Mutual Funds

Mutual Funds
Dr.K.Padmanabhan
Assistant Professor
P.G. & Research Dept. of Corporate Secretaryship
Bharathidasan Govt. College for Women
Puducherry

Mutual Funds
Introduction:
A Mutual Fund is an investment vehicle that pools the
money of several investors and invests it in different
securities.
Form of trust that pools the funds of a whole lot of
investors to make more money by investing in an array
of financial instruments.
A mutual fund is the trust that pools the savings of a
number of investors who share a common financial
goal.

Mutual Funds
M.F. collects the savings from small investors, invest
them in Govt. & other corporate securities & earn
income through interest & dividends, besides capital
gains.
A mutual fund is just the connecting bridge or a
financial intermediary that allows a group of investors
to pool their money together with a predetermined
investment objective.
The mutual fund will have a fund manager who is
responsible for investing the gathered money into
specific securities (stocks or bonds).

Mutual Funds
A mutual fund is just the connecting bridge or a
financial intermediary that allows a group of investors
to pool their money together with a predetermined
investment objective.
The mutual fund will have a fund manager who is
responsible for investing the gathered money into
specific securities (stocks or bonds).
An investment company that invests its shareholders’
money in a diversified portfolio of securities.
It gives the market returns and not assured returns.

Mutual Funds
It is formed by the coming together of a number of investors
who transfer their surplus funds to a professionally qualified
organisation to manage it.
A.M.F. Pools the savings of the community & invest thereafter
careful research & analysis in various types of securities.
A mutual fund is a means of investing that enables individuals
to share the risks of investing with other investors. All
contributors to the fund experience an equal share of gains and
losses for each dollar invested.
Don't put all your eggs in one basket" the holders of mutual
fund shares are able to gain the advantage of diversification
which might be beyond their financial means individually.

Mutual Funds
It is formed by the coming together of a number of
investors who transfer their surplus funds to a
professionally qualified organisation to manage it.
A.M.F. Pools the savings of the community & invest
thereafter careful research & analysis in various types of
securities.
Each fund is divided into small fraction called ‘units’ of
equal value. Each investor is allocated units in proportion
to the size of this investment. Thus, every investor,
whether big or small, will have a stake in the fund & can
enjoy the wide portfolio of the investment held by the fund.

Mutual Funds
A mutual fund is a means of investing that enables individuals
to share the risks of investing with other investors. All
contributors to the fund experience an equal share of gains and
losses for each dollar invested.
Don't put all your eggs in one basket" the holders of mutual
fund shares are able to gain the advantage of diversification
which might be beyond their financial means individually.
Definition by SEBI-
“A fund established in the form of a trust by a sponsor, to raise
monies by the trustees through the sale of units to the public,
under one or more schemes, for investing in securities in
accordance with these regulations”.

History of Mutual Funds
The modern mutual fund was first introduced in Belgium
in 1822. This form of investment soon spread to Great
Britain and France. Mutual funds became popular in the
United States in the 1920s and continue to be popular
since the 1930s, especially open-end mutual funds. Mutual
funds experienced a period of tremendous growth after
World War II, especially in the 1980s and 1990s.
The mutual fund industry in India started in 1963 with the
formation of Unit Trust of India, at the initiative of the
Government of India and Reserve Bank. The history of
mutual funds in India can be broadly divided into four
distinct phases.

The modern mutual fund was first introduced in
Belgium in 1822. This form of investment soon spread
to Great Britain and France.
Mutual funds became popular in the United States in
the 1920s and continue to be popular since the 1930s,
especially open-end mutual funds.
Mutual funds experienced a period of tremendous
growth after World War II, especially in the 1980s and
1990s.

Mutual Fund in India:
The mutual fund industry in India started
in 1963 with the formation of Unit Trust
of India, at the initiative of the
Government of India and Reserve Bank.
The history of mutual funds in India can
be broadly divided into four distinct
phases.

I-Phase-(1964-87)
Unit Trust of India (UTI)
was established on 1963 by
an Act of Parliament.
I
I-Phase-(1987-1993)
Entry of Public Sector
Funds
History of
Mututal Funds
III-Phase-(1993-2003)
Entry of
Private Sector Funds
IV-Phase-(since
February 2003)
UTI was bifurcated into
two separate entities

Phases of Mutual Funds
First Phase – 1964-87:
Unit Trust of India (UTI) was established on 1963 by an
Act of Parliament. It was set up by the Reserve Bank of
India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. UTI
launched its first fund Unit Scheme 1964 in the year 1964.
In 1978 UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over
the regulatory and administrative control in place of RBI.
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 (Dec 87),
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.

