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
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.
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
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
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
Mutual Funds are Professionally Managed
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
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
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
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
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
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
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
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
Classification of Mutual Fund Schemes
Mutual Fund Schemes may be classified on the basis of
- Its structure &
- Its investment objective
- Special Scheme.