MFS
Content
GROUP 1 MEMBERS
oTREASA LILIYA oANUSHA JOSE oMATHEW JOSEPH oKARTHIKA GOPINATH oVISHNU M.C oSIRAJ MEHABOOB
INTRODUCTION
A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.
History of mutual funds
The modern mutual fund was first introduced in Belgium in 1822. This form of investment soon spread to Great Britain and France. Mutual funds became popular in the United States in the 1920s and continue to be popular since the 1930s, especially open-end mutual funds. Mutual funds experienced a period of tremendous growth after World War II, especially in the 1980s and 1990s.
Mutual Fund Industry in India
The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India.
Phase 1. Establishment and Growth of Unit Trust of India - 1964-87
Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were delinked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years.
UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund schemes etc
Phase II. Entry of Public Sector Funds 1987-1993
The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.
Phase III. Emergence of Private Sector Funds - 1993-96
The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investorservicing technology. By 1994-95, about 11 private sector funds had launched their schemes.
Phase IV. Growth and SEBI Regulation 1996-2004
The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Investors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry.
Phase V. Growth and Consolidation - 2004 Onwards
The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players
IMPORTANCE OF MUTUAL FUNDS
Channelizing savings for investment
• Mutual funds act as a vehicle galvanising the savings of the people by offering various schemes suitable to the various classes of customers for the development of the economy as a whole. • A number of schemes are being offered by MFs so as to meet the varied requirements of the masses, and thus savings are directed towards capital investments directly. • In the absence of MFs, these savings would have remained idle. • Thus the whole economy benefits due to the cost efficient and optimum use and allocation of scarce financial and real resources in the economy for its speedy development.
Offering wide portfolio investment
• Small and medium investors used to burn their fingers in stock market exchange operations with a relatively modest outlay. • If they invest in a select few shares, some may even sink without a trace never to rise again. • Now, these investors can enjoy the wide portfolio of these investment held by the MF. • The fund diversifies its risk by investigating on large verities of shares and bonds which cannot be done by small and medium investors.
Providing better yields
• The pooling of funds from a large no of customers enables the fund to have large funds at disposal. • Due to these large funds, mutual funds are able to buy cheaper and sell dearer than the small and medium investors. • Thus , they are able to command better market rates and lower rates of brokerage.
Rendering expertised investment services at low cost
• The management of the fund is generally assigned to be professionals who are well trained and have adequate experience in the field of investment. • The investment decisions of these professionals are always backed by informed judgement and experience.
Providing research services
• A mutual fund is able to command vast resources and hence it is possible for it to have an in depth study and carry out research team which constantly analyses the companies and the industries and recommends the fund to buy or sell a particular share. • Thus investments are made purely on the basis of research.
Offering tax benefits
• Apart from dividends, interest and capital appreciation, investors also stand to get the benefit of tax concession. • The MFs are themselves totally exempt from tax on all income on their investments.
Introducing flexible investment schedule
• Some mutual funds have permitted the investors to exchange their units from one scheme to another and this flexibility is a great boon to investors. • Income units can be exchanged for growth units depending upon performance of the funds. • One cannot derive such a flexibility in any other investments.
Providing greater affordability
• Even a very small investor can afford to invest in MFs. • They provide an attractive and cost effective alternative to direct purchase of shares.
Simplified record keeping
• Record keeping is the biggest problem for small and medium investors. • Now, a mutual fund offers single investment source facility i.e., a single buy order of 100 units from a mutual fund is equivalent to investment in more than 100 companies. • The investor has to keep record of only one deal with the mutual fund. • Even if he does not keep a record, the MF sends statements very often to the investor. • Thus, by investing in MFs, the record keeping work is also passed on to the fund.
Supporting capital market
• MF play a vital role in supporting the development of capital markets. • The MF makes the capital market active by means of providing a sustainable domestic source of demand for capital market instruments. • In other words, the savings of the people are directed towards investments in capital markets through these mutual funds. • MF also provide a valuable liquidity to the capital market and thus, the market is made very active and stable.
