INTRODUCTION TO MUTUAL FUNDS

Mutual fund is a buzz in the market these days. The mutual fund industry is burg
eoning, it is completely untapped market. Only 5% of total potential of this ind
ustry has been grabbed. Hence this industry has a lot of opportunities in it. Th
atâ s why it is so much interactive.
As Indian economy is growing at the rate of 8% per annum, we can see its effect
in all areas. The Indian stock market and companies have become lucrative for fo
reign investors. More and more fund is pouring in our country. This is increasin
g liquidity in the market and hence increasing the money in the hands of people
and thus investment. As the future prospects for Indian companies are bright, th
ey have lots of opportunities to expand their business worldwide, the investment
in Indian companies.
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 in different types of securities depending upon the objective of the scheme
. These could range from shares to debentures to money market instruments. The i
ncome 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
owned 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, professi
onally managed portfolio at a relatively low cost. Anybody with an investible su
rplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mut
ual Fund scheme has a defined investment objective and strategy.
A mutual fund is the ideal investment vehicle for todayâ 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 fund is the answer to all these situations. It appoints professionally
qualified and experienced staff that manages each of these functions on a full t
ime 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 ex
ploits economies of scale in all three areas - research, investments and transac
tion processing. While the concept of individuals coming together to invest mone
y collectively 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. Globally, there are thousands of firms offering tens of thousands of mutua
l funds with different investment objectives. Today, mutual funds collectively m
anage 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. Typi
cally, it pre specifies the investment objectives of the fund, the risk associat
ed, the costs involved in the process and the broad rules for entry into and exi
t from the fund and other areas of operation. In India, as in most countries, th
ese sponsors need approval from a regulator, SEBI (Securities exchange Board of
India) in our case. SEBI looks at track records of the sponsor and its financial
strength in granting approval to the fund for commencing operations.
A sponsor then hires an asset management company to invest the funds according t
o 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 u
nit holders (subscribers) of the fund.
In the Indian context, the sponsors promote the Asset Management Company also, i
n which it holds a majority stake. In many cases a sponsor can hold a 100% stake
in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor
of the Birla Sun Life Asset Management Company Ltd., which has floated differen
t mutual funds schemes and also acts as an asset manager for the funds collected
under the schemes.

Future Scenario
The asset base will continue to grow at an annual rate of about 30 to 35 % over
the next few years as investorâ s shift their assets from banks and other tradition
al avenues. Some of the older public and private sector players will either clos
e shop or be taken over.
Out of ten public sector players five will sell out, close down or merge with st
ronger players in three to four years. In the private sector this trend has alre
ady started with two mergers and one takeover. Here too some of them will down t
heir shutters in the near future to come.
But this does not mean there is no room for other players. The market will witne
ss a flurry of new players entering the arena. There will be a large number of o
ffers from various asset management companies in the time to come. Some big name
s like Fidelity, Principal, and Old Mutual etc. are looking at Indian market ser
iously. One important reason for it is that most major players already have pres
ence here and hence these big names would hardly like to get left behind.
The mutual fund industry is awaiting the introduction of derivatives in India as
this would enable it to hedge its risk and this in turn would be reflected in i
tâ s Net Asset Value (NAV).
SEBI is working out the norms for enabling the existing mutual fund schemes to t
rade in derivatives. Importantly, many market players have called on the Regulat
or to initiate the process immediately, so that the mutual funds can implement t
he changes that are required to trade in Derivatives.
Market Trends
A lone UTI with just one scheme in 1964 now competes with as many as 400 odd pro
ducts and 34 players in the market. In spite of the stiff competition and losing
market share, UTI still remains a formidable force to reckon with.
Last six years have been the most turbulent as well as exiting ones for the indu
stry. New players have come in, while others have decided to close shop by eithe
r selling off or merging with others. Product innovation is now passé with the
game shifting to performance delivery in fund management as well as service. Tho
se directly associated with the fund management industry like distributors, regi
strars and transfer agents, and even the regulators have become more mature and
responsible.
The industry is also having a profound impact on financial markets. While UTI ha
s always been a dominant player on the bourses as well as the debt markets, the
new generations of private funds which have gained substantial mass are now seen
flexing their muscles. Fund managers, by their selection criteria for stocks ha
ve forced corporate governance on the industry. By rewarding honest and transpar
ent management with higher valuations, a system of risk-reward has been created
where the corporate sector is more transparent then before.
Funds have shifted their focus to the recession free sectors like pharmaceutical
s, FMCG and