| . | | | | certificates of deposit, commercial paper and |
| Over view of Mutual Fund Industry in India | | | | inter-bank call money. Returns on these schemes |
| Introduction- | | | | hinges on the interest rates prevailing in the |
| The mutual fund collects money directly or | | | | market. MMFs are ideal for corporate and individual |
| through brokers from investors. The money is | | | | investors looking to park funds for short period. |
| invested in various instruments depending on the | | | | 8. Tax saving schemes: Tax saving schemes or |
| objective of the scheme. The income generated | | | | equity-linked savings schemes offer tax rebates |
| by selling securities or capital appreciation of these | | | | to investors under section 88 of the Income Tax |
| securities is passed on to the investors in | | | | Act. They generally have a lock-in period of three |
| proportion to their investment in the scheme. The | | | | years. They are ideal for investors looking to |
| investments are divided into units and the value | | | | exploit tax rebates as well as growth in |
| of the units will be reflected in Net Asset Value or | | | | investments. |
| NAV of the unit. NAV is the market value of the | | | | 9. Special schemes: These schemes invest only in |
| assets of the scheme minus its liabilities. The per | | | | the industries specified in the offer document. |
| unit NAV is the net asset value of the scheme | | | | Examples are InfoTech funds, FMCG funds, |
| divided by the number of units outstanding on the | | | | pharma funds, etc. These schemes are meant for |
| valuation date. Mutual fund companies provide daily | | | | aggressive and well-informed investors. |
| net asset value of their schemes to their | | | | 10. Index funds: Index Funds invest their corpus |
| investors. NAV is important, as it will determine | | | | on the specified index such as BSE Sensex, NSE |
| the price at which you buy or redeem the units | | | | index, etc. as mentioned in the offer document. |
| of a scheme. Depending on the load structure of | | | | They try to mimic the composition of the index in |
| the scheme, you have to pay entry or exit | | | | their portfolio. Not only are the shares, even their |
| loadual earnings) and may also levy other fees | | | | weight age replicated. Index funds are a passive |
| and sales commission (called 'load') if units are | | | | investment strategy and the fund manager has a |
| bought from a financial advisor. The term 'mutual | | | | limited role to play here. The NAVs of these |
| fund' has no legal bearing, and may be referred to | | | | funds move along with the index they are trying |
| as unit investment trust in the US and unit trust in | | | | to mimic save for a few points here and there. |
| the UK and other British Commonwealth countries. | | | | This difference is called tracking error. |
| History of mutual fund in India- | | | | 11. Sector specific schemes: These funds invest |
| | | | only specified sectors like an industry or a group |
| The concept of mutual funds was introduced in | | | | of industries or various segments like ‘A' |
| India with the formation of Unit Trust of India in | | | | Group shares or initial public offerings. |
| 1963. The first scheme launched by UTI was the | | | | Features of mutual funds in India- |
| now infamous Unit Scheme 64 in 1964. UTI | | | | Affordability: Mutual funds allow you to start with |
| continued to be the sole mutual fund until 1987, | | | | small investments. For example, if you want to |
| when some public sector banks and Life Insurance | | | | buy a portfolio of blue chips of modest size, you |
| Corporation of India and General Insurance | | | | should at least have a few lakhs of rupees. A |
| Corporation of India set up mutual funds. It was | | | | mutual fund gives you the same portfolio for |
| only in 1993 that private players were allowed to | | | | meagre investment of Rs 1,000-5,000. A mutual |
| open shops in the country. Today, 32 mutual | | | | fund can do that because it collects money from |
| funds collectively manage Rs 6713575.19 cr under | | | | many people and it has a large corpus. |
| hundreds of schemes. | | | | Professional management: The major advantage |
| Elements of mutual funds- | | | | of investing in a mutual fund is that you get a |
| A mutual fund is set up by a sponsor. However, | | | | professional money manager for a small fee. You |
| the sponsor cannot run the fund directly. He has | | | | can leave the investment decisions to him and |
| to set up two arms: a trust and Asset | | | | only have to monitor the performance of the |
| Management Company. The trust is expected to | | | | fund at regular intervals. |
| assure fair business practice, while the AMC | | | | Diversification: Considered the essential tool in risk |
| manages the money. All mutual funds except UTI | | | | management, mutual funds makes it possible for |
| functions under Sebi (Mutual Fund) regulations | | | | even small investors to diversify their portfolio. A |
| 1996. | | | | mutual fund can effectively diversify its portfolio |
| The mutual fund collects money directly or | | | | because of the large corpus. However, a small |
| through brokers from investors. The money is | | | | investor cannot have a well-diversified portfolio |
| invested in various instruments depending on the | | | | because it calls for large investment. For example, |
| objective of the scheme. The income generated | | | | a modest portfolio of 10 blue-chip stocks calls for |
| by selling securities or capital appreciation of these | | | | a few a few thousands. |