Second Phase – 1987-1993 (Entry of Public Sector Funds)
7 New Mutual Fund in Public Sector
Banking Industry :
1.SBI Mutual Fund - June 1987
2.CanBank Mutual Fund - Dec. 1987
3.Punjab National Bank M.F. - Aug. 1989
4.Indian Bank Mutual Fund - Nov. 1989
5.Bank of Baroda M.F. - Oct. 1992
Insurance Industry:
6.LIC Mutual Fund - June 1987
7.GIC Mutual Fund - Dec. 1990

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. Also,
1993 was the year in which the first Mutual Fund
Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The
erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund
registered in July 1993.

Third Phase (Contd.)
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.
The number of mutual fund houses went on increasing,
with many foreign mutual funds setting up funds in India
and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33
mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.

Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act
1963, UTI was bifurcated into two separate entities. One is the
Specified 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.

Fourth Phase (Contd.)
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 March 2000 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. As at the
end of September, 2004, there were 29 funds, which manage
assets of Rs.153108 crores under 421 schemes.

 1964-1987 (Phase I) – Growth of Unit Trust of India
 1987-1993 (Phase II) – Entry of Public Sector Funds
 1993-1996 (Phase III) – Emergence of Private Funds
 1996-1999 (Phase IV) – Growth and SEBI Regulation
 1999-2004 (Phase V) – Emergence of large & uniform
Industry
 2004 onwards (Phase VI) – Consolidation and Growth.

Players in Mutual Fund Industry
1.UTI
2.Public Sector Banks
3.Insurance Companies
4.Private Sector

Mutual Fund Companies in India
ABN AMRO Mutual Fund
Birla Sun Life Mutual Fund
Bank of Baroda Mutual Fund (BOB Mutual Fund)
HDFC Mutual Fund
HSBC Mutual Fund
ING Vysya Mutual Fund
Prudential ICICI Mutual Fund
Sahara Mutual Fund
State Bank of India Mutual Fund
Tata Mutual Fund
Kotak Mahindra Mutual Fund
Unit Trust of India Mutual Fund

Mutual Funds Companies in India
Reliance Mutual Fund
Standard Chartered Mutual Fund
Franklin Templeton India Mutual Fund
Morgan Stanley Mutual Fund India
Escorts Mutual Fund
Alliance Capital Mutual Fund
Benchmark Mutual Fund
Canbank Mutual Fund
Chola Mutual Fund
LIC Mutual Fund
GIC Mutual Fund

Organisation & Management of Mutual Funds
3 Tier System
1.Sponsor
2.Trust (Trustee)
3.Asset Management Company (AMC)
Sponsor:-Sponsor Institution which sets up the Mutual
Fund is called Sponsor. Sponsors are like promoters of
the company & responsible for starting the Mutual fund.
Sponsors must met the criteria fixed by SEBI.

Trustee:-
 They act as the watch dog for the properties of Mutual
Funds.
 Judges, Bankers & Insurance Companies are appointed as
Trustees, to look after the assets of Mutual Funds.
 Trustees responsible for safeguarding the interest of the
investors.

Asset Management Company:
 Should be registered with ROC & approved by SEBI.
 Manages the funds of various schemes/Mutual Funds.
 Operates under the supervision & guidance of the trustees.
 It employs a number of professionals for investment &
research & for investor servicing.
 Success of any Mutual Funds depends upon the efficiency
of this AMC.

Advantages of Mutual Funds
1.Channelising Savings for Investment:
A number of schemes are being offered by Mutual funds to meet
the varied requirement of the masses & thus, savings are diverted
towards capital investment directly.
2.Offering Wide Portfolio Investment:
“Not to lay all eggs in one basket” Small & medium investors
used to burn their fingers in stock exchange operations.
Now investors joy wide portfolio of the investment held by
Mutual Funds.
The risk diversification which a pool of savings through Mutual
Fund can achieve what cannot be attained by a single investor’s
savings.

3. Providing Better Yields:
Pooling of funds from larger number of customers enable the
funds to have large funds at its disposal. Due to these large
funds, Mutual Funds able to buy cheaper and sell dearer than
the small and medium musters thus, they able to command
better yield to customers. Transfer costs of large investments
are definitely comes than that of small investments.
4. Rendering Expertise Investment Service at Low Cost:
Management of Fund is assigned to professionals who are well
framed and adequate experience in the field of investment.
Thus, investors are assured of quality services in their best
interest (1%)

5. Providing Research Services:
A large research team constantly analyses the companies &
recommends the fund to buy or sell a particular share.
Thus investments are made purely on the basis of a thorough
research.
6. Offering Tax Benefits:
Certain funds offer tax benefits to its customers. Thus apart from
dividends, interest, capital appreciation, investors also stand to
set the benefit of tax concessions.
The Mutual Funds themselves are to fully exempt from tax on all
income on their investment. But all other companies have to pay
taxes and they can declare dividends only from the profits after
tax.

