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Mutual funds
A mutual fund is an investment tool that pools money from many investors and invests it in stocks, bonds, and other securities. The document summarizes the history and growth of mutual funds in India from 1963 to the present in four phases. It describes the types of mutual funds including by maturity, investment objective, and advantages for investors such as portfolio diversification, professional management, reduced costs and risk, and liquidity.
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Mutual funds
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- 2. What is MutualFund ? A mutual fund is a pool of money, collected from investors, and is invested according to certain investment objectives. A mutual fund is created when investors put their money together. It is therefore a pool of the investor’s funds.
- 3. Growth of mutualfunds 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. Until 1987, UTI enjoyed a monopoly in the Indian mutual fund market. Then a host of other government controlled Indian financial companies came up with their own funds. These included State Bank of India, Canara Bank, and Punjab National Bank. The history of mutual funds in India can be broadly divided into four distinct phases:
- 4. First Phase –1963-87 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. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores 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.
- 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. In 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.
- 7. Fourth Phase –since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was divided 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. 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.
- 8. Mutual Fund Operation FlowChart Investors Fund Securities Return Given back to Pool their money in Which is invested inThat generates
- 9. TYPES OF MUTUALFUNDS Mutual Funds By Maturity Period By Investment Objective Equity Income Balance fund Money market Gilt fund Index fund Close ended Open ended
- 10. Schemes according toMaturity Period A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund : 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. Close-ended Fund : 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.
- 11. Fund according toInvestment Objective A scheme can also be classified as growth fund, income fund, or balanced fund considering its investment objective. Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long- term. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc.
- 12. Income / DebtOriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth.
- 13. Money Market These fundsare also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, commercial paper and government securities, etc. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
- 14. Gilt Funds These fundsinvest exclusively in government securities. Government securities have no default risk. Index Funds This schemes invest in the securities in the same weightage comprising of an index. This schemes would rise or fall in accordance with the rise or fall in the index.
- 15. Advantages of mutualfunds to the Investors Portfolio diversification Professional management Reduction in risk Reduced transaction costs Liquidity
- 16. Portfolio diversification: Byoffering readymade diversified portfolios, mutual funds enable investors to hold diversified portfolios. Though investors can create their own diversified portfolios, the costs of creating and monitoring such portfolios can be high, apart from the fact that investors may lack the professional expertise to manage such a portfolio. Professional management: Mutual funds are managed by investment managers (Asset management companies or AMCs) who are appointed by trustees and bound by the investment management agreement, on the how's and whys of their investment management functions. Investment managers and funds are also bound by the AMFI code of ethics, which foster professional standards in the industry. Reduction of risk: Mutual funds invest in a portfolio of securities. This means that all funds are not invested in the same investment avenue. It is well known that risk and returns of various investment options do not move uniformly or in sympathy with one another. If the equity market is moving down, the debt markets may be moving up. Therefore, holding a portfolio that is diversified across investment avenues is a wise way to manage risk. When such a portfolio is liquid and marked to market, it enables investors to continuously evaluate the portfolio and manage their risks more efficiently.
- 17. Reduced transaction costs:Mutual funds provide the investor the benefit of economies of scale, by virtue of their size. Though the individual investor's contribution may be small, the mutual fund itself is large enough to be able to reduce costs in its transactions. These benefits are passed on to the investors. Liquidity : Most of the funds being sold today are open-ended. That is , investors can sell their existing units, or buy new units, at any point of time, at prices that are related to the to the NAV of the fund on the date of the transaction. This enables investors to enjoy a high level of liquidity on their investments.
- 18. Conclusion Different investment avenuesare available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.
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