| securities is passed on to the investors in | | | | Convenience: Mutual funds offer tailor-made |
| proportion to their investment in the scheme. The | | | | solutions like systematic investment plans and |
| investments are divided into units and the value | | | | systematic withdrawal plans to investors, which is |
| of the units will be reflected in Net Asset Value or | | | | very convenient to investors. Investors also do |
| NAV of the unit. NAV is the market value of the | | | | not have to worry about the investment |
| assets of the scheme minus its liabilities. The per | | | | decisions or they do not have to deal with their |
| unit NAV is the net asset value of the scheme | | | | brokerage or depository, etc. for buying or selling |
| divided by the number of units outstanding on the | | | | of securities. Mutual funds also offer specialized |
| valuation date. Mutual fund companies provide daily | | | | schemes like retirement plan, children's plan, |
| net asset value of their schemes to their | | | | industry specific schemes, etc. to suit personal |
| investors. NAV is important, as it will determine | | | | preference of investors. These schemes also help |
| the price at which you buy or redeem the units | | | | small investors with asset allocation of their |
| of a scheme. Depending on the load structure of | | | | corpus. It also saves a lot of paper work. |
| the scheme. | | | | Cost effectiveness: A small investor will find that |
| Classification of mutual funds in India- | | | | a mutual fund route is a cost effective method. |
| 1. Open-ended funds: Investors can buy and sell | | | | AMC fee is normally 2.5% and they also save a |
| units of open-ended funds at NAV-related price | | | | lot of transaction costs as they get concession |
| every day. Open-end funds do not have a fixed | | | | from brokerages. Also, they get the service of a |
| maturity and it is available for subscription every | | | | financial professional for a very small fee. If they |
| day of the year. Open-end funds also offer | | | | were to seek a financial advisor's help directly, |
| liquidity to investments, as one can sell units | | | | they may end up pay more. Also, the size of the |
| whenever there is a need for money. | | | | corpus should be large to get the service of |
| 2. Close-ended funds: These funds have a | | | | investment experts, who offer portfolio |
| stipulated maturity period, which may vary from | | | | management. |
| three to 15 years. They are open for subscription | | | | Liquidity: You can liquidate your investments |
| only during a specified period. Investors have the | | | | anytime you want. Most mutual funds dispatch |
| option of investing in the scheme during initial | | | | checks for redemption proceeds within two or |
| public offer period or buy or sell units of the | | | | three working days. You also do not have to pay |
| scheme on the stock exchanges. Some | | | | any penal interest in most cases. However, some |
| close-ended funds repurchase the units at | | | | schemes charge an exit load. |
| NAV-related prices periodically to provide an exit | | | | Tax breaks: You do not have to pay any taxes |
| route to the investors. | | | | on dividends issued by mutual funds. You also |
| 3. Interval Funds: These funds combine the | | | | have the advantage of capital gains taxation. |
| features of both open and close-ended funds. | | | | Tax-saving schemes and pension schemes give |
| They are open for sale and repurchase at a | | | | you the added advantage of benefits under |
| predetermined period. | | | | Section 88. Investments up to Rs 10,000 in them |
| 4. Growth funds: They normally invest most of | | | | qualify for tax rebate. |
| their corpus in equities, as their objective is to | | | | Transparency: Mutual funds offer daily NAVs of |
| provide capital appreciation over the | | | | schemes, which help you to monitor your |
| medium-to-long term. Growth schemes are ideal | | | | investments on a regular basis. They also send |
| for investors with risk appetite. | | | | quarterly newsletters, which give details of the |
| 5. Income funds: As the name suggests, the aim | | | | portfolio, performance of schemes against various |
| of these funds is to provide regular and steady | | | | benchmarks, etc. They are also well regulated and |
| income to investors. They generally invest their | | | | Sebi monitors their actions closely. |
| corpus in fixed income securities like bonds, | | | | Conclusion- |
| corporate debentures, and government securities. | | | | We can now conclude on the above said |
| Income funds are ideal for those looking for | | | | discussion that the mutual fund pool money from |
| capital stability and regular income. | | | | investors and invest in shares and income earn |
| 6. Balanced funds: The objective of balanced | | | | from the shares distributed between the account |
| funds is to provide growth along with regular | | | | holders according to their share of holdings. Indian |
| income. They invest their corpus in both equities | | | | mutual fund industry is sound and effective in |
| and fixed income securities as indicated in the | | | | case of investor's point of view. |
| offer documents. Balanced funds are ideal for | | | | References- |
| those looking for income and moderate growth. | | | | |
| 7. Money market funds: These funds strive to | | | | 1. Business 2. AMFI |
| provide easy liquidity, preservation of capital and | | | | 3. SEBI |
| modest income. MMFs generally invest the corpus | | | | 4. RBI |
| in safer short-term instruments like treasury bills, | | | | Chinmoy ghosh. |