MUTUAL FUND

Mutual funds is a trust that pools the savings of a number of investors to

purchase securities who share a common financial goal. The investors may be
retail or institutional in nature. The pool of money is invested in accordance
with the stated objective. The joint ownership of the fund is thus “Mutual” that
is the fund belongs to all investors. The money thus collected is then
investment capital market instruments such as shares, debentures and other
securities. The income earned through these investments and the capital
appreciation realised are shared by its units holders in proportion the number of
units owned by them .

Thus a Mutual fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket
of securities at a relatively low cost. A Mutual Fund is an investment tool that
allows small investors access to a well- diversified portfolio of equities, bonds
and other securities at relatively low cost . Each shareholder participates in the
loss or gain of the fund. Units are issued and can be redeemed as needed.

When an investor subscribes for the units of a mutual fund, he becomes part
owner of the assets of the fund in same proportion as his contribution amount
put up with the corpus ( the total amount of the fund) .Mutual Fund investor is
also known as a mutual fund shareholder or a unit holder.

Any change in the value of the investments made into capital market
instruments (such as shares, debentures etc) is reflected in the Net Asset Value
(NAV) of the scheme. NAV is defined as the market value of the Mutual Fund
scheme’s asset net of its liabilities. NAV of a scheme is calculated by dividing
the market value of scheme’s asset net of its liabilities .NAV of a scheme is
calculated by dividing the market value of the scheme’s assets by the total
number of units issued to the investors. The Net Asset Value (NAV) of the
fund is changes frequently and hence calculated daily.
HISTORY OF MUTUAL FUND

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

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 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 Canara Bank 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.

At the end of 1993, the mutual fund industry had assets under management of Rs.
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.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996. The industry now
functions under the SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual
funds setting up funds in India and also the industry has witnessed several mergers
and acquisitions. As at the end of January 2003, there were 33 mutual funds with total
assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs. 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 Rs. 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 Regulations.
The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76,000
crores of assets under management and with the setting up of a UTI Mutual Fund,
conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking
place among different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth.

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of
the Unit Trust of India effective from February 2003. The Assets under management
of the Specified Undertaking of the Unit Trust of India has therefore been excluded
from the total assets of the industry as a whole from February 2003 onwards.
The graph indicates the growth of assets over the years
ADVANTAGES OF MUTUAL FUND

 Liquidity
Unless you opt for close-ended mutual funds, it is relatively easier to buy and exit a
scheme. You can sell your units at any point (when the market is high). Do keep an
eye on surprises like exit load or pre-exit penalty. Remember, mutual fund
transactions happen only once a day after the fund house releases that day’s NAV.

 Diversification
Mutual funds have their own share of risks as their performance is based on the
market movement. Hence, the fund manager always invests in more than one asset
class (equities, debts, money market instruments etc.) to spread the risks. It is
called diversification. This way, when one asset class doesn’t perform, the other can
compensate with higher returns to avoid the loss for investors.

 Expert Management
Mutual fund is favored because it doesn’t require the investors to do the research and
asset allocation. A fund manager takes care of it all and makes decisions on what to
do with your investment. He/she decides whether to invest in equities or debt. He/she
also decide on whether to hold them or not and for how long.
Your fund manager’s reputation in fund management should be an important criterion
for you to choose a mutual fund for this reason. The expense ratio (which cannot be
more than 1.05% of the AUM guidelines as per SEBI) includes the fee of the manager
too.

 Less cost for bulk transactions

You must have noticed how price drops with increased volume, when you buy any
product. For instance, if a 100 g toothpaste costs Rs. 10, you might get a 500g pack
for, say, Rs. 40. The same logic applies to mutual fund units as well. If you buy
multiple units at a time, the processing fees and other commission charges will be less
compared to when you buy one unit.

 Invest in smaller denominations

By investing in smaller denominations (SIP), you get exposure to the entire stock (or
any other asset class). This reduces the average transactional expenses – you benefit
from the market lows and highs. Regular (monthly or quarterly) investments as
opposed to lump sum investments give you the benefit of rupee-cost averaging.
  Suit your financial goals

There are several types of mutual funds available in India catering to investors from
all walks of life. No matter what your income is, you must make it a habit to set aside
some amount (however small) towards investments. It is easy to find a mutual fund
that matches your income, expenditures, investment goals and risk appetite.

 Cost-efficiency
You have the option to pick zero-load mutual funds with less expense ratios. You can
check the expense ratio of different mutual funds and choose one that fits in your
budget and financial goals. Expense ratio is the fee for managing your fund. It is a
useful tool to assess a mutual fund’s performance.

 Quick & painless process

You can start with one mutual fund and slowly diversify. These days it is easier to
identify and handpick fund most suitable for you. Maintaining and regulating the
funds too will take no extra effort from your side. The fund manager with the help of
his team of will decide when, where and how to invest. In short, their job is to
consistently beat the benchmark and deliver you maximum returns.

 Tax Efficiency

You can invest up to Rs. 1.5 lakhs in tax-saving mutual funds mentioned under 80C
tax deductions. ELSS is an example for that. Though a 10% Long Term Capital Gains
(LTCG) is applicable for returns in excess of Rs 1 Lakh after one year, they have
consistently delivered higher returns than other tax-saving instruments like FD in the
recent years.
DISADVANTAGES OF MUTUAL FUND

 Costs to manage the mutual fund

The salary of the market analysts and fund manager basically comes from the
investors. Total fund management charge is one of the main parameters to consider
when choosing a mutual fund. Greater management fees do not guarantee better fund
performance.

 Lock-in periods

Many mutual funds have long-term lock-in periods, ranging from 5 to 8 years. Exiting
such funds before maturity can be an expensive affair. A certain portion of the fund is
always kept in cash to pay out an investor who wants to exit the fund. This portion in
cash cannot earn interest for investors.

 Dilution
While diversification averages your risks of loss, it can also dilute your profits. Hence,
you should not invest in more than 7-9 mutual funds at a time.
As you have just read above, the benefits and potential of mutual funds can certainly
override the disadvantages, if you make informed choices. However, investors may
not have the time, knowledge or patience to research and analyze different mutual
funds.

 Tax Inefficiency
Like it or not, investors do not have a choice when it comes to capital gain payouts in
mutual funds. Due to the turnover, redemptions, gains, and losses in
security holdings throughout the year, investors typically receive distributions from
the fund that are an uncontrollable tax event.

 CAGR
The performance of a mutual fund vis-a-vis the compounded annualised growth rate
(CAGR) neither provides investors adequate information about the amount of risk
facing a mutual fund nor the process of investment involved. It is therefore, only one
of the indicators to gauge the performance of a fund but is far from being
comprehensive.

 Past performance
Ratings and advertisements issued by companies are only an indicator of the past
performance of a fund. It is important to note that robust past performance of a fund is
not a guarantee of a similar performance in the future.

As an investor, you should analyse the investment philosophy, transparency, ethics,

compliance and overall performance of a fund house across different phases in the
market over a period of time. Ratings can be taken as a reference point.
CATEGORIES OF MUTUAL FUND