Mutual Fund
Content
Mutual fund
MUTUAL FUNDS: AN INTRODUCTION A Mutual Fund is an investment tool that allows small investors access to a
well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. The income earned through these investments and the capital ca pital appreciations realized are 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 low cost. Mutual funds are financial intermediaries, which collect the savings s avings of investors and invest them in a large and well-diversified portfolio of securities such as money market instruments, corporate and government bonds and equity shares of joint stock companies. Mutual funds are conceived as institutions for providing small investors with avenues of investments in the capital market.Since small investors generally do not have adequate time, knowledge, experience and resources for directly accessing the capital market, they have to rely on an intermediary, which undertakes informed investment decisions and provides consequential benefits of professional expertise. The raison d’être of mutual funds is their ability to bring down the transaction
costs. The advantages for the investors are reduction in risk, expert professional management, diversified portfolios, and liquidity of investment and tax benefits.
By pooling their assets through mutual funds, investors achieve economies of scale. The advantage that such a investing logic offers to an individual investor is the advantage of scale. A collected corpus can be used to procure a
1
Mutual fund
diversified portfolio, portfolio, indicating greater returns as also create economies of scale through cost reduction.
This principle has been effective world-wide as more and more investors are going the mutual fund way. This portfolio diversification ensures risk minimization. minimizatio n. The criticality of such a measure comes in when you factor in the fluctuations that characterize stock markets. The interests of the investors are protected by the the SEBI, which acts as a watch watchdog. dog. Mutua Mutuall funds are governed governed by the SEBI (Mutual Funds) Regulations, 1993.
2
Mutual fund
INTRODUCTION TO MUTUAL FUND INDUSTRY: The mutual fund industry in India began with the setting up of the Unit Trust In India (UTI) in 1964 by the Government of India. During the last 36 years, UTI has grown to be a dominant player in the industry with assets of over Rs.24,464 Crores as of March 31, 2000. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1987, 6 public sector banks have set up mutual funds. Also the two Insurance Insurance companies LIC and GIC established mutual funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors. Mutual funds have been a significant source of investment in both government and corporate securities. It has been for decades the monopoly of the state with UTI being the key player, with invested funds exceeding Rs.300 bn. (US$ 10 bn.). The state-owned insurance companies also hold a portfolio portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies. Banks--- mainly state-owned too have established Mutual Funds (MFs). Foreign participation in mutual funds and asset management companies is permitted on a case by case basis. UTI, the largest mutual fund in the country was set up by the government in 1964, to encourage small investors in the equity market. UTI has an extensive marketing network of over 35, 000 agents spread over the country. The UTI scrips have performed relatively well in the market, as compared to the Sensex trend. However, the same cannot be said of all mutual funds. All MFs are allowed to apply for firm allotment in public issues. SEBI regulates the functioning of mutual funds, and it requires that all MFs should be 3
Mutual fund
established as trusts under the Indian Trusts Act. The actual fund management activity shall be conducted from a separate asset management company (AMC). The minimum net worth of an AMC or its affiliate must be Rs. 50 million to act as a manager in any other fund. MFs can be penalized for defaults including non-registration and failure to observe rules set by their AMCs. MFs dealing exclusively with money market instruments have to be registered with RBI. All other schemes floated by MFs are required to be registered with SEBI. In 1995, the RBI permitted private sector institutions to set up Money Market Mutual Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated government securities having unexpired maturity up to one year.
4
Mutual fund
MUTUAL FUND INDUSTRY IN INDIA The end of millennium marks 49 years of existence of mutual funds in this country. The ride through these 49 years is not been smooth. Investors opinion is still divided. While some are for mutual funds others are against it.UTI commenced its operation fom 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 into existence during a period marked by great political and economic uncertainity in India. With was on the borders and economic turm turmoil oil that depre depressed ssed the financ financial ial market, entrepreneurs entrepreneurs were hesitant to enter capital market. Though the growth was slow, But it accelerated from the year 1987, when non- UTI players entered the industry.In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. Before, the monopoly monopoly of the market had seen an ending phase: the Assent under Management(AUM) was Rs.67bn. The private sector entry to the fund family raised the AUM to Rs.470bn in March 1993 and till April 2004; it reached the height of 1,540bn.The mutual fund industry can be broadly put into four phases according to the development of the sector, Each phase is briefly described as under.
