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Mutual fund investement
- 1. MUTUAL FUND INVESTEMENTIN INDIA
- 2. Meaning of Mutualfund A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets.
- 3. History of Mutualfund 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 of India. The history of mutual funds in India can be broadly divided into four distinct phases.
- 4. First Phase -1964-1987 Unit Trust of India (UTI) was established in 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. 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. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 cores of assets under management
- 5. 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.
- 6. 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 first private sector mutual fund registered in July 1993
- 7. 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 cores 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.
- 8. Types of mutualfund Money market funds Open-ended funds Closed –ended funds Fixed income funds Equity funds Balanced funds Index funds Specialty funds Fund-of-funds
- 9. 1. Money marketfunds These funds invest in short-term fixed income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit. They are generally a safer investment, but with a lower potential return then other types of mutual funds.
- 10. Open ended fund open for all the year minimum subscription amt 50cr No duration refunded if min subs not achieved repurchased any time redeemed at nav & load factor ranges (4% to 6%) as re purchased so not listed at stock ex traded as permitted lot dividend may /may not switchover allowed
- 11. Closed ended fund open for fixed period min subs amt 20cr duration (5to7 years) refunded if min amt not achieved may be repurchased (after 2 to 3 yrs) redemption specified & done at nav - service charge listed at stock ex dividend may/may not be switchover allowed
- 12. Fixed income funds These funds buy investments that pay a fixed rate of return like government bonds, investment-grade corporate bonds and high-yield corporate bonds. They aim to have money coming into the fund on a regular basis, mostly through interest that the fund earns. High-yield corporate bond funds are generally riskier than funds that hold government and investment-grade bonds.
- 13. Equity funds Thesefunds invest in stocks. These funds aim to grow faster than money market or fixed income funds, so there is usually a higher risk that you could lose money.
- 14. Balanced funds Thesefunds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money.
- 15. Specialty funds Thesefunds focus on specialized mandates such as real estate, commodities or socially responsible investing. For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights and diversity, and may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.
- 16. Fund-of-funds These fundsinvest in other funds. Similar to balanced funds, they try to make asset allocation and diversification easier for the investor. The MER for fund-of-funds tend to be higher than stand-alone mutual funds.
- 17. The Advantages ofmutual fund investment
- 18. Diversification: A singlemutual fund can hold a wide range of securities from different issuing companies. Focus funds are on the lower end of the spectrum and can hold little as 20 investments that the manager has high conviction in. On the other hand, there are mutual funds that hold thousands upon thousands of different investments. Generally a mutual fund will have somewhere between 75-125 holdings.
- 19. Affordability: Many mutualfunds set a relatively low dollar amount for initial investments and subsequent purchases. For example, many fund families allow you to begin buying units or shares with a small dollar amount (e.g. $500) for the initial purchase. Some mutual funds also permit you to buy more units on a regular basis with even smaller installments (e.g. $50 per month) allowing you to invest small dollar amounts in many companies. This allows an individual to own all of the underlying investments of the fund that may not have been affordable to purchase individually.
- 20. Professional Management: Many investorsdo not have the time or expertise to manage their personal investments every day, to efficiently reinvest interest or dividend income, or to filter through the thousands of securities available in the financial markets. Mutual funds are managed by professionals who are experienced in investing money and who have the education, skills and resources to research diverse investment opportunities. Not only do they do the security selection, but many will also monitor performance and make adjustments with the changing economic and market cycles.
- 21. Liquidity Units orshares in a mutual fund can be bought and sold on any business day (that the market is open), providing investors with easy access to their money for the current net asset value (NAV), minus any redemption fees, usually within three business days of the transaction.
- 22. Flexibility: Many mutualfund companies manage several different funds (e.g., money market, fixed-income, growth, balanced, sector, index, international, global, alternative, allocation, target date, etc.) and allow you to switch between these funds at little to no charge. This enables you to change your portfolio balance as personal needs, financial goals or market conditions change.
- 23. The Disadvantages ofMutual Funds
- 24. Not tax-efficient Nottax-efficient: In a non IRA account, mutual funds will process capital gain distributions about once per year, which you will then be taxed on, even if you did not take any capital gains that year. The end investor has little impact or say on how much a fund will decide to spit out in capital gain distributions. The funds have the freedom to delay capital gain distributions in some years, essentially kicking the can down the road for later years. This could adversely impact you as the end investor.
- 25. Impersonal connection Wheninvesting in a mutual fund, you do not usually have easy access to the one making the investment decisions. There may be quarterly investor calls and updates, but there will be a significant lack of interpersonal communication with the main folks in charge of the fund.
- 26. Costs: Mutual funds alwayscarry some kind of costs. In all cases, costs will decrease your overall rate of return. That is why it is important to limit the annual expenses of mutual funds, the potential front-end or back-end loads, and turnover costs. It takes more than a novice investor to navigate these issues, but this is one of the most important downsides to using mutual funds and thus, should certainly be evaluated and address by all investors.
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- 29. Step 1Identify your investment needs 1. What are my investment objectives and needs? 2. How much risk am I willing to take? 3. What are my cash flow requirements? Step 2 Choose the right mutual fund. 1. The track record of performance over the last few years in relation to the appropriate Benchmark and similar funds in the same category 2. How well the mutual fund is organized to provide efficient, prompt and personalized service. 3. Degree of transparency as reflected in frequency an d quality of their communications. Step 3 Select the ideal mix of schemes Investing in just 1 scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals.
- 30. Mutual Fund: Howto buy?
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