CONTENTS

y INTRODUCTION y MEANING AND IMPORTANCE y STAKE HOLDERS OF MUTUAL FUND y MUTUAL FUND CYCLE y CLASSIFICATION OF MUTUAL FUND y BENEFITS OF MUTUAL FUND y SEBI GUIDELINES y MUTUAL FUND IN INDIA y CONCLUSION

INTRODUCTION

Of late, Mutual funds have become a hot favorite of millions of people all over the world. The driving force of Mutual Funds is the safety of principal guaranteed , plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend. People prefer mutual fund than bank deposits, life insurance and even bonds because with a little money, they can get into the investment game. One can own a string of blue chips like ITC, TISCO, and Reliance etc. through mutual funds. Thus Mutual Funds act as a gateway to enter into big companies hither to in accessible to an ordinary investor with his small investment.

MEANING

A Mutual Fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities. In other words, Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to 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 lower cost. Thus Mutual Fund is a collective savings schemes. It plays an important role in mobilizing and channelizing the same for productive ventures in the Indian economy. Definition The Security Exchange Board of India (SEBI) Mutual Fund regulation, 1993 defines A Mutual Fund as a fund established in the form of a trust by a sponsor, to raise money by the trustees through the sale of units to the public under one or more schemes, for investing in securities in accordance with these regulations. According to Weston J. Fred & Brigham F. Eugene Unit trusts are Corporations which accepts dollars from savers and then use these dollars to buy stocks, long term bonds, short term debt instruments issued by business or Govt. units; these corporations pool funds and these reduce risk by diversification.

IMPORTANCE Owing to the size, operating economics and ability to commit large sum of money for long periods, the mutual funds enjoy ample resources at their disposal by mobilizing resources of the investors. The mutual fund with the expert and experienced management cadre can secure large varieties of high yielding Blue chip securities and show better results to the investing public. Therefore the investors now prefer investing their resources in various mutual fund schemes, than managing themselves. y Ordinary investor who applies for share in a public issue of any company is not assured of any firm allotment. But Mutual Fund, those subscribe to the capital issue made by companies get firm allotment of shares. Mutual funds later sell these shares in the share market and to the promoter of the company at a much higher price. Hence mutual fund helps develop confidence among the investors. y Mutual fund creates awareness among urban rural middle class people about the benefits of investment in the capital market through profitable and safe avenues. Therefore mutual fund could be able to mop up a large amount of the surplus funds available with the people. y Lastly, another notable thing is that Mutual Funds are controlled and regulated by SEBI and hence are considered safe. Due to all the benefits the importance of Mutual Fund has been increasing. STAKEHOLDERS The Sponsor Any corporate body, which initiates the launching of a mutual Fund, is referred to as the Sponsor. According to the SEBI norms, the sponsor should have professional competence, financial soundness and a general reputation for fairness and integrity in business transactions. The sponsor appoints trustees, an asset management company and custodians in compliance with the regulations.

The Trustees Person who hold the property of the mutual fund in trust for the benefit of the unit holders are called Trustees. Functions: y Keeping under its custody all the property of the mutual fund schemes administered by the mutual fund. y Furnish all the information to unit holders as well as to SEBI about the mutual fund schemes. y Appoint an asset management company for the purpose of floating the mutual fund schemes. y Supervise the collection of any income due to be paid to the scheme. The Custodians Any agency that keeps custody of the securities that are bought by the mutual fund managers under the various schemes is called the custodians. Functions: y Safe keeping of securities. y Participating any clearing system on behalf of the client to effect deliveries of the securities y Ensuring delivery of scrip only on receipt of payment and payment only upon receipt of scrips. y Arranging for proper registration or record of securities. Asset Management Company (AMC) The investment manager of a mutual fund is technically known as Asset Management Company and is appointed by the sponsor or the Trustees. The AMC manages the affairs of the mutual fund. It is responsible for operating all the schemes of the fund and can act as the AMC of only one Mutual fund. With the permission of the SEBI, it can also operates as an under writer.

MUTUAL FUND CYCLE

Passed back to

Invests in

Generates returns

RETURNS

SECURITIES

TYPES OF MUTUAL FUNDS

CONSTITUTION

INVESTMENT

SPECIAL SCHEMES

Open-ended Scheme Close-ended- Scheme Interval Scheme Money Market Scheme

Equity Based Schemes Debt Based Schemes Balance Scheme

Tax Savings Sector Specific Index Schemes

BY CONSTITUTION 1. OPEN-ENDED SCHEMES The units offered by these schemes are available for sale or repurchase on any business day at NAV based price. Hence the unit capital of the schemes keeps changing each day because the schemes itself buys and sells units from investors. Such schemes thus offer very high liquidity to investors and are becoming increasingly popular in India. The investor of an open-ended fund can any moment redeem his existing unit. 2. CLOSE-ENDED SCHEMES The unit capital of a close-ended product is fixed as it makes a onetime sale of fixed number of units. These schemes are lunched with an Initial Public Offer (IPF) with a stated maturity period, after which the units are fully redeemed at NAV linked price. In the interim, investors can buy or sell units on the stock exchanges where they are listed. Unlike open-ended schemes, the unit capital in close ended schemes usually remains unchanged. After an initial close period, the scheme may offer direct repurchase facility to the investors. Closed ended schemes are usually are more illiquid as compared to open -ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closed to the maturity date of the scheme.