First Phase-1964-87
Unit Trust of India(UTI) was established on 1963 by Act of Parliament. It was set up by the Reserve Bank of India and functioned uned the Regulatory and admisnistrative control of the Reserve Bank f India. In 1978 UTI was de-linked from RBI and the Industrial Development Bank of India(IDBI) took ove the regulatory and admistrative control in place of RBI. The first scheme launched bye UTI was Unit Scheme Scheme 1964. At the end of 1988 UTI had Rs.6,700 Rs.6,700 cror crores es of assets under management.
5
Mutual fund
Second phase 1987-1993(entry of public sector funds)
The period 1986-1993 can be termed as the period of public sector mutual funds (PMSs). From one player in 1985 the number increased to 8 in 1993. Entry of non-UTI mutual funds. SBI mutual fund was the first followed Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Oct 90), Bank of Baroda Mutual fund (oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs. 47,000 as assets under management. The industry was one-entity show till 1986 when the UTI monopoly was broken when SBI and BOI, LIC, GIC etc. sponsored by public sector banks. Starting with an asset
base of Rs. 0.25bn in 1964 the industry has grown at a
compounded average growth rate of 26.34% to its current size of Rs. 1130bn.
Third phase 1990-2003 (entry of private sector funds):
When the private sector made its debut in 1993-94, the stock market was booming. Also, 1993 was the year in which the first Mutual fund Regulations Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. Other Private sector mutual funds are Morgan Sanley, Jardine Fleming, JP Morgan, George Soros and Capital International along with the host of domestic players join the party. The
1993
SEBI
(Mutual
Fund)Regulations
substituted
by
a
more
comprehensive and revised Mutual Find regulations 1996. But for the equity funds, the period of 1994-96 was one of the worst in the history of Indian Mutual Funds, But the year 1999 saw immense future potential and developments in this sector. This year signaled the year of resurgence of mutual funds and the regaining regaining of investor confidence in these MF’s. As at the end of
January 2003, There were 33 mutual fund 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. 6
Mutual fund
Fourth Phase – Since February 2003
This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The specified undertaking of Unit Trust of India, functioning under an adminisratior and unde the rules framed by Government of India and Does not come under the purview of the Mutual Fund Regulations.The Regulations. The second is the UTI Mutual F Fund und 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 AUM 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. As at the end of September 2004, There were 29 fund, Which manage assets of Rs. 153108 crores under 421 Structure of Mutual Funds in India. At the end of year 2006 the AUM crossed 2,50,000 crores.
7
Mutual fund
CATEGORIES OF MUTUAL FUND SCHEMES A mutual fund scheme can be classified into open-ended scheme or closeended scheme depending on its maturity period.
CLOSE-ENDED FUND/ SCHEME
OPEN-ENDED FUND/ SCHEME An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices, which are declared on a daily basis. The key feature of open-end schemes is liquidity.
A close-ended fund or scheme has a stipulated maturity period period e.g. 5 5-7 -7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial issue and thereafter or sell the units of the scheme on the public stock exchanges where thethey unitscan arebuy listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulation Regulationss stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
SCHEMES ACCORDING TO INVESTMENT OBJECTIVE:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
GROWTH /EQUITY ORIENTED SCHEME
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.
8
Mutual fund
The investors must indicate the option in the application form.The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
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.
BALANCED FUND
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
MONEY MARKET OR LIQUID FUND
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.
9
Mutual fund
INDEX FUNDS
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 weightage 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.
Other Schemes Tax Saving Schemes
These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Governm Government ent offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes. The details of such tax saving schemes are provided in the relevant offer documents.
10
Mutual fund
FREQUENTLY USED TERMS
NET ASSET VALUE(NAV) Net Asset Value is the market value of the assets of the
scheme minu minuss its liabilities. The per unit NAV is he n net et asset valu valuee of the scheme divided by the number of units outstanding on the Valuation date. Net Asset Value is the market value of securities of scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of the securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units at Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis- daisy or weekly- depending on the type of scheme
Sale Price Is the price you pay when you invest in a scheme or NAV a unit holder is
charged while investing in an open-ended scheme is sale price. Also called Offer Price. It may iinclude nclude a Sale lload, oad, if ap applicable. plicable.
Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.
Redemption Price Is the price at which open-ended schemes repurchase their
units and close-ended schemes redeem their units on maturity. Such prices are NAV related.
11
Mutual fund
BENEFITS OF MUTUAL FUNDS PROFESSIONAL MANAGEMENT:
Mutual Funds are backed by experienced and skilled professionals, a dedicated investment research team that analyses the performance and prospects of companies and selects investments. investments. CONVENIENT ADMINISTRATION:
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. This is important when you want to have a diversified portfolio through direct equity investments.
DIVERSIFICATION :
Mutual Funds always have an investment mix. The diversity in this mix spreads out the probability of profits and losses, reducing the risk of a substantial fall in the money you have invested.
