Paper On

Mutual Funds in India

Submitted to: Submitted by:

Dr. JS Sudeer Aneesh MJ

Lecturer Manoj MV
PG Department of Commerce Midhun V
Iqbal College, Peringammala Niyas SR
(Mcom S3)
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Introduction:

Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and
are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise
option, as in real terms the value of money decreases over a period of time.

One of the options is to invest the money in stock market. But a common investor is not
informed and competent enough to understand the workings of stock market. This is where mutual
funds come to the rescue.

A mutual fund is a group of investors operating through a fund manager to purchase a diverse
portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By
pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower
trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks
or bonds to buy. But the biggest advantage of mutual funds is diversification.

Diversification means spreading out money across many different types of investments. When
one investment is down another might be up. Diversification of investment holdings reduces the risk
tremendously.
Thus, Mutual Funds are essentially portfolios, which co-mingle the savings of a large number
of individuals in a large diversified investment portfolio. Mutual funds have long been popular in the
developed economies.

Overview of Mutual Funds in India:

 In India, the largest mutual fund is UTI, which was established in the year 1964 in order to
encourage the small investors to invest in the equity market.
 The Unit Trust of India has nearly 35, 000 agents in the country.
 The Securities Exchange Board of India (SEBI) regulates the functioning of the mutual funds.
 The Mutual funds should be set up as trusts under the guidelines of the Indian Trusts Act.
 Activity pertaining to the management of fund should be directed by an asset management
company.
 The money market dealings of the mutual funds are to be registered with the Reserve Bank of
India.
 Various schemes floated by the mutual funds have to be registered under Securities Exchange
Board of India (SEBI).
 The RBI, in the year 1995, allowed the private players to establish Money Market Mutual
Funds.

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Mutual Fund Operation Flow Chart:

Organisation of a Mutual Fund:

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Organization of a Mutual Fund:

The Organization of a Mutual Fund is how the mutual funds are controlled. A number of entities are
involved in the Organization of a Mutual Fund. This helps in the proper management of the mutual
fund portfolio.

The Organization of a Mutual Fund contains entities such as

 Mutual Fund Shareholders: The Mutual Fund Shareholders, like the other shareholders have
the right to vote. The voting rights include, the right to elect directors during the directorial
elections, voting right to approve the alterations investment advisory contract pertaining to the
fund and provide approval for changing investment objectives or policies.

 Board of directors: The Board of directors supervise the functional activities, which include
approval of the contract Asset Management Company and other various service providers.

 Investment Management Company or Asset Management Company: This body handles

the mutual fund portfolio as per the objectives and policies mentioned in the prospectus of the
mutual funds.

 Custodians: The custodians protect the portfolio securities. Mostly qualified bank custodians
are used for mutual funds.

 Transfer Agents: The transfer agent for the purpose of maintaining records and similar
functions. The maintenance of the shareholder's accounts, calculation of dividends to the be
disbursed, sending information to the shareholders about the account statements, notices, and
income tax information. Some of the transfer agent sends information to the share holders
about the shareholder transactions and account balances. They also maintain customer service
departments in order the cater to the queries of the shareholders

 SEBI: The primary aim of the Securities Exchange Board of India is to protect the interest of
the mutual fund investors. The SEBI has formulated several policies for better functioning and
controls the mutual funds. In the year 1993, SEBI issued guidelines pertaining to the mutual
funds. All mutual funds, private sector and public sector are regulated by the guidelines of the
SEBI. The Asset

Management Company managing the funds has to be approved by the SEBI.

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History:
The mutual fund industry in India started in 1963 with the formation of Unit Trust 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:

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.
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 ` 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 the following. At the
end of 1993, the mutual fund industry had assets under management of ` 47, 004 crores.

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. As at the end of January 2003, there were 33 mutual funds
with total assets of `1, 21,805 cores. The Unit Trust of India with `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 `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

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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.

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Frequently Used Terms:

1. Net Asset value

2. Sales Price
3. Repurchase Price
4. Redemption Price
5. Sales Load
6. Repurchase Load

Net Asset Value (NAV):

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per
unit NAV is the net asset value of the scheme divided by the number of units outstanding on the
Valuation Date.

Sale Price:

Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a
sales load.

Repurchase Price:

Is the price at which a close-ended scheme repurchases its units and it may include a back-end
load. This is also called Bid Price.

Redemption Price:

Is the price at which open-ended schemes repurchase their units and close-ended schemes
redeem their units on maturity. Such prices are NAV related.