WORKING OF MUTUAL FUND AND FACILITIES AVILABLE TO INVESTORS
Mutual fund
• A mutual fund is a type of professionallymanaged type collective investment scheme that pools money from many investors. • The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). • When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Fund manager
• The person(s) responsible for implementing a fund's investing strategy and managing its portfolio trading activities. A fund can be managed by one person, by two people as comanagers and by a team of three or more people. Fund managers are paid a fee for their work, which is a percentage of the fund's average assets under management.
Risk return matrix
FACILITIES AVAILABLE TO INVESTORS Repurchase Facility Reissue Facility Roll Over Facility Lateral Shifting Facility
are……………………………!
Repurchase Facility
The units of closed ended schemes must be compulsorily listed in recognized stock exchanges. Such units can be sold or bought at market price. But, units of open ended scheme are not at all listed and hence they have to bought only from the fund. So, the fund reserves the right to buy back the units from its members. The process of buying back the units from the investors by the fund called repurchase facility. This is available in both scheme so as to provide liquidity to investors. The price fixed for this purpose is called repurchase price
Reissue Facility
In the case of open ended schemes, units can be bought only from the fund and not in the open market. The units bought from the investors are again reissued to those who are interested in purchasing it. The price fixed for this purpose is called re-issue price.
Roll Over Facility
At the time of redemption, the investor is given an option to reinvest his entire investment once again for another term. An investor can overcome an adverse market condition prevailing at the time of redemption by resorting to this Roll over facility. This is applicable in the case of close-ended funds.
Lateral Shifting Facility
Some mutual finds permit the investors to shift from one scheme to another on the basis of the Net Asset Value with a view to providing total flexibility in their operation. This is done with out any discount on the fund and without any additional charges. This is a great privilege given to the investors. This shifting is called ‘lateral shifting’.
Mutual Fund Organization
•A mutual fund can be constituted either as a entity or a trust •In India , UTI was set up as a corporation under an Act of parliament in1964
• Indian banks operating Mutual funds had made a convincing plea before the Government to allow their mutual funds to constitute them as ASSET MANAGEMENT COMPANY..
GUIDELINES FOR REGISTRATION OF AMC S
Approval of AMC by SEBI
Authorized capital of AMC
Major players
Registers and transfer agents Advertiser Advisor / manager Trustees Custodian Major players
Mutual fund 2000
During April 1996, the mutual funds Department of SEBI has released an exhaustive study on MF industry called MF 2000. It suggests several reforms they are-: o It has been proposed that MF should broaden their areas of investment. Accordingly, there is a proposal to set up MF to invest in guilt edged securities or real estate.
o There is a proposal to do away with the restriction of maximum industry exposure of 15% for a MF scheme. o At present, a MF can hold at maximum of only 5% of equity of a company. It has been proposed that this limit be increased to 10%. o Similarly, it is proposed to remove the existing minimum limit of 10% of a MF investment(both debt and equity) in a single company.
o All closed-end MF should get used within 6 months from the date of allotment unless they offer a continuous re-purchase facility to their clients. o It has been [proposed that closed-ended MF scheme which offer monthly income or schemes which are targeted at any certain categories of investors like women need not get listed.
o The existing requirement of minimum initial corpus for both open-ended and closed-end schemes is likely to be remove. o Further, the requirement of refunding subscription in case of collection falling below 60% of the target collection is sought to be removed.
o There is a proposal to extend the lock in period of 60 days before redemption in the case of open-ended schemes to 6 months. o For the purpose of meeting the redemption requests alone, it has been suggested that MF be permitted to borrow upto10% of their net assets for a maximum period of 3 months only.
o The SEBI has laid down new norms that require MF’s to pay an interest of 15%per annum for my delay beyond 10 working days in giving investors their repurchase amount.