RETURN POTENTIAL :
Over a medium to long-term, Mutual Funds have the potential to provide a higher net return as they invest in a diversified basket of selected securities. ECONOMIES:
Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. investors. LIQUIDITY:
In open-end schemes, the investor gets the money back promptly at net NAV pegged prices. prices. In closed-end sch schemes, emes, the units can can be sold on a stock exchan exchange ge at the prevailing market price. The fund also repurchases from the investors at 12
Mutual fund
NAV pegged prices. There is scope to speedily disinvest assets and obtain disinvestments proceeds. FLEXIBILITY:
Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. TRANSPARENCY:
You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. AFFORDABILITY:
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. OPTIONS:
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. INVESTOR SAFETY:
All Mutual Funds are registered with SEBI and they function within the provisions of strict re provisions regulations gulations d designed esigned to pr protect otect the interest interestss of investor investors. s. The operations of Mutual Funds are regularly monitored by SEBI.
13
Mutual fund LIMITATIONS OF MUTUAL FUND
No Guarantee:
No investment is risk risk free. If the entire stock market declines declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. portfoli o. Investor Investorss encounter fewer ris risks ks when they inve invest st in mutual fund fundss than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Fees and commissions commissions::
All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or “loads” to compensate brokers, financial consultants, or financial planners. Even if you don’t use a broker or
other financial adviser, you will pay a sales commission if you buy shares in a load fund. Taxes:
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.
Management Risk:
When you invest in a mutual fund, you depend on the fund manager to make the right decisions regarding the fund’s portfolio. If the manager does not perform
as well as you had hoped, you might not make as much money on your investments as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
14
Mutual fund
Ground Rules of Mutual Fund Investing
Assess yourself : Self-assessment of one’s needs; expectations and risk profile is of prime importance failing which, one will make more mistakes in putting money in right places than otherwise. One should identify the degree of risk bearing capacity one has and also clearly state the expectations from the investments. Irrational expectations will only bring pain. pain.
Try to understand where the money is going: It is important to identify the nature of investment and to know if one is compatible with the investment. One can lose substantially if one picks the wrong kind of mutual fund. In order to avoid any confusion it is better to go through the literature such as offer document and fact sheets that mutual fund companies provide on their funds.
Don't rush in picking funds, think first: one first has to decide what he wants the money for and it is this investment goal that should be the guiding light for all investments done. It is thus important to know the risks associated with the fund and align it with the quantum of risk one is willing to take. One should take a look at the portfolio of the funds for the purpose. Excessive exposure to any specific sector should be avoided, as it will only add to the risk of the entire portfolio. Mutual funds invest with a certain ideology such as the "Value Principle" or "Growth Philosophy". Both have their share of critics but both philosophies work for investors of different kinds. Identifying the proposed investment philosophy philoso phy of the fund will give an insight into the kind of risks that it shall be taking in future. 15
Mutual fund
Invest. Don’t speculate: A common investor is limited in the degree of risk that he is willing to take. It is thus of key importance that there is thought given to the process of investment and to the time horizon of the intended investment. One should abstain from speculating which in other words would mean getting out of one fund and investing in another with the intention of making quick money. One would do well to remember that nobody can perfectly time the market so staying invested is the best option unless there are compelling reasons to exit.
Don’t put all the eggs in one basket: This old age adage is of utmost importance. No matter what the risk profile of a person is, it is always advisable to diversify the risks associated. So putting one’s money in different asset classes is generally the best option as it averages the risks in each category. Thus, even investors of equity should be judicious and invest some portion of the investment in debt. Diversification even in any particular asset asset class (such as equity, debt) is go good. od. Not all fund fund managers managers have the same acumen of fund management and with identification of the best man being a tough task, it is good to place money in the hands of several fund managers. This might reduce the maximum return possible, but will also also reduce tthe he risks.
Be regular: Investing should be a habit and not an exercise undertaken at one’s wishes, if one has to really benefit from them. As we said earlier,
since it is extremely difficult to know when to enter or exit the market, it is important to beat the market by being systematic. The basic philosophy of Rupee cost averaging would suggest that if one invests regularly through the ups and downs of the market, he would stand a better chance of generating more returns than the market for the entire duration. 16
Mutual fund
The SIPs (Systematic Investment Plans) offered by all funds helps in being systematic. All that one needs to do is to give post-dated cheques to the fund and thereafter one will not be harried later. The Automatic investment Plans offered by some funds goes a step further, as the amount can be directly/electronically transferred from the account of the investor. Do your homework:
It is important for all investors to research the avenues available to them irrespective of the investor category they belong to. This is important because an informed investor is in a better decision to make right decisions. Having identified the risks associated with the investment is important and so one should try to know all aspects associated with it. Asking the intermediaries is one of the ways to take care of the problem.
