical. Regulation: Mutual funds are regulated by the government under the Investment Company Act of 1940. This act requires that mutual funds register their securities with the Securities and Exchange Commission. The act also regulates the way that mutual funds approach new investors and the way that they conduct their internal operations. This provides some level of safety to you, although you should be aware that the investments are not guaranteed by anyone and that they can (and often do) decline in value. Additional Services: Some mutual funds offer additional services to their shareholders, such as tax reports, reinvestment programs, and automatic withdrawal and contribution plans. Professional Management:: Mutual funds are managed by a team of professionals, which usually includes one mutual fund manager and several analysts. Presumably, professionals have more experience, knowledge, and information than the average investor when it comes to deciding which securities to buy and sell. They also have the ability to focus on just a single area of expertise. (However, it should be noted that this apparent benefit has not always translated into superior performance, and in fact the majority of all mutual funds don't manage to keep up with the overall performance of the market. Classification of Mutual Fund Schemes Mutual Fund Schemes may be classified on the basis of - Its structure & - Its investment objective - Special Scheme.
  8. 8. Type of Mutual Fund Schemes Structure Open Ended Funds Close Ended Funds Interval Funds Investment Objective Growth Funds Income Funds Balanced Funds Money Market Funds Special Schemes Industry Specific Schemes Index Schemes Sectoral Schemes