SELECTION OF A FUND
Mutual funds are not magic institutions which can bring treasure to the millions of their investors within a short span of time. All funds are equal to start with.
But in due course of time, some excel the other.
It all depends upon the efficiency with which the fund is being managed by the professionals of the fund. Hence, the investor has to be very careful in selecting a fund.
a. Objectives of the Fund : Objectives – Income oriented or Growth oriented
Income oriented are backed mainly by fixed interest yielding securities like debentures and bonds. Growth oriented are backed by equities. The investor should compare the particular scheme of one fund with the same scheme of another fund and make comparative analysis. His objective should also coincide with the objective of the scheme which he proposes to choose.
b. Consistency of Performance : A mutual fund is always intended to give steady long term returns, and hence, the investor should measure the performance of a fund over a period of at least 3 years. Consistency in performance is a good indicator of its investment expertise.
c. Historical Background : The success of any fund depends upon the competence of the management, its integrity, periodicity and experience. A good historical record could be a better horse to bet on than new funds.
c. Cost of Operation : Mutual funds seek to do a better job of the investible funds at a lower cost than the individuals could do for themselves. Hence, the prospective investor should scrutinize the expense ratio of the fund and compare it with others. Higher the ratio, lower will be the actual returns to the investor.
d. Capacity for Innovation : An innovator will be always a successful man. It is quite natural that an investor will look for funds which are capable of introducing innovations in the financial market. e. Market Trends :-
A prudent investor must keep his eyes on the stock market index, interest rate and the inflation rate.
f. Investor Servicing : Most important factor prompt and efficient servicing. Services like quick response to investor queries, prompt despatch of unit certificates, quick transfer of units etc will go a long way in creating a lasting impression in the minds of investors.
g. Transparency of the Fund Management : In these days of investor awareness, it is very vital that the fund should disclose the complete details regarding the operation of the fund. It will go a long way in creating a lasting impression in the minds of the investors to patronise the fund forever.
oTREASA LILIYA oANUSHA JOSE oMATHEW JOSEPH oKARTHIKA GOPINATH oVISHNU M.C oSIRAJ MEHABOOB
INTRODUCTION
A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.
History of mutual funds
The modern mutual fund was first introduced in Belgium in 1822. This form of investment soon spread to Great Britain and France. Mutual funds became popular in the United States in the 1920s and continue to be popular since the 1930s, especially open-end mutual funds. Mutual funds experienced a period of tremendous growth after World War II, especially in the 1980s and 1990s.
Mutual Fund Industry in India
The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India.
Phase 1. Establishment and Growth of Unit Trust of India - 1964-87
Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were delinked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years.
UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund schemes etc
Phase II. Entry of Public Sector Funds 1987-1993
The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.
Phase III. Emergence of Private Sector Funds - 1993-96
The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investorservicing technology. By 1994-95, about 11 private sector funds had launched their schemes.
Phase IV. Growth and SEBI Regulation 1996-2004
The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Investors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry.
Phase V. Growth and Consolidation - 2004 Onwards
The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players
IMPORTANCE OF MUTUAL FUNDS
Channelizing savings for investment
• Mutual funds act as a vehicle galvanising the savings of the people by offering various schemes suitable to the various classes of customers for the development of the economy as a whole. • A number of schemes are being offered by MFs so as to meet the varied requirements of the masses, and thus savings are directed towards capital investments directly. • In the absence of MFs, these savings would have remained idle. • Thus the whole economy benefits due to the cost efficient and optimum use and allocation of scarce financial and real resources in the economy for its speedy development.
Offering wide portfolio investment
• Small and medium investors used to burn their fingers in stock market exchange operations with a relatively modest outlay. • If they invest in a select few shares, some may even sink without a trace never to rise again. • Now, these investors can enjoy the wide portfolio of these investment held by the MF. • The fund diversifies its risk by investigating on large verities of shares and bonds which cannot be done by small and medium investors.