Find the right funds
Finding funds that do not charge much fees is of importance, as the fee charged ultimately goes from the pocket of the investor. This is even more important for debt funds as the returns from these funds are not much. Funds that charge more will reduce the yield to the investor
17
Mutual fund
Risks involved in investing in Mutual Funds
Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures, bonds etc. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/p interest/principal rincipal on their debentures/bonds debentures/bonds the performance of the fund may get affected. Besides incase there is a sudden downturn in an industry or the government comes up with new a regulation which affects a particular industry or company the fund can again be adversely affected. All these factors influence the performance of Mutual Funds. Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk If the overall stock or bond markets fall on account of overall economic
factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio portfoli o that consists of a wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively.
18
Mutual fund
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing causing the NA NAV V of the fu fund nd to tak takee a beating. Performance Measures Measures or Risk Measurement Measurement Of Mutual Funds
Mutual Fund industry today, with about 34 players and more than five hundred
schemes, is one of the most preferred investment avenues in India. However, with a plethora of schemes to choose from, the retail investor faces problems in selecting funds. Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone alone can not be indic indicative ative of futur futuree performance, performance, it is, frankly, frankly, the only quantitative way to judge how good a fund is at present. Therefore, there is a need to correctly assess the past performance of different mutual funds. Worldwide, good mutual fund companies over are known by their AMCs and this fame is directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must be held accountable for their selection of stocks. In other words, there must be some performance indicator that will reveal the quality of stock selection of various AMCs. Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. Risk associated with a fund, in a general, can be defined as variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces. First, general market fluctuations, which affect all the securities present in the market, called market risk or systematic risk and 19
Mutual fund
second, fluctuations due to specific securities present in the portfolio of the fund, called unsystematic risk. The Total Risk of a given fund is sum of these two and is measured in terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is
measured in terms of Beta, which represents fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of a mutual fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a mutual fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk can not. By using the risk return relationship, we try to assess the competitive strength of the mutual funds vis-à-vis one another in a better way.
20
Mutual fund
STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY
The Indian Mutual Fund industry is dominated by the Unit Trust of India which has a total corpus of 700 Billion collected from over 20 million investors. The UTI has many funds/ schemes in all categories i.e. Equity, balanced, income etc. With some being open ended and some being closed ended. The Unit scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme scheme with a corpus of about 200 billion. UTI was floated floated by financial institutions and is governed by a special act of Parliament. Most of its investors believe that the UTI is governm government ent owned and controlled, which, while legally incorrect, is true for all practical purposes. The second largest category of mutual funds are the ones floated by nationalized banks. Canbank asset management floated by Canara Bank and SBI Funds Management floated by State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones. The aggregate corpus of the funds managed by this category of AMC’s is around Rs.150
The third largest category of mutual funds are the ones floated by the private sector and by foreign asset management companies. The largest of these are Birla Capital AMC an and d Kotak AMC . The aggreg aggregate ate corpus of the assets managed by this category of AMC’s is about Rs. 60 billion.
Organization of A Mutual Fund
There are many entities involved in organization of Mutual Fund. Diagram given below illustrates the organization set-up of a mutual fund.The structure of mutual fund in India is governed by SEBI (Mutual fund) Regulation, 1996. The Sponsor These regulation make it mandatory to a mutual fund to have three-tier structure of Sponsor-Trustees-Asset Management Company.is
promoter of the mutual fund appoint appointss trustees, custodian custodianss and the AMC with 21
Mutual fund
prior approval of SEBI. The sponsor establishes the mutual fund and registers the same with SEBI. Sponsors must contribute at least 40% of the capital of the AMC.
Trust/ Board of Trustees: Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Trustees float and
market schemes, and secure necessary approvals. They check if the AMC’s investments are within well-defined limits, whether the fund’s assets are protected, and also ensure that unithol unitholders ders get their due returns. They also review any due diligence by the AMC. For major decisions concerning the fund, they have to take the unitholders’consent. They submit reports every six months
to SEBI; investors get an annual report. Trustees are paid annually out of the fund’s assets – 0.5 percent of the weekly net asset value. Fund Managers/ AMC: They are the ones who manage money of the
investors. An AMC takes decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides provides informati information on on listed schemes. It also exercises due diligence on investments, and submits quarterly reports to the trustees. A fund’s
AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below Rs. 10 crore. And, its fee should not exceed 1.25 percent if collections are below Rs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can pull up an AMC if it deviates from its prescribed role.