Sales Load:

Sales load is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’
load. Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’ Load:

Repurchase or Back-end Load is a charge collected by a scheme when it buys back the units
from the unit holders.

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Types of Mutual Fund:

Based on their structure and objective, mutual funds can be classified into following major types:

1. Close-end Funds
2. Open-end Funds
3. Large cap Funds
4. Mid-cap Funds
5. Equity Funds
6. Balanced Funds
7. Growth Funds
8. No load Funds
9. Exchange Traded Funds
10. Value Funds
11. Money Market Funds
12. International Mutual Funds
13. Regional Mutual Funds
14. Sector Funds
15. Index Funds
16. Funds of Funds

Closed-End Mutual Funds:

A closed-end mutual fund has a set number of shares issued to the public through an initial public
offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund
is open for subscription only during a specified period. 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 they are listed.

Open End Mutual Fund:

Open end funds are operated by a mutual fund house which raises money from shareholders and
invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by
selling shares of the fund to the public, in a manner similar to any other company, which sell its stock
to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell
shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at
their current net asset value.

Large Cap Funds:

Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in
stocks of large blue chip companies with above-average prospects for earnings growth. Different
mutual funds have different criteria for classifying companies as large cap. Generally, companies with
a market capitalisation in excess of Rs 1000 crore are known large cap companies.
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Mid Cap Funds:
Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no
standard definition classifying companies as small or medium, each mutual fund has its own
classification for small and medium sized companies. Generally, companies with a market
capitalization of up to Rs 500 crore are classified as small. Those companies that have a market
capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized.

Equity Mutual Funds:

Equity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts
of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies,
and the aim of stock ownership is to see the value of the companies increase over time. Stocks are
often categorized by their market capitalization (or caps), and can be classified in three basic sizes:
small, medium, and large. Many mutual funds invest primarily in companies of one of these sizes and
are thus classified as large-cap, mid-cap or small-cap funds.

Balanced Fund:
Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of
common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital
appreciation while avoiding excessive risk. Balanced funds provide investor with an option of single
mutual fund that combines both growth and income objectives, by investing in both stocks (for growth)
and bonds (for income).

Growth Funds:
Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth
stocks. They focus on those companies, which are experiencing significant earnings or revenue growth,
rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing
companies in the market. Growth managers are willing to take more risk and pay a premium for their
stocks in an effort to build a portfolio of companies with above-average earnings momentum or price
appreciation.

No-Load Mutual Funds:

Mutual funds can be classified into two types - Load mutual funds and No-Load mutual funds. Load
funds are those funds that charge commission at the time of purchase or redemption. They can be
further subdivided into (1) Front-end load funds and (2) Back-end load funds.
Front-end load are fees or expenses recovered by mutual funds against compensation paid to
brokers, their distribution and marketing costs. These expenses are generally called as sales loads.
Front-end load funds charge commission at the time of purchase. Similar to front end loads there are
back end loads. Back-end load funds charge commission at the time of redemption.
No-load funds are those funds that can be purchased without commission. No load funds have
several advantages over load funds.

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Exchange Traded Funds:
Exchange Traded Funds (ETFs) represent a basket of securities that is traded on an exchange, similar
to a stock. Hence, unlike conventional mutual funds, ETFs are listed on a recognised stock exchange
and their units are directly traded on stock exchange during the trading hours. In ETFs, since the
trading is largely done over stock exchange, there is minimal interaction between investors and the
fund house. ETFs can be categorised into close-ended ETFs or open-ended ETFs.

Value Funds:
Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose
investments providing dividends as well as capital appreciation. They invest in companies that the
market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due
to changing investor preferences, a poor quarterly earnings report, or hard times in a particular
industry.

Money Market Mutual Funds:

A money market fund is a mutual fund that invests solely in money market instruments. Money market
instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make
up the bulk of the money market instruments. Securities in the money market are relatively risk-free.
Money market funds are generally the safest and most secure of mutual fund investments.

International Mutual Funds:

International mutual funds are those funds that invest in non-domestic securities markets throughout
the world. Investing in international markets provides greater portfolio diversification and let you
capitalize on some of the world’s best opportunities. If investments are chosen carefully, international
mutual fund may be profitable when some markets are rising and others are declining.

Regional Mutual Fund:

Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified
geographical area, usually, the fund’s local region. A regional mutual fund generally looks to own a
diversified portfolio of companies based in and operating out of its specified geographical area.

