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  • 1. Chapter 3 Industry Profile
  • 2. Industry Profile:Overview and Development of Mutual funds in India: An efficient, articulate and developed financial system is necessary for the rapid economic growth and development of a country. Financial system facilitates the transformation of savings of individuals, governments, and businesses into investment and consumption. A complete system is formed of specialized intermediaries and non-specialized intermediaries, organized and nonorganized financial markets and financial instruments and services. Financial institutions act as mobilizes and depositories of savings, purveyors of credit and providers of various financial services to the community. Be that as it may, the financial system helps accelerate the rate of economic development and there by improve the standard of living and increase the social welfare of the community. This is achieved by the financial system through mobilizing the savings and investing them gainfully. Financial markets make it possible by performing a number of important and useful functions and providing variety of services such as: 1. Enabling economic units to exercise their time preference 2. Diversification and Reduction of risk 3. Efficient operation of payment mechanism 4. Transformation of financial claims suiting to the preferences of savers and borrowers 5. Increasing liquidity of financial claims through securities trading and 6. Portfolio management. In an economy, at a particular point of time some people have higher current income than their current expenditure, while just reverse happens in respect of others.
  • 3. The link between savings and investments is provided by a mechanism through which savings, also known as claims to resources, of different kinds of savers – small, moderate and large are pooled together and are put at the disposal of those who are able and willing to invest. Such a mechanism includes variety of institutions, which meet the strategy, liquidity and profitability requirements of savers, and short-term and long-term financial requirements of investors, these institutions are broadly classified as money market and capital market institutions. The last two decades have seen a phenomenal expansion in the geographical coverage and financial spread of our financial system. This, in turn, has helped maintaining the savings and investments at a relatively high level in this duration, As in evident from the savings of household sector, which constitute more than three-fourth of the gross domestic savings, have grown at a yearly rate falling between 17.4% and 20.5% during 1990s. The percentage of gross financial assets to GDP at current market prices has risen to 12.8% in 1997-98 from 11.22% in 1995-96. However, the investment in shares, debentures, and mutual funds as percentage of GDP at current market prices has declined considerably to 0.2 in 1997-98 from 0.8 in 1995-96. The spread of banking system has been a major factor in promoting financial intermediation in the economy. The development of various mutual funds is also a part of the response to this favorable environment. Mutual funds have emerged as powerful players in the financial markets, but they have attracted diverse reactions from financial experts.
  • 4. ALL ABOUT MUTUAL FUND:“A Mutual Fund Is a Pool of Money That Is Invested In Various Securities and Professionally Managed By an Investment Manager” Mutual Fund – Concept A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. 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. The flow chart below describes broadly the working of a mutual fund. Definition of Mutual Fund: A mutual fund is a pool of assets invested on behalf of investors. Mutual funds invest in a diversified portfolio of securities, which can include equity securities (such as common and preferred shares), debt securities (such as bonds and debentures) and other financial instruments issued by corporations and governments, according to the stated investment objectives of the funds. Individual investors own a percentage of the value of the fund as represented by the number of units they purchase. A collection of money invested in a group of assets and managed by an investment company (a mutual fund company or other). The money comes from investors who want to buy shares in the fund.
  • 5. History of Mutual Funds in India (1964 - 2000) The end of millennium marks 39 years of existence of mutual funds in this country. The ride through these 39 years has not been smooth. Investor opinion is still divided. While some investors are having positive view about mutual funds while others are against it. UTI commenced its operations from July 1964 .The impetus for establishing a formal institution came from the desire to increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during a period marked by great political and economic uncertainty in India. With war on the borders and economic turmoil that depressed the financial market, entrepreneurs were hesitant to enter capital market. The already existing companies found it difficult to raise fresh capital, as investors did not respond adequately to new Initial Public Offerings (which is now compulsorily known as New Fund Offers by SEBI). Earnest efforts were required to canalize savings of the community into productive uses in order to speed up the process of industrial growth. The Finance Minister of that time, T.T. Krishnamachari set up the idea of a unit trust that would be "open to any person or institution to purchase the units offered by the trust. However, this institution as Investors see it, is intended to cater to the needs of individual investors, and even among them as far as possible, to those whose means are small." His ideas took the form of the Unit Trust of India, an intermediary that would help fulfil the twin objectives of mobilizing retail savings and investing those savings in the capital market and passing on the benefits so accrued to the small investors.
