Emerging trends in indian mutul funds


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Emerging trends in indian mutul funds

  1. 1. EMERGING TRENDS IN INDIAN MUTUL FUNDSContent: Introduction Definition of Mutual Fund Origin of Mutul funds The Evolution Advantages and Disadvantages The Future of Mutul funds in india facts on growth ConclusionIntroduction: A mutual fund is a type of professionally-managed type collective investmentscheme that pools money from many investors. While there is no legal definition of mutual fund,the term is most commonly applied only to those collective investment schemes that areregulated, available to the general public and open-ended in nature. Hedge funds are notconsidered a type of mutual fund. The term mutual fund is less widely used outside of the United States. For collectiveinvestment schemes outside of the United States, see articles on specific types of funds includingopen-ended investment companies, SICAVs, unitized insurance funds, unit trusts andUndertakings for Collective Investment in Transferable Securities.Definition of Mutual Fund An investment vehicle that is made up of a pool of funds collected from manyinvestors for the purpose of investing in securities such as stocks, bonds, moneymarket instruments and similar assets. Mutual funds are operated by money managers, whoinvest the funds capital and attempt to produce capital gains and income for the funds investors.A mutual funds portfolio is structured and maintained to match the investment objectives statedin its prospectus.
  2. 2. Origin of Mutul funds: The first mutual funds were established in Europe. One researcher credits a Dutchmerchant with creating the first mutual fund in 1774. The first mutual fund outside theNetherlands was the Foreign & Colonial Government Trust, which was established in London in1868. It is now the Foreign & Colonial Investment Trust and trades on the London stockexchange.Mutual funds were introduced into the United States in the 1890s. They became popular duringthe 1920s. These early funds were generally of the closed-end type with a fixed number of shareswhich often traded at prices above the value of the portfolio.The first open-end mutual fund with redeemable shares was established on March 21, 1924. Thisfund, the Massachusetts Investors Trust, is now part of the MFS family of funds. However,closed-end funds remained more popular than open-end funds throughout the 1920s. By 1929,open-end funds accounted for only 5% of the industrys $27 billion in total assets.After the stock market crash of 1929, Congress passed a series of acts regulating the securitiesmarkets in general and mutual funds in particular. The Securities Act of 1933 requires that allinvestments sold to the public, including mutual funds, be registered with the Securities andExchange Commission and that they provide prospective investors with a prospectus thatdiscloses essential facts about the investment. The Securities and Exchange Act of 1934 requiresthat issuers of securities, including mutual funds, report regularly to their investors; this act alsocreated the Securities and Exchange Commission, which is the principal regulator of mutualfunds. The Revenue Act of 1936 established guidelines for the taxation of mutual funds, whilethe Investment Company Act of 1940 governs their structure.When confidence in the stock market returned in the 1950s, the mutual fund industry began togrow again. By 1970, there were approximately 360 funds with $48 billion in assets. Theintroduction of money market funds in the high interest rate environment of the late 1970sboosted industry growth dramatically. The first retail index fund, First Index Investment Trust,was formed in 1976 by The Vanguard Group, headed by John Bogle; it is now called theVanguard 500 Index Fund and is one of the worlds largest mutual funds, with more than $100billion in assets as of January 31, 2011.Fund industry growth continued into the 1980s and 1990s, as a result of three factors: a bullmarket for both stocks and bonds, new product introductions (including tax-exempt bond, sector,international and target date funds) and wider distribution of fund shares. Among the newdistribution channels were retirement plans. Mutual funds are now the preferred investmentoption in certain types of fast-growing retirement plans, specifically in 401(k) and other definedcontribution plans and in individual retirement accounts (IRAs), all of which surged in popularityin the 1980s. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008.