Providing better yields
• The pooling of funds from a large no of customers enables the fund to have large funds at disposal. • Due to these large funds, mutual funds are able to buy cheaper and sell dearer than the small and medium investors. • Thus , they are able to command better market rates and lower rates of brokerage.
Rendering expertised investment services at low cost
• The management of the fund is generally assigned to be professionals who are well trained and have adequate experience in the field of investment. • The investment decisions of these professionals are always backed by informed judgement and experience.
Providing research services
• A mutual fund is able to command vast resources and hence it is possible for it to have an in depth study and carry out research team which constantly analyses the companies and the industries and recommends the fund to buy or sell a particular share. • Thus investments are made purely on the basis of research.
Offering tax benefits
• Apart from dividends, interest and capital appreciation, investors also stand to get the benefit of tax concession. • The MFs are themselves totally exempt from tax on all income on their investments.
Introducing flexible investment schedule
• Some mutual funds have permitted the investors to exchange their units from one scheme to another and this flexibility is a great boon to investors. • Income units can be exchanged for growth units depending upon performance of the funds. • One cannot derive such a flexibility in any other investments.
Providing greater affordability
• Even a very small investor can afford to invest in MFs. • They provide an attractive and cost effective alternative to direct purchase of shares.
Simplified record keeping
• Record keeping is the biggest problem for small and medium investors. • Now, a mutual fund offers single investment source facility i.e., a single buy order of 100 units from a mutual fund is equivalent to investment in more than 100 companies. • The investor has to keep record of only one deal with the mutual fund. • Even if he does not keep a record, the MF sends statements very often to the investor. • Thus, by investing in MFs, the record keeping work is also passed on to the fund.
Supporting capital market
• MF play a vital role in supporting the development of capital markets. • The MF makes the capital market active by means of providing a sustainable domestic source of demand for capital market instruments. • In other words, the savings of the people are directed towards investments in capital markets through these mutual funds. • MF also provide a valuable liquidity to the capital market and thus, the market is made very active and stable.
WORKING OF MUTUAL FUND AND FACILITIES AVILABLE TO INVESTORS
Mutual fund
• A mutual fund is a type of professionallymanaged type collective investment scheme that pools money from many investors. • The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). • When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Fund manager
• The person(s) responsible for implementing a fund's investing strategy and managing its portfolio trading activities. A fund can be managed by one person, by two people as comanagers and by a team of three or more people. Fund managers are paid a fee for their work, which is a percentage of the fund's average assets under management.
Risk return matrix
FACILITIES AVAILABLE TO INVESTORS Repurchase Facility Reissue Facility Roll Over Facility Lateral Shifting Facility
are……………………………!
Repurchase Facility
The units of closed ended schemes must be compulsorily listed in recognized stock exchanges. Such units can be sold or bought at market price. But, units of open ended scheme are not at all listed and hence they have to bought only from the fund. So, the fund reserves the right to buy back the units from its members. The process of buying back the units from the investors by the fund called repurchase facility. This is available in both scheme so as to provide liquidity to investors. The price fixed for this purpose is called repurchase price
Reissue Facility
In the case of open ended schemes, units can be bought only from the fund and not in the open market. The units bought from the investors are again reissued to those who are interested in purchasing it. The price fixed for this purpose is called re-issue price.
Roll Over Facility
At the time of redemption, the investor is given an option to reinvest his entire investment once again for another term. An investor can overcome an adverse market condition prevailing at the time of redemption by resorting to this Roll over facility. This is applicable in the case of close-ended funds.
Lateral Shifting Facility
Some mutual finds permit the investors to shift from one scheme to another on the basis of the Net Asset Value with a view to providing total flexibility in their operation. This is done with out any discount on the fund and without any additional charges. This is a great privilege given to the investors. This shifting is called ‘lateral shifting’.