  • 6. UTI commenced its operations from July 1964 “with a view to encouraging savings and investment and participation in the income, profits and gains accruing to the Corporation from the acquisition, holding, management and disposal of securities." Different provisions of the UTI Act laid down the structure of management, scope of business, powers and functions of the Trust as well as accounting, disclosures and regulatory requirements for the Trust. One thing is certain – the fund industry is here to stay. The industry was oneentity show till 1986 when the UTI monopoly was broken when SBI and Canara bank mutual fund entered the arena. This was followed by the entry of others like BOI, LIC, GIC, etc. sponsored by public sector banks. Starting with an asset base of Rs. 25 crore in 1964 the industry has grown at a compounded average growth rate of 27% to its current size of Rs.90000 crore. The period 1986-1993 can be termed as the period of public sector mutual funds (PMFs). From one player in 1985 the number increased to 8 in 1993. The party did not last long. When the private sector made its debut in 1993-94, the stock market was booming. The opening up of the asset management business to private sector in 1993 saw international players like Morgan Stanley, Jardine Fleming, JP Morgan, George Soros and Capital International along with the host of domestic players joins the party. But for the equity funds, the period of 1994-96 was one of the worst in the history of Indian Mutual Funds. Mutual funds have been around for a long period of time to be precise for 36 yrs but the year 1999 saw immense future potential and developments in this sector. This year signalled the year of resurgence of mutual funds and the regaining of investor confidence in these Mutual funds. This time around all the
  • 7. participants are involved in the revival of the funds the Asset Management Companies, the unit holders, the other related parties. Growth of Mutual Funds in India 1st Phase (1964-87): - Growth of Unit Trust of India Only one player: Unit Trust of India (UTI) with a total asset of Rs. 6700/- crores at the end of 1988. 2nd Phase (1987-93): - Entry of Public Sector Funds Total 8 new funds were established in which (6 by banks and one each by LIC and GIC). The total AUM had grown to Rs. 61028/- crores at the end of 1994 and the numbers of schemes were 167. 3rd Phase (1993-96): - Emergence of Private Funds Began with the entry of private and foreign sectors in the Mutual Fund industry in 1993.Kothari Pioneer Mutual fund was the first fund to be established by the private sector in association with a foreign fund. In this third phase 32 new funds have came with NFO of Rs. 1, 13,005 crores as total Asset under Management. As on August end 2000, there were 33 funds with 391 schemes and asset under management with Rs. 1, 02,849 crores. The SEBI came out with comprehensive regulation in 1993 which defined the structure of Mutual Fund and AMC for the first time. Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the private players has risen rapidly since then. Currently there are 38 Mutual Fund organizations in India managing 1, 55,845 crores.
  • 8. 4th Phase (1996-99): - Growth and SEBI Regulation In February 2003, UTI was bifurcated into two separate entities. One is the specified undertaking of UTI of Rs.29, 835 in 65 schemes. Second UTI M.F. sponsored by SBI, PNB, BOB and LIC. 5th Phase (1999-04):- Emergence of a large and uniform industry The other major development in the fund industry has been the creation of a level playing field for all mutual funds operating in India. This happened in February 2003, when the UTI act was repealed. Unit Trust of India no longer has a special legal status as a trust established by an act of Parliament. Instead, it has also adopted the same structure as any other fund in India – a Trust and an Asset Management Company. UTI Mutual Fund is the present name of the erstwhile Unit Trust of India. While UTI functioned under a separate law of Indian parliament earlier, UTI Mutual Fund is now under the SEBI’s (Mutual Funds) Regulations, 1996 like all other mutual funds in India. Year 1999 marked the beginning of a new phase in the history of the mutual fund industry in India, a phase of significant growth in terms of both amounts mobilized from investors and assets under management. 6th Phase (2004-onwards):- Consolidation and Growth The industry has lately witnessed a spate of mergers and acquisitions, most recent ones being the acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund by Principal and PNB Mutual Fund by Principal. At the same time, more international players continue to enter India, including Fidelity, one of the largest funds in the world.
  • 9. Global Scenario Some Basic Facts:  The money market mutual fund segment has a total corpus of Rs. 63,640 crores in the U.S. against a corpus of Rs. 430 crores in India.  Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only Fidelity and Capital are non-bank mutual funds in this group.  In the U.S. the total number of schemes is higher than that of the listed companies while in India AMCs have just 277 schemes.  Internationally, mutual funds are allowed to go short. In India fund managers do not have such leeway.  In the U.S. about 97, 00,000 households will manage their assets on-line by the year 2003, such a facility is not yet of avail in India.  On- line trading is a great idea to reduce management expenses from the current 2 % of total assets to about 0.75 % of the total assets.  Such changes could facilitate easy access, lower intermediation costs and better services for all. A research agency that specializes in internet technology estimates that over the next four years Mutual Fund Assets traded on- line will grow ten folds from 5,504 crores to 5,27,610 crores; whereas equity assets traded on-line will increase during the period from 10578 crores to 618782 crores. This will increase the share of mutual funds from 34% to 40% during the period. Here are some of the basic changes that have taken place since the advent of the Internet.  Lower Costs: Distribution of funds will fall in the online trading regime by 2003. Mutual funds could bring down their administrative costs to 0.75% if trading is done on- line. As per SEBI regulations, bond funds can charge a maximum of 2.25% and equity funds can charge 2.5% as administrative fees.