  3. 3. In 2003, the mutual fund industry was involved in a scandal involving unequal treatment of fundshareholders. Some fund management companies allowed favored investors to engage in latetrading, which is illegal, or market timing, which is a practice prohibited by fund policy. Thescandal was initially discovered by then-New York State Attorney General Eliot Spitzer andresulted in significantly increased regulation of the industry. At the end of 2010, there were over 15,000 mutual funds of all types in the UnitedStates with combined assets of $13.1 trillion, according to the Investment Company Institute(ICI), a national trade association of investment companies in the United States. The ICI reportsthat worldwide mutual fund assets were $24.7 trillion on the same date. Mutual funds play an important in U.S. household finances. At the end of 2010, theyaccounted for 23% of household financial assets. Their role in retirement planning is particularlysignificant. Roughly half of assets in 401(k) plans and individual retirement accounts wereinvested in mutual funds. When three Boston securities executives pooled their money together in 1924 tocreatethe first mutual fund, they had no idea how popular mutual funds wouldbecome.The idea ofpooling money together for investing purposes started in Europe in themid-1800s. The first pooled fund in the U.S. was created in 1893 for the faculty andstaff ofHarvard University. On March 21st, 1924 the first official mutual fund wasborn. It was called theMassachusetts Investors Trust.After one year, the Massachusetts Investors Trust grew from$50,000 in assets in1924 to $392,000 in assets (with around 200 shareholders). In contrast, there areover 10,000 mutual funds in the U.S. today totaling around $7trillion (withapproximately 83million individual investors) accor ding to theInvestmentCompany Institute.The stock market crash of 1929 slowed the growth of mutualfunds. In response tothe stock market crash, Congress passed the Securities Act of 1933 andtheSecurities Exchange Act of 1934. These laws require that a fund be registered withthe SEC and provide prospectiveinvestors with a prospectus. The SEC(U.S. Securities and Exchange Commission) helpedcreate the Investment Company Actof 1940 which provides the guidelines that all funds mustcomply with today.With renewed confidence in the stock market, mutual funds began toblossom. Bythe end of the 1960s there were around 270 funds with $48 billion in assets.In 1976,John C. Bogle opened the first retail index fundcalled the First IndexInvestment Trust. It is now called the Vanguard500 Index fund and in November of 2000 it became thelargest mutual fund ever with $100 billion in assets. One of the largest contributors of mutualfund growth was Individual Retirement Account (IRA) provisions made in 1981, allowingindividuals (including those already in corporate pension plans) to contribute $2,000 a year.Mutual funds are now popular in employer-sponsored defined contribution retirement plans(401k),IRAs and Roth IRAs. Mutual funds are very popular today, known for ease-of-use,liquidity, and unique diversification capabilities.
  4. 4. The Evolution The formation of Unit Trust of India marked the evolution of the Indian mutual fundindustry in the year 1963. The primary objective at that time was to attract the small investorsand it was made possible through the collective efforts of the Government of India and theReserve Bank of India. The history of mutual fund industry in India can be better understooddividedintofollowingphases:Phase 1. Establishment and Growth of Unit Trust of India - 1964-87 Unit Trust of India enjoyed complete monopoly when it was established in the year 1963by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operateunder the regulatory control of the RBI until the two were de-linked in 1978 and the entirecontrol was tranferred in the hands of Industrial Development Bank of India (IDBI). UTIlaunched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted thelargest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of differentinvestors. It launched ULIP in 1971, six more schemes between 1981-84, Childrens Gift GrowthFund and India Fund (Indias first offshore fund) in 1986, Mastershare (Inidas first equitydiversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during1990s. By the end of 1987, UTIs assets under management grew ten times to Rs 6700 crores.Phase II. Entry of Public Sector Funds - 1987-1993 The Indian mutual fund industry witnessed a number of public sector players entering themarket in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of Indiabecame the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by CanbankMutual Fund, LIC Mutual Fund, Indian Bank Muatual Fund, Bank of India Mutual Fund, GICMutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industryincreased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about80% market share. Amount Assets Under Mobilisation as % of gross1992-93 Mobilised Management Domestic SavingsUTI 11,057 38,247 5.2%Public Sector 1,964 8,757 0.9%Total 13,021 47,004 6.1%