Sector Mutual Funds:

Sector mutual funds are those mutual funds that restrict their investments to a particular segment or
sector of the economy. Also known as thematic funds, these funds concentrate on one industry such as
infrastructure, banking, technology, energy, real estate, power heath care, FMCG, pharmaceuticals etc.
The idea is to allow investors to place bets on specific industries or sectors, which have strong growth
potential.

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Index Funds:
An index fund is a mutual fund (or exchange-traded fund) that aims to replicate the movements of an
index of a specific financial market. An Index fund follows a passive investing strategy called
indexing.

Fund of Funds:
A fund of funds (FoF) is an investment fund that holds a portfolio of other investment funds rather than
investing directly in shares, bonds or other securities. This type of investment is also known as multi-
manager investment. Fund of funds can be classified into: Mutual fund FoF and Hedge fund FoF.
A Mutual fund FoF invests in other mutual funds. Just as a mutual fund invests in a number of
different securities, a fund of funds holds shares of many different mutual funds. A Hedge fund FoF
invests in a portfolio of different hedge funds to provide broad exposure to the hedge fund industry and
to diversify the risks associated with a single investment fund.

Association of Mutual Funds in India (AMFI):

With the increase in mutual fund players in India, a need for mutual fund association in India was
generated to function as a non-profit organisation. Association of Mutual Funds in India (AMFI) was
incorporated on 22nd August, 1995.
AMFI is an apex body of all Asset Management Companies (AMC) which has been registered
with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It
functions under the supervision and guidelines of its Board of Directors.
Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a
professional and healthy market with ethical lines enhancing and maintaining standards. It follows the
principle of both protecting and promoting the interests of mutual funds as well as their unit holders.

The objectives of Association of Mutual Funds in India:

The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has
certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are
as follows:

 This mutual fund association of India maintains a high professional and ethical standards in all
areas of operation of the industry.
 It also recommends and promotes the top class business practices and code of conduct which is
followed by members and related people engaged in the activities of mutual fund and asset
management. The agencies who are by any means connected or involved in the field of capital
markets and financial services also involved in this code of conduct of the association.
 AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund
industry.

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 Association of Mutual Fund of India do represent the Government of India, the Reserve Bank
of India and other related bodies on matters relating to the Mutual Fund Industry.
 It develops a team of well-qualified and trained Agent distributors. It implements a programme
of training and certification for all intermediaries and other engaged in the mutual fund
industry.
 AMFI undertakes all India awareness programme for investors in order to promote proper
understanding of the concept and working of mutual funds.
 At last but not the least association of mutual fund of India also disseminate informations on
Mutual Fund Industry and undertakes studies and research either directly or in association with
other bodies.

ADVANTAGES OF MUTUAL FUND:

S. No. Advantage Particulars

Mutual Funds invest in a well-diversified portfolio of
Portfolio securities, which enables investor to hold a diversified
1.
Diversification investment portfolio (whether the amount of
investment is big or small).
Fund manager undergoes through various research
Professional works and has better investment management skills
2.
Management which ensure higher returns to the investor than what
he can manage on his own.
Investors acquire a diversified portfolio of securities
even with a small investment in a Mutual Fund. The
3. Less Risk risk in a diversified portfolio is lesser than investing in
merely
2 or 3 securities.
Due to the economies of scale (benefits of larger
Low Transaction
4. volumes), mutual funds pay lesser transaction costs.
Costs
These benefits are passed on to the investors.
An investor may not be able to sell some of the shares
5. Liquidity held by him very easily and quickly, whereas units of a
mutual fund are far more liquid.
Mutual funds provide investors with various schemes
with different investment objectives. Investors have the
option of investing in a scheme having a correlation
6. Choice of Schemes
between its investment objectives and their own
financial goals. These schemes further have different
plans/options

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 Funds provide investors with updated information
pertaining to the markets and the schemes. All material
7. Transparency
facts are disclosed to investors as required by the
regulator.
Investors also benefit from the convenience and
flexibility offered by Mutual Funds. Investors can
switch their holdings from a debt scheme to an equity
8. Flexibility
scheme and vice-versa. Option of systematic (at
regular intervals) investment and withdrawal is also
offered to the investors in most open-end schemes.
Mutual Fund industry is part of a well-regulated
investment environment where the interests of the
9. Safety investors are protected by the regulator. All funds are
registered with SEBI and complete transparency is
forced.

