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Chapter 1: Introduction to the study

Introduction Global Economic view has changed drastically. There has been a great transition in recent years leading to some positive development in the Industry and Financi al System. An efficient, articulate and developed financial system is indispensa ble for the rapid economic growth of any country s economy. The process of econom ic development is invariably accompanied by a corresponding and parallel growth of financial organizations. However, their institutional structure, operating po licies, regulatory/legal framework differed greatly and is largely influenced by politico-economic environment. Thus, minimal regulation and restriction from au thorities became the need of the hour. After the disintegration of Soviet Union (U.S.S.R) and adoption of GATT treaty, it became crystal clear that the every ec onomy is going to be globally exposed. Realizing this issue, India under the aeg is of P.V. Narshima Rao and Dr. Manmohan Singh came out with slew of economic me asures in 1991 to foster the economic development of our country. The Industrial Policy of 1991 called for changes through LPG (Liberalization, Privatization an d Globalization) for rapid economic growth and stability. A need for strong capi tal market was felt which could be possible only if large chunk of funds come fr om investors. The most important problem was to dissipate small investor s hindran ces towards the capital market. By now general public of our country was not rea sonably participating in industrial investments. Lack of information, complexity of industrial investment process, lack of knowledge about portfolio management, fear of high risk and shyness served as major roadblocks in investment. India i s a nation predominantly occupied with middle class having great amount of small savings. Out of total savings which are 20% of GDP, only 7% was invested direct ly in industries. Even now, in this age of Globalization, a large amount of reso urces is blocked in traditional conservative schemes such as bank deposits, gove rnment bonds, post office savings certificates etc. Thus, a need was felt to div ert these resources of small investors by a mechanism which could be termed secu re and reliable. Mutual funds came into existence on the principle of co-operati on which means collecting money from various sources and governing it under a ro of. The investment so collected is judiciously re-invested in many other securit ies. Thus these small savings were tapped by bringing the concept of mutual fund which is definitely a revolution in the history of capital market industry. The Research centers upon the study of Mut ual Funds and its scenario in our Economy. The thesis is all about all equity or

iented mutual fund schemes in our Country and taking the case of Unit Trust of I ndia (UTI), 1st mutual fund of our country. This thesis is an outcome of careful study and analysis of various data collected through many books, internet, maga zines etc. Even analysis of various scholars including foreign ones is quoted to provide a profound understanding upon the topic. A mechanism for pulling resources from the publi c by issuing units to them and investing the funds. Mutual Funds so collects sec urities in accordance with objectives as disclosed in an offer doccument. Mutual Fund issues units to investors in accordance with the quantum of money invested by them. As a maater of fact,unit holders are the investors of Mutual Fund. Th e profits / losses of the particular fund / plan are shared by the investors in proportion to their investments. Mandatory registration with SEBI ( Securities A nd Exchange Board Of India) is the pre-requisite of a Mutual Fund, which regulat es the securities market before it can collect funds from the public. SEBI formu lates the policies and regulates the Mutual Funds to protect the interest of inv estors. Meaning of Mutual Fund: Conceptualization A Mutual Fund is a trust that pools the savings of a number of investors who sha re a common financial goal. The money thus collected is invested by the fund man ager indifferent types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The in come earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units o wned by them (pro rata). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professio nally managed portfolio at a relatively low cost. Anybody with an investible sur plus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutu al Fund scheme has a defined investment objective and strategy. A mutual fund is the ideal investment vehicle for today s complex and modern finan cial scenario. Markets for equity shares, bonds and other fixed income instrumen ts, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership o f his assets, investments, brokerage dues and bank transactions etc. A mutual fu nd is the answer to all these situations. It appoints professionally qualified a nd experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits econ omies of scale in all three areas -research, investments and transaction process ing. While the concept of individuals coming together to invest money collective ly is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Global ly, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the inve stment objectives of the fund, the risk associated, the costs involved in the pr ocess and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI looks a t track records of the sponsor and its financial strength in granting approval t o the fund for commencing operations. A sponsor then hires an asset management c ompany to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders (subscribers) of the fund.