3. INTERVAL SCHEME These schemes combine the features of open-ended and close ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV linked prices. 4. MONEY MARKET SCHEMES These schemes invest in short- term instruments such as Commercial Papers (CP) Certificate of Deposits(CD) Treasury Bills (T-Bills) and Overnight money (Call). The schemes are the least volatile of all the types of schemes because of their investment in money market instruments with shortterm maturity. These schemes have become popular with institutional investors and high net worth individuals having short-term surplus funds BY INVESTMENT 1. EQUITY BASED SCHEMES These schemes also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in liquid money market securities. Such schemes have the potential to deliver superior returns over the long term. However because they invest in equities, these schemes are exposed to sharp fluctuations in value especially in short term. Equity schemes are hence not for investors seeking regular income or needing their investments back in short term. They are ideal for investors who have a long term investment horizon. The NAV prices of

equity funds fluctuates with market value of the underlying stock with are influenced by external factors such as social, political as well as economic. Equity schemes can be further divided in to two categories. These are y General purpose y Sector Specific GENERAL PURPOSE The investment objective of general purpose Equity schemes do not restrict them to invest in specific industries or sectors; they thus have a diversified portfolio of companies across a large spectrum of industries. While they are exposed to equity price risks, diversified general-purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure. SECTOR SPECIFIC These schemes restricts their investing to one or more pre-defined sector i.e. technology sector. Since they depend upon the performance of selected sector only, these schemes are inherently more risky than general purpose schemes. They are suited for informed investors who wish to take a view and risk on the concerned sector. 2. DEBT BASED SCHEMES These schemes are commonly called Income Schemes; invest in fixed income securities such as corporate bonds and debentures and Government securities. The price of these schemes tends to be more stable

compared with equity schemes and most of the returns to the investors are generated through dividends or steady capital appreciation. These schemes are ideal for conservative investors or those who are not in a position to take higher equity risks, such as retired individuals. However as compared to money market schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher credit risk. 3. BALANCED FUNDS These schemes are commonly called as hybrid schemes. The funds invest in both equities and bonds. By investing in a mix of this nature, balanced funds seek to attain the objective of income and moderate capital appreciation and ideal for investors with a conservative and long-term orientation. SPECIAL SCHEMES 1. INDEX SCHEMES An Index fund tracks the performance a specific stock market index. The objective is to match the performance of the stock market by tracking an index that represents the overall market. The funds invest in shares that constitutes the index and in the same portion as a index. The BSE sensex and the NSE nifty are being increasing used as benchmarks for Index Funds in India. Since these schemes mirror an index, there is no active management and hence they are called passive funds. Their performance is closed linked to that of the underlying index. Such schemes are best suited for investors

who would like an equity exposure but are not comfortable with active management by their fund of their fund by fund manager. 2. TAX SAVING SCHEAMS Generally called as Equity Linked Saving Schemes (ELSS). Investors have been given tax concessions to encourage them to participate in equity markets special schemes like ELSS. Investment in these schemes entitles the investor to claim an income tax rebate. This investment usually has lock-in period before the end of which funds cant be withdrawn. The maximum amount the investor can invest in fund to get the tax benefit is Rs 10,000. 3. REAL ESTATE FUNDS Specialized Real Estate Funds would invest in real estate directly, or may found real estate developers or lend to them directly or by shares of housing finance companies or may even by their securitized assets. They may be in form of Growth Fund or Income Fund. TYPES OF RETURNS EXPECTED FROM A MUTUAL FUND Mutual Funds give returns in two ways. y Capital Appreciation y Dividend Distribution CAPITAL APPRECIATION An increasing value of the units of the fund is known as capital appreciation. As the value of individual securities in the fund increases, the

funds unit price increases. An investor can book a profit by selling the units at prices higher than the price at which he brought the units. DIVIDEND DISTRIBUTION The profit earned by the fund is distributed among unit holders in the form of dividends. Dividend distribution again is of two types. It can either be reinvested in the fund or can be on-paid to the investor. MUTUAL FUNDS IN INDIA The end of millennium marks 42 years of existence of Mutual Funds in this country. The ride through these 42 years has not been smooth. Investors opinion is still divided. While some are for Mutual Fund others are against it. UTI commences its operation from July 1964. The impetus for establishing a formal institution came from the desire to increase the propensity of the middle and lower groups to save and to invest. UTI came in to existence during a period marked by great political and economic uncertainty in India. With war on the borders and economic turmoil that depressed the financial market, entrepreneurs were hesitant to enter capital market. The already existing companies found it difficult to raise fresh capital, as investors does not respond adequately to new issues. Earnest efforts were required to channelize savings of the community in to productive uses in

order to speed up the process of industrial growth.

