What is Mutual Fund ? 

     Concept of Mutual Fund

     The flow chart below describes broadly the working of a mutual fund:

                 How does a Mutual fund work?

                History of Mutual Fund in India

• Pioneer of mutual fund is UTI in 1963

• Actual growth started in 1987

• The dramatic improvement through quality wise and quantity wise

• Main reason for its poor growth is new concept in the country.

• Large sections of Indian investor are yet to be intellectual with this concept.

• Hence the it is prime responsibility of all Mutual Fund companies , to make the product correctly abreast of selling.

• There are four 4 phases according to the development of sector  

         First Phase 1964-1987

• 1964 to 1987: - 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 Rs.6,700 cores of asset

         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 Canbank 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 Ltd, 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.  

                The graph indicates the growth of assets over the years.

                                          GROWTH IN ASSETS UNDER MANAGEMENT

   Some facts for the growth of mutual funds in India                 

• Our saving rate is over 23%, highest in the world. Only channel zing these savings in mutual fund sector is required.

• 100% growth in the last 6 years

• There are approximately 29 mutual funds which are 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 rural like the Indian insurance industry with simple and limited products.

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100           Regulations

Mutual Funds in India are governed by the SEBI (Mutual Fund) Regulations 1996 as  amended     from time to time. For further details please visit the SEBI website http://www.sebi.gov.in  

                           Organization of Mutual Fund 

The structure consists of 

           Sponsor

Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.   

           Trust  

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.

           Trustee

Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alias ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.  

 Asset Management Company (AMC) 

The Trustee as the Investment Manager of the Mutual Fund appoints the AMC. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. Atlas 50% of the directors of the AMC is an independent director who is not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times.  

           Registrar and Transfer Agent 

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form; redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.

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Types of Mutual Fund

Equity    Debt/Income    Arbitrage    Gold       Unit Linked Plan 

Fixed Maturity Period    Monthly Income Plan

Equity Oriented Schemes

These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.  

Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic.

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Index Schemes

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds launched by the mutual funds, which are traded on the stock exchanges. 

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Sector Specific Schemes

These are the funds/schemes, which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.  

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Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.  

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Income/Debt Oriented 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. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

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                    Hybrid/Balanced Schemes 

These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. Balanced Fund and Gift Fund are examples of hybrid schemes.

Money Market/Liquid Schemes

These funds are 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, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.  

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Gilt Schemes

These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as are the case with income or debt oriented schemes.

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Arbitrage Fund

Arbitrage is one of the most effective ways to insulate against market volatility. An arbitrage fund buys equities in the cash market and simultaneously sells in the futures market, thus ensuring market neutrality for the investment.  In other words, it is a unique asset class by itself where returns are generated by capturing the pricing differential between the cash and the futures markets. It is also termed as a market-neutral fund where the returns are not going to be impacted by volatility in the market.  

For any arbitrage fund, the following market conditions are beneficial  -- a bullish market and a volatile market.  While the fund performs very well in bullish markets, a volatile market gives it opportunities for early exit, thus enhancing the overall yield of the portfolio. However, a prolonged bear phase is not an ideal situation for this kind of product. 

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Difference between Arbitrage Fund & Income Fund both in terms of risk and returns

In terms of returns, an arbitrage fund is better than an income product. An income product has a fixed yield-to-maturity while in an arbitrage product, the yields are better due to lower cost of carry and are usually in the range of 10-14%.

Secondly, the risk parameters are similar or lower than an income product.  An arbitrage fund does not carry any credit rating risk and interest rate risk, while the returns can be much higher than an income product. Added to this, a mutual fund arbitrage product enjoys all the tax benefits enjoyed by mutual fund products Derivatives in India have more often been used for speculation purposes than for hedging and arbitrage. What are your views on this? Both in India and the world over, derivatives have been widely used as a leverage product but as the trends are changing and the investors are maturing, the other tools like hedging and risk free arbitrage strategies are also being widely used. 

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           Gold Exchange-Traded Schemes

Exchange-traded funds (ETFs) are mutual fund schemes that are listed and traded on exchanges like stocks. ETFs trading value is based on the net asset value (NAV) of the assets it represents. Generally, ETFs invest in a basket of stocks and try to replicate a stock market index such as the S&P CNX Nifty or BSE Sensex, a market sector such as energy or technology, or a commodity such as gold or petroleum. 

Recently, the Securities and Exchange Board of India (SEBI) amended its regulations and allowed mutual funds launch gold exchange-traded funds (GETFs) in India. Two mutual funds, UTI mutual fund and Benchmark Mutual Fund, has been launched. These funds got  listed on the National Stock Exchange (NSE).

A gold-exchange traded fund unit is like a mutual fund unit backed by gold as the underlying asset and would be held mostly in demat form. An investor would get a securities certificate issued by the mutual fund running the Gold-ETF defining the ownership of a particular amount of gold. GETFs are designed to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell through trading of a security on a stock exchange.   With gold being one of the important asset classes, GETFs will provide a better, simpler and affordable method of investing as compared to other investment methods like bullion, gold coins, gold futures, or jewelry.

click here to get more   GOLD EXCHANGE TRADED FUND

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Unit-Linked Plan

Unit-linked life insurance offers the interesting option of combining protection and tax advantages of life insurance with the attractive prospects of investing in  equities. A unit-linked plan works on a minimum premium basis and not on a sum assured one. You decide the amount you can contribute at regular intervals. ULIP offers you insurance cover till your insurance needs are fulfilled, beyond that it becomes an investment avenue.

click here to get more  UNIT LINKED PLAN

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Fixed Maturity Plans (FMPs)

Safe, predictable and better post-tax returns than bank FDs

Rising interest rates not only mean rising EMIs but also offer an opportunity to earn higher returns. Debt schemes are now offering attractive returns with short-term rates in the region of 8-10%. Call money rates have been moving higher to about 7.5-8% due to tight liquidity conditions. With the RBI deciding to raise the cash reserve ratio (CRR), liquidity conditions have worsened. Tightness in the money markets is expected to continue till the end of the current financial year and investors can consider investing in short term options like FMPs or floating rate schemes. Fixed maturity plans, or FMPs as they are popularly called, are close-ended funds with a fixed tenure and invest in a portfolio of debt products whose maturity coincides with the maturity of the product. 

 

The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. The tenure can be of different maturities, ranging from one month to five years. FMPs can be compared to fixed deposits of a bank. While a fixed deposit offers a 'guaranteed' return, returns in FMPs are only 'indicative'. Typically, the fund house fixes a 'target amount' for a scheme, which it ties up informally with borrowers before the scheme opens. That way it knows the interest rate it will earn on its investments, providing the 'indicative return' to investors.

 

click here to get more  FIXED MATURITY PLAN 

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Monthly Income Plans

 

Monthly income plans, or MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments. Only about 10-20-% of the assets are allocated to equity stocks. But the very name  – monthly income plan – is a misnomer, as these funds do not guarantee a monthly income. Like any other fund, the returns are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation. MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor. These are generally monthly, quarterly, half-yearly and annual options. A growth option is also available, where the investors do not receive regular dividends, but gains in the form of capital appreciation. 

 

click here to get more  MONTHLY INCOME PLAN 

 

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 Courtesy:-ICICI Prudential Mutual Fund, TATA Mutual Fund

 Courtesy:-AMFI (Association of Mutual Fund in India) ,HDFC Mutual Fund