DISADVANTAGES OF MUTUAL FUND:

S.
Disadvantage Particulars
No.
Investor has to pay investment management fees and
Costs Control Not in
fund distribution costs as a percentage of the value of
1. the Hands of an
his investments (as long as he holds the units),
Investor
irrespective of the performance of the fund.
The portfolio of securities in which a fund invests is a
decision taken by the fund manager. Investors have no
No Customized
2. right to interfere in the decision making process of a
Portfolios
fund manager, which some investors find as a
constraint in achieving their financial objectives.
Many investors find it difficult to select one option
Difficulty in Selecting from the plethora of funds/schemes/plans available.
3. a Suitable Fund For this, they may have to take advice from financial
Scheme planners in order to invest in the right fund to achieve
their objectives.

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Performance of Mutual Funds in India:
The performance of mutual funds in India from the day the concept of mutual fund took birth in
India. The year was 1963. Unit Trust of India invited investors or rather to those who believed in
savings, to park their money in UTI Mutual Fund.

For 30 years it goaled without a single second player. Though the 1988 year saw some new
mutual fund companies, but UTI remained in a monopoly position.

The performance of mutual funds in India in the initial phase was not even closer to satisfactory
level. People rarely understood, and of course investing was out of question. But yes, some 24 million
shareholders was accustomed with guaranteed high returns by the begining of liberalization of the
industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations
of investors touched the sky in profitability factor. However, people were miles away from the
praparedness of risks factor after the liberalization.

The Assets Under Management of UTI was ` 67bn. by the end of 1987. Let me concentrate
about the performance of mutual funds in India through figures. From ` 67bn. the Assets Under
Management rose to `470 bn. in March 1993 and the figure had a three times higher performance by
April 2004. It rose as high as ` 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock prices started falling
in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative
investments. There were rather no choice apart from holding the cash or to further continue investing
in shares. One more thing to be noted, since only closed-end funds were floated in the market, the
investors disinvested by selling at a loss in the secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market
scandal, the losses by disinvestments and of course the lack of transparent rules in the where about
rocked confidence among the investors. Partly owing to a relatively weak stock market performance,
mutual funds have not yet recovered, with funds trading at an average discount of 10-20 percent of
their net asset value.

The supervisory authority adopted a set of measures to create a transparent and competitve
environment in mutual funds. Some of them were like relaxing investment restrictions into the market,
introduction of open-ended funds, and paving the gateway for mutual funds to launch pension
schemes.

The measure was taken to make mutual funds the key instrument for long-term saving. The
more the variety offered, the quantitative will be investors.

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 At last to mention, as long as mutual fund companies are performing with lower risks and
higher profitability within a short span of time, more and more people will be inclined to invest until
and unless they are fully educated with the dos and donts of mutual funds.

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Achievements:
Annual Data April 2009 – March 2010

 174 new schemes were launched during the year

 Total Funds mobilized during the year was Rs. 1,00,19,023 crores as against Rs. 54,26,353
crores in the last year representing an increase of 85%.

 Redemptions at Rs. 99,35,942 crores were 82% higher than the redemptions of Rs. 54,54,650
crores in the previous year.

 The Assets Under Management as on March 31, 2010 stood at Rs. 6,13,979 crores as against
Rs. 4,17,300 crores as at the end of the previous year representing an increase of 47%.

Some facts for the growth of mutual funds in India:

 100% growth in the last 6 years.

 Number of foreign AMC’s are in the que to enter the Indian markets like Fidelity Investments,
US based, with over US$ 1 trillion assets under management worldwide.
 Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual
funds sector is required.
 We have approximately 200 mutual funds which is much less than US having more than 800.
There is a big scope for expansion.
 ‘B’ and ‘C’ class cities are growing rapidly. Today most of the mutual funds are concentrating
on the ‘A’ class cities. Soon they will find scope in the growing cities.
 Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited
products.
 SEBI allowing the MF’s to launch commodity mutual funds.
 Emphasis on better corporate governance.
 Trying to curb the late trading practices.
 Introduction of Financial Planners who can provide need based advice.

Conclusion:

Mutual funds are essentially portfolios, which co-mingle the savings of a large number of individuals
in a large diversified investment portfolio. As with any investment, there are risks involved in buying
mutual funds. These investment vehicles can experience market fluctuations and sometimes provide
returns below the overall market. Also, the advantages gained from mutual funds are not free: many of
them carry loads, annual expense fees and penalties for early withdrawal.

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References:

 wikipedia.com
 sebi.org
 mapsofindia.com
 amfi.org
 Financial Services and Markets : GS. Batra
 Financial Services : MY. Khan

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