7. Introducing Flexible Investment Schedule:
Some Mutual Funds have permitted the investors to exchange
their units from one scheme to another and thus flexibility is a
real boon to investors.
Income Units– growth Units.
This flexibility cannot be derived in any other investments.
8. Providing greats Affordability & Liquidity:
Affordability:
Small investor can afford to invest in Mutual Funds. They
provide an attractive &cost effective alternative to direct
purchase of shares. In the absence of Mutual Funds. Small
investors cannot think of participated in a number of investment
with such a meagre sum.

Liquidity:
Units can be sold to the fund at any time at the Net Asset Value
(NAV) and thus quick access to liquid cash is assured.
Net Asset Value:
The repurchase price is linked to the Net Asset Value.
NAV:
Market price of each unit of a particular scheme in relation to all
the assets of the scheme.
This value is a true indicator of the performance of the fund.

If NAV is more than the face value of the unit, it clearly
indicated that the money invested on that unit has appreciated
and the fund has performed well.
E.g.:
Fortune Mutual Fund introduced a scheme – size – 100 crores
value of each unit is Rs.10. the company invested all funds in
share and debenture and for market value of investment comes to
Rs.200 crores.
200 crores
NAV =------------- X Value of each unit.
100 crores
= 2 X 10 = 20/-
Hence NAV = Rs. 20/-

Investor can call up Mutual Fund at any time to find out NAV.
Some Mutual Funds publish NAV weekly in 2/3 leading daily
news papers.
9. Simplified Record Keeping:
Investment in 500 shares in ¾ companies means, it is necessary
to keep records has dividend payment/ Bonus Issue/ Rights Issue
etc.,
Mutual Fund - single invest source facility – i.e. Single buy
order of 100 units from a Mutual Fund is equivalent to
investment in more than 100 companies.
Investor to keep record of only 1 deal with Mutual Fund. (Mutual
Fund - sends statement very often to the investor) Record
keeping work passed to Mutual Fund.

10. Supporting Capital Market:
Mutual Fund plays a vital role in supporting the development of capital
markets.
saving of the people are directed towards investments in capital markets
through future Mutual Funds.
11. Promoting Industrial Development:
Economic development of any nation depends upon its industrial and
agricultural development. All Industrial units have to raise funds by
resorting to capital market by issue of share &debenture.
The Mutual Funds not only creating demand for these capital market
instruments but also supply a large source of funds and industries are
assured of their capital requirements.
It also supply a large source of funds & industries are assured of their
capital requirements.

12.Acting as Substitute for IPOs
Investors not able to get allotment in IPOs due to oversubscription
many time.
Also minimum shares – 500 – may not be able to small investors.
So participation in MFs – investors able to get satisfaction of
participating in hundreds of varieties of companies.
13.Reducing the Marketing Cost of New Issues:
Promoter used to allot major share of IPO to Mutual Funds. So
marketing cost of new issues reduced.
14.Keep the Money Market Active:
Individual investor cannot have access to money market instruments
as minimum amount of investment is out of his reach. Mutual Funds
keep money market active by investing money on money market
instruments.

Risks in Mutual Funds
Market Risks:
Prices of shares subject to prices fluctuations depending
on market conditions.
Economy has to pass thru a cycle i.e. Boom, Recession,
Slump & Recovery.
The phase of business cycle affects the market conditions
to a larger extent.
Scheme Risks:
Depends upon the scheme, risks attached. In pure growth
scheme, risks are greater. (As one expects more returns).

Risks in Mutual Funds
Investment Risks:
Mutual Funds makes money in shares. Profits/loses depends
upon the investment expertise of the AMC.
Business Risks:
Corpus of Mutual Fund might have been invested in
companies shares. If companies suffers set back, will not
declare dividend & may also goes winding up. Though Mutual
Fund can withstand, it also affected.
Political Risks:
Policies of various Govt. also affects Mutual Funds.

Types of Mutual Funds
Close-Ended Funds
 It is a fund wherein it has a fixed corpus & operates for fixed duration
at the end of which the entire corpus is disinvested & proceeds are
distributed to the various unit holders in proportion to their holdings.
 If the subscription reaches the pre-determined level, entry of investors
is closed. The fund ceased after final distribution.
 A close-ended Mutual fund has a stipulated maturity period e.g. 5-7
years.
 The fund is open for subscription only during a specified period at
the time of launch of the scheme.
 Investors can invest in the scheme at the time of the initial public
issue and thereafter they can buy or sell the units of the scheme on
the stock exchanges where the units are listed.