  5. 5. Phase III. Emergence of Private Secor Funds - 1993-96 The permission given to private sector funds including foreign fund managementcompanies (most of them entering through joint ventures with Indian promoters) to enter themutal fund industry in 1993, provided a wide range of choice to investors and more competitionin the industry. Private funds introduced innovative products, investment techniques andinvestor-servicing technology. By 1994-95, about 11 private sector funds had launched theirschemes.PhaseIV.Growth and SEBI Regulation 1996-2004 The mutual fund industry witnessed robust growth and stricter regulation from the SEBIafter the year 1996. The mobilisation of funds and the number of players operating in theindustry reached new heights as investors started showing more interest in mutual funds. Invetors interests were safeguarded by SEBI and the Government offered tax benefits tothe investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 wasintroduced by SEBI that set uniform standards for all mutual funds in India. The Union Budgetin 1999 exempted all dividend incomes in the hands of investors from income tax. VariousInvestor Awareness Programmes were launched during this phase, both by SEBI and AMFI,with an objective to educate investors and make them informed about the mutual fund industry. In February 2003, the UTI Act was repealed and UTI was stripped of its Special legalstatus as a trust formed by an Act of Parliament. The primary objective behind this was to bringall mutal fund players on the same level. UTI was re-organised into two parts: 1. The SpecifiedUndertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its pastschemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTIMutual Fund is still the largest player in the industry. In 1999, there was a significant growth inmobilisation of funds from investors and assets under management which is supported by thefollowing data:
  6. 6. GROSS FUND MOBILISATION (RS. CRORES) PUBLIC PRIVATEFROM TO UTI TOTAL SECTOR SECTOR01-April-98 31-March-99 11,679 1,732 7,966 21,37701-April-99 31-March-00 13,536 4,039 42,173 59,74801-April-00 31-March-01 12,413 6,192 74,352 92,95701-April-01 31-March-02 4,643 13,613 1,46,267 1,64,52301-April-02 31-Jan-03 5,505 22,923 2,20,551 2,48,97901-Feb.-03 31-March-03 * 7,259* 58,435 65,69401-April-03 31-March-04 - 68,558 5,21,632 5,90,19001-April-04 31-March-05 - 1,03,246 7,36,416 8,39,66201-April-05 31-March-06 - 1,83,446 9,14,712 10,98,158ASSETS UNDER MANAGEMENT (RS. CRORES)AS ON UTI PUBLIC SECTOR PRIVATE SECTOR TOTAL31-March-99 53,320 8,292 6,860 68,472Phase V. Growth and Consolidation - 2004 Onwards The industry has also witnessed several mergers and acquisitions recently, examples ofwhich are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C MutualFund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more internationalmutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. Therewere 29 funds as at the end of March 2006. This is a continuing phase of growth of the industrythrough consolidation and entry of new international and private sector players.
  7. 7. Advantages and DisadvantagesMutual funds have advantages compared to direct investing in individual securities. Theseinclude: Increased diversification Daily liquidity Professional investment management Ability to participate in investments that may be available only to larger investors Service and convenience Government oversight Ease of comparisonMutual funds have disadvantages as well, which includ: Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize
  8. 8. Future of Mutual Funds In India-Facts on growthImportant aspects related to the future of mutual funds in India are - The growth rate was 100 % in 6 previous years. The saving rate in India is 23 %. There is a huge scope in the future for the expansion of the mutual funds industry. A number of foreign based assets management companies are venturing into Indian markets. The Securities Exchange Board of India has allowed the introduction of commodity mutual funds. The emphasis is being given on the effective corporate governance of Mutual Funds. The Mutual funds in India has the scope of penetrating into the rural and semi urban areas. Financial planners are introduced into the market, which would provide the people with better financial planning.Conclusion: Professional Investment Management. By pooling the money of thousands ofinvestors, mutual funds provide full-time, high-level professional management that fewindividual investors can afford to obtain independently. Such management can be important toachieving results in todays complex markets. Mutual funds invest in a broad range of securities. This limits investment risk byreducing the effect of a possible decline in the value of any one security. Mutual fundshareowners can benefit from diversification techniques usually available only to investorswealthy enough to buy significant positions in a wide variety of securities. Investor Information Shareholders receive regular reports from the mutual funds,including details of transactions on a year-to-date basis. The current net asset value of your shares (theprice at which you may purchase or redeem them) appears in the mutual fund price listings of dailynewspapers. You can also obtain pricing and performance results for the all mutual funds at this site, or itcan be obtained by phone from the mutual funds.
  9. 9. Bibliography: www.google.com www.investopedia.com www.Businessdictionery.com www.investorindia.com www.mutualfundsindia.com
  10. 10. EMERGING TRENDS IN INDIAN MUTUAL FUNDS Submitted ByDate: .03.2012 T.Ranjithkumar IstMBA MISS College,Madurai