  • 10.  Better advice: Mutual funds could provide better advice to their investors through the Net rather than through the traditional investment routes where there is an additional channel to deal with the Brokers. Direct dealing with the fund could help the investor with their financial planning. Future Scenario: The asset base will continue to grow at an annual rate of about 30 to 35 % over the next few years as investor’s shift their assets from banks and other traditional avenues. Some of the older public and private sector players will either close shop or be taken over. Out of ten public sector players five will sell out, close down or merge with stronger players in three to four years. In the private sector this trend has already started with two mergers and one takeover. Here too some of them will down their shutters in the near future to come. Organization Structure of Mutual Funds Industry Organization of a Mutual Fund Unit Holders Sponsors Trustees AMC Mutual Fund Transfer Agent SEBI
  • 11. Mutual fund is set up in the form of a trust, which has sponsor, trustees, asset Management Company (AMC) and a custodian. The trust is established by a sponsor or more than one sponsor who is like a promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit-holders. The AMC, approved by SEBI, manages the funds by making investments in various types of securities. The custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. Mutual Fund The Mutual Fund Regulations lay down several criteria that need to be fulfilled in order to be granted registration as a mutual fund. Every mutual fund must be registered with SEBI and must be constituted in the form of a trust in accordance with the provisions of the Indian Trusts Act, 1882. The instrument of trust must
  • 12. be in the form of a deed between the sponsor and the trustees of the mutual fund duly registered under the provisions of the Indian Registration Act, 1908. Sponsor The sponsor is required, under the provisions of the Mutual Fund Regulations, to have a sound track record, a reputation of fairness and integrity in all his business transactions additionally; the sponsor should contribute at least 40% to the net worth of the AMC. However, if any person holds 40% or more of the net worth of an AMC shall be deemed to be a sponsor and will be required to fulfill the eligibility criteria specified in the Mutual Fund Regulations. The sponsor or any of its directors or the principal officer employed by the mutual fund should not be guilty of fraud, not be convicted of an offence involving moral turpitude or should have not been found guilty of any economic offence. Trustees The mutual fund is required to have an independent Board of Trustees, i.e. two thirds of the trustees should be independent persons who are not associated with the sponsors in any manner whatsoever. An AMC or any of its officers or employees is not eligible to act as a trustee of any mutual fund. In case a company is appointed as a trustee, then its directors can act as trustees of any other trust provided that the object of such other trust is not in conflict with the object of the mutual fund. Asset Management Company The sponsor or the trustees are required to appoint an AMC to manage the assets of the mutual fund. Under the Mutual Fund Regulations, the applicant must satisfy certain eligibility criteria in order to qualify to register with SEBI as an AMC
  • 13.  The sponsor must have at least 40% stake in the AMC.  The directors of the AMC should be persons having adequate professional experience in finance and financial services related field and not found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws.  The AMC should have and must at all times maintain, a minimum net worth of Rs. 100 million. Custodian Under the Securities and Exchange Board of India (Custodian of Securities) Guidelines, 1996, any person proposing to carry on the business as a custodian of securities must register with the SEBI and is required to fulfill specified eligibility criteria. Additionally, a custodian in which the sponsor or its associates holds 50% or more of the voting rights of the share capital of the custodian or where 50% or more of the directors of the custodian represent the interest of the sponsor or its associates cannot act as custodian for a mutual fund constituted by the same sponsor or any of its associate or subsidiary company. Schemes Under the Mutual Fund Regulations, a mutual fund is allowed to float different schemes. Each scheme has to be approved by the trustees and the offer document is required to be filed with the SEBI. The offer document should contain disclosures which are adequate enough to enable the investors to make informed investment decision, including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor. If the SEBI does not comment on the contents of the offering documents within 21 days from the date of filing, the AMC would be free to issue the offer documents to public.
  • 14. Investment Criteria The money collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securities debts. However, in the case of securities debts, such fund may invest in asset-backed securities and mortgaged backed securities. The mutual fund having an aggregate of securities which are worth Rs.100 million (approximately USD 2.15 million) or more shall be required to settle their transactions through dematerialized securities. Even such borrowing cannot exceed 20% of the net asset of a scheme and the duration of such a borrowing cannot exceed a period of six months. Similarly, a mutual fund is not permitted to advance any loans for any purpose. Mutual Fund Operation Flow Chart Passed back to Investor Pooled their money with Fund Returns Manager Generates Securities Invest in Securities
  • 15. How Does Mutual Fund Work? Types of Mutual Funds:
  • 16. Classification According To Investment Objective: Equity Money Market Debt Equity Funds Fixed Income Index Funds Funds Money Market Mutual Funds Sector Funds Balanced Funds Liquid Funds Gold Traded Exchange Fund Risk Profile Comparison B/w Money Market, Debt and Equity:-
  • 17. Benefits of Mutual Fund Professional Management Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. Diversification Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. Return Potential Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Low Costs Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
  • 18. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Transparency Regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. Affordability Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. Choice of Schemes Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. Well Regulated All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.