Open-Ended Funds
 The size &/ period of fund is not pre-determined. The investors are
free to buy & sell any no. of units at any point of time.
 An open-ended Mutual fund is one that is available for
subscription and repurchase on a continuous basis.
 These Funds do not have a fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value (NAV) related
prices which are declared on a daily basis.
 The main objective of this fund is income generation.

Income Funds
 The main objective of the fund is to provide regular income to the
investors.
 So Mutual Funds wish to invest the public money raised in bonds,
debentures & others debt related investments, In some cases Mutual
Funds may invest in equity shares of company with high dividend
payouts.
Growth Oriented Funds
 Concentrates mainly on long run gains i.e. Capital Appreciation.
 This scheme is not for investors seeking regular income or need
their money back in the short term.
 Mutual Fund investing in risk bearing securities & high growth
equities.

Balanced Funds/(“Income-cum-Growth Fund”)
 Combination of both income & growth funds.
 It aims at distributing regular income as well as capital appreciation.
 Investment in high growth equity shares & also the fixed income
earning securities (Govt. Bonds).
Specialised Funds
 Mutual Funds will be investing the investors’ money in a particular
industry such as steel/petroleum etc.
 High risk taking investors prefer this type of fund.
 Large number of specialised funds are exists in abroad.

Money Market Funds
 Like Open-Ended Fund, this scheme invest in highly liquid &
safe securities like Commercial Paper, Certificates of Deposits,
Treasury Bills etc.(Money Market Instruments).
(Treasury Bills-A promissory note issued by Govt. for a specific period stated
therein. Issued by R.B.I. on behalf of Govt. Issued for meeting temporary Govt.
deficits.)
(Commercial Paper-Unsecured Promissory Note issued with fixed maturity by a
company approved by R.B.I.)
(Certificates of Deposits-Short Term deposits instruments issued by Banks &
Financial Institutions to raise large sums of money).
 Returns on these schemes may fluctuate, depending upon the
interest rates prevailing in the market.

Taxation Funds
 It is a growth oriented fund.
 It offers tax rebates to the investors.
 It is suitable to salaried people who want to enjoy the tax
rebates.
 This is ideal for investors seeking tax rebates.
Leveraged Funds/(Borrowed Funds)
 The mutual funds uses borrowed money in order to purchase
shares & later on it is repaid from out of the sale of the units.
Dual Funds
 It is a special kind of close-ended-funds. The funds are
invested according to investors’ preference i.e. those who
prefer income & those who prefer growth separately.

Index Funds
Here, the investments will be in those companies which forms
the part of index number of the stock exchange.
Bond Funds
They provide fixed return for those who desire safety & safety
income. The fund is invested in Govt. securities and bonds.
Off-Shore Mutual Funds
It is meant for non-residential investor. The sources of
investments for these funds are from abroad. This is to attract
foreign capital for investment in the country (of issuing
company).

SEBI Guidelines on Mutual Funds
 The M.F. company must be a registered company.
 M.F. shall be established in the form of Trusts under the Indian
Trust Act to be authorised for business by the SEBI.
 M.F. shall be operated only by separately established AMCs.
 The AMC should have minimum networth of Rs.10 Crores.
 SEBI-Power to withdraw the authorisation given to any AMC
if it is found to be not serving the best interest of investor as
well as the capital market. This is not applicable to Bank
sponsored AMCs.
 Both AMC & trustees should be treated as 2 separate legal
entities.

 AMCs should not be permitted to undertake any other business
activities except mutual funds.
 One AMC cannot act as AMC for another M.F.
 Each scheme of a M.F. must be compulsory registered with the
SEBI before it is floated in the market.
 For liquidity, closed-ended-schemes should be listed on stock
exchanges.
 Open-ended-schemes to be repurchased on NAV.
 M.F.s should invest only in transferable securities either in the
capital market or money market or securitised debt.

 The fees charged by AMC on M.F. should be disclosed in the
prospectus.
 All M.F.s must distribute minimum of 90% of their profits in
any given year.
 SEBI may call any information regarding operative of M.F.s.
 Every M.F. is required to send its copies of duly audited annual
statements of A/cs, 6 monthly unaudited A/cs, quarterly
statements of movements in net assets for each of its schemes
to the SEBI.
 SEBI can lay down A/c policies, format & contents of financial
statements & other reports.

 SEBI shall also lay down a common advertising code for all
M.F.s to comply with.
 A/c for all schemes must be done for the same year-ending.
 Each closed-end-scheme should be wound-up or extended with
the permission of the SEBI as soon as the pre-determined
period is over.
 Open-end-schemes shall be wound-up if total number of units
outstanding after repurchase at a point of time falls below 50%
of the originally issued number of units.
 SEBI can impose penalties on M.F.s for violatiing guidelines if
necessary after the investigation.

Mutual Funds

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