Mutual Fund Organization
•A mutual fund can be constituted either as a entity or a trust •In India , UTI was set up as a corporation under an Act of parliament in1964
• Indian banks operating Mutual funds had made a convincing plea before the Government to allow their mutual funds to constitute them as ASSET MANAGEMENT COMPANY..
GUIDELINES FOR REGISTRATION OF AMC S
Approval of AMC by SEBI
Authorized capital of AMC
Major players
Registers and transfer agents Advertiser Advisor / manager Trustees Custodian Major players
Mutual fund 2000
During April 1996, the mutual funds Department of SEBI has released an exhaustive study on MF industry called MF 2000. It suggests several reforms they are-: o It has been proposed that MF should broaden their areas of investment. Accordingly, there is a proposal to set up MF to invest in guilt edged securities or real estate.
o There is a proposal to do away with the restriction of maximum industry exposure of 15% for a MF scheme. o At present, a MF can hold at maximum of only 5% of equity of a company. It has been proposed that this limit be increased to 10%. o Similarly, it is proposed to remove the existing minimum limit of 10% of a MF investment(both debt and equity) in a single company.
o All closed-end MF should get used within 6 months from the date of allotment unless they offer a continuous re-purchase facility to their clients. o It has been [proposed that closed-ended MF scheme which offer monthly income or schemes which are targeted at any certain categories of investors like women need not get listed.
o The existing requirement of minimum initial corpus for both open-ended and closed-end schemes is likely to be remove. o Further, the requirement of refunding subscription in case of collection falling below 60% of the target collection is sought to be removed.
o There is a proposal to extend the lock in period of 60 days before redemption in the case of open-ended schemes to 6 months. o For the purpose of meeting the redemption requests alone, it has been suggested that MF be permitted to borrow upto10% of their net assets for a maximum period of 3 months only.
o The SEBI has laid down new norms that require MF’s to pay an interest of 15%per annum for my delay beyond 10 working days in giving investors their repurchase amount.
SELECTION OF A FUND
Mutual funds are not magic institutions which can bring treasure to the millions of their investors within a short span of time. All funds are equal to start with.
But in due course of time, some excel the other.
It all depends upon the efficiency with which the fund is being managed by the professionals of the fund. Hence, the investor has to be very careful in selecting a fund.
a. Objectives of the Fund : Objectives – Income oriented or Growth oriented
Income oriented are backed mainly by fixed interest yielding securities like debentures and bonds. Growth oriented are backed by equities. The investor should compare the particular scheme of one fund with the same scheme of another fund and make comparative analysis. His objective should also coincide with the objective of the scheme which he proposes to choose.
b. Consistency of Performance : A mutual fund is always intended to give steady long term returns, and hence, the investor should measure the performance of a fund over a period of at least 3 years. Consistency in performance is a good indicator of its investment expertise.
c. Historical Background : The success of any fund depends upon the competence of the management, its integrity, periodicity and experience. A good historical record could be a better horse to bet on than new funds.
c. Cost of Operation : Mutual funds seek to do a better job of the investible funds at a lower cost than the individuals could do for themselves. Hence, the prospective investor should scrutinize the expense ratio of the fund and compare it with others. Higher the ratio, lower will be the actual returns to the investor.
d. Capacity for Innovation : An innovator will be always a successful man. It is quite natural that an investor will look for funds which are capable of introducing innovations in the financial market. e. Market Trends :-
A prudent investor must keep his eyes on the stock market index, interest rate and the inflation rate.
f. Investor Servicing : Most important factor prompt and efficient servicing. Services like quick response to investor queries, prompt despatch of unit certificates, quick transfer of units etc will go a long way in creating a lasting impression in the minds of investors.
g. Transparency of the Fund Management : In these days of investor awareness, it is very vital that the fund should disclose the complete details regarding the operation of the fund. It will go a long way in creating a lasting impression in the minds of the investors to patronise the fund forever.