The then Finance Minister, T.T krishnamachary set up the idea of a unit trust that would be open to any person or institution to purchase the units offered by the trust. However, this institutions as we see it, is intended to cater to the needs of individual investors and even among them as far as possible, to those whose means are small. His ideas took the form of the Unit Trust of India, an intermediary that would help to fulfill the twin objectives of mobilizing retails savings and investing those savings in the capital market and passing on the benefits so accrued to the small investors. UTI commenced its operation from July 1964 with a view to encouraging savings and investment and participation in the income, profits and gains accruing to the Corporation from the acquisition, holding, management and disposal of securities. Different provisions of the UTI Act laid down the structure of management. Scope of business, power and functions of the Trust as well as accounting, disclosures and regulatory requirement for the trust. One thing is certain; the fund industry was here to stay. The industry was one entity show till 1986 when the UTI monopoly was broken, when SBI and Canada Bank Mutual Fund entered the arena. This was followed by the entry of others like BOI, LIC, and GIC; etc, sponsored by public sector Banks. The period in 1986-1993 can be termed as the public sector mutual funds (PMFs).

From one player in 1985 the number increased to 8 in 1993. The party didnt last long. When the private made its debut in 1993-94, the stock market was booming. The opening of the asset management business to private sector in 1993 saw international players like, Morgan Stanley, Jardine Fleming, JP Morgan, George Soros and Capital International, along with the host of domestic player join the party . But for the equity funds the period of 1994-96 was one of the worst in the history of mutual fund.
SEBI GUIDELINES (2001-02) RELATING TO MUTUAL FUND

y A common format is prescribed for all Mutual Fund schemes to disclose their entire portfolio an half yearly basis ,so that the investors can get mining full information on the deployment of funds . Mutual Funds are also required to disclose the investment in various types of instruments and percentage of investment in each script to total NAV, illiquid and Non Performing Assets, investment in derivatives and in ADRs and GDRs. y To enable the investor to make informed investment decisions, Mutual Funds have been directed to fully revise and update offer document and memorandum at least once in 2 years y Mutual Funds are also required to 1. Bring uniformity in disclosures of various categories of advertisements, with a view to ensuring consistency and comparability across schemes of various Mutual Funds

2. Reduce initial offer period from a maximum of 45 days to 30 days.

3. Dispatch Statements Of Account once the maximum subscription amount specified in the offer document is received, even before the closure of the issue

4. Invest in mortgaged backed securities of investment grade given by Credit Rating Agency

5. Identify and make provisions for the non performing assets (NPA) according to criteria for classification of NPAs and treatment of income accrued on NPAs and to disclose NPAs in half yearly portfolio reports.

6. Disclose information in a revised format on unit capital, reserves, performance in terms of dividends and rise / fall in NAV during the half yearly period, annualized yields over the last 1,3,5 years in addition to percentage of management fees , percentage of recurring expenses to net assets, investment made in associate companies for their services and details of large holdings since their operation. 7. Declare their NAV and sell or repurchase prices of all schemes updated daily on regular basis on the AMFI website by 8:00 pm

and declare NAVs of their close ended schemes on every Wednesday

y The format for unaudited half yearly results for mutual funds has been revised by SEBI. These results are to be published before the expiry of one month from the close of each half year as against two months period provided earlier. These results.

y All the schemes by mutual funds shall be launched within six months from the date of the letter containing observations from SEBI on the scheme offer document. Otherwise, afresh offer document along with filling fees shall be filed with SEBI. y Mutual funds are required to disclose large unit-holdings in the schemes, which are over 25% of the NAV.

CONCLUSION

The mutual funds have been operating for the last twelve years in India. Of late, mutual funds find their going very tough. Most of the funds are not able to collect the targeted amount from small investors. The mutual fund industry has to face many problems also. Some of them are: y Disparity between NAV and listed price. y No uniformity in the calculation of NAV. y Lack of transparency y Poor investor servicing. y Too much dependence on outside agencies. y Investors Psychology. y Absence of qualified sales force. If mutual funds ensure good returns, quick liquidity and safety and create a good rapport with the investor s, their future will be very bright. they act as a via media between bank deposits and share in the sense it involves a higher risk than a bank deposits and share in the sense it involves a higher risk than a bank deposits and hence better return , but a lower risk than a share and hence more safety . it is time for the Mutual funds to act as a Mutual Friends by creating good rapport with the investors by rendering efficient and prompt services . No doubt, there is a bright future for Mutual funds in India.