Custodian: Often an independent organization, it takes custody of securities
and other assets of mutual fund. Its responsibilities include receipt and delivery of securities, collecting income-distributing dividends, safekeeping of the units and segregating assets and settlements between schemes. Their charges range 22
Mutual fund
between 0.15-0.2 0.15-0.2 percent of the n net et value of the hol holding. ding. Cust Custodians odians can service service more than one fund. Mutual Fund is managed either trust company or board of trustees. Provisions of Indian Trust Act govern board of trustees and trust. If trustee is a company , it is also subject to Indian Company Act. Trustees appoint AMC in consultation with the sponsors and according to SEBI regulation. All mutual fund scheme floated by AMC have to be approved by trustees. Trustees review and ensure that net worth of the company is according to stipulated norms, every quarter. Though the trust is the mutual fund, the AMC is its operational face. The AMC is the first functionary to be appointed , and is involved in appointment of all other functionaries. The AMC structures the mutual fund products, markets them and mobilizes fund, manages the funds and services the investors. It seeks the service other functionaries in carrying out these functions. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities exchange Board of India) in our case. A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders (subscribers) of the fund.In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd., which has floated different mutual funds schemes and also acts as an asset manager for the funds collected under the schemes. 23
Mutual fund
COMPARISON OF MUTUAL FUNDS WITH THE BANKS Banks v/s v/s M utual F unds
BANKS
MUTUAL FUNDS
Returns
Low
Better
Administrativee exp. Administrativ
High
Low
Risk
Low
Moderate
Investment options
Less
More
High penetration
Low but improving
At a cost
Better
etwork Liquidity Quality of assets Interest calculation
ot transparent
Transparent
Minimum balance between Everyday 10th.&30th.Of every month
Guarantee
Max Rs.1 lakh on deposits
one
Capital flow in the economy
MFs make it possible for investors to assume risks in the expectation of the higher returns even if the investor cannot actively manage these investments and the associated risks. risks. This increase increasess the level of risk capital that is av available ailable in the economy for funding enterprise enterprise.. The MFs also add depth to the security markets where they invest, thus contributing to liquidity and price discovery. This again is a significant factor in channelling more money into the markets, instead of this being locked up in unproductive physical capital like gold, real estate etc.
24
Mutual fund
Schemes and Units
Investment in a company is normally represented by a certain number of shares. shares . People invest in a company by acquiring its shares; they disinvest by selling its shares. The total outstanding shares of a company multiplied by the face value of each share, constitute constitutess the share capital of the company. What shares are for for a com company, pany, units are for a mutual mutual fund scheme. Thus investors invest in a scheme by buying its units. They disinvest by selling its units. The total outstanding units of a scheme m multiplied ultiplied by the face value of its units, constitutes constitutes the unit capital of the scheme. Every scheme has an investment objective or philosophy i.e. a promise by the AMC on how the funds would be managed.
Investors in a scheme scheme are
essentially buying into this investment objective or philosophy. In reality, the distinction among some of the stock fund objectives discussed is not clear-cut. The actual stocks that constitu constitute te a specific mutual fund po portfolio rtfolio depend on the analysis analysis and perspective of the fund’s m manager. anager. Hence, a generic
investment objective (e.g. growth, income) can be interpreted and executed aggressive gressive growth fund may differently by different managers. One company’s ag look like another company’s specialty fund, which may look like another company’s world fund. It is im important portant to read the fund’s prospectus and review
the list of its top holdings before making your final investment decision.
25
Mutual fund
COMPANY PROFILE: STATE BANK OF INDIA SBI Mutual Fund is India’s largest bank sponsored mutual fund and has an
enviable track record in judicious investments and consistent wealth creation.The fund traces its lineage to SBI - India’s largest banking enterprise. The institution has grown immensely since its inception and today it is India's largest bank, patronised by over 80% of the top corporate houses of the country. c ountry. In eighteen years of operation, the fund has launched thirty-two schemes and successfully redeemed fifteen of them. In the process it has rewarded it’s investors handsomely with consistently high returns.
A total of over 3.5 million investors have reposed their faith in the wealth generation expertise of the Mutual Fund. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the prefe pr eferr rred ed inv invest estmen mentt for f or mil millio lions ns of inv invest estors ors and HNI HNI’s. ’s.
Today, the fund manages over Rs. 20000 crores of assets and has a diverse profile pro file of investo inve stors rs act active ively ly par parkin king g the their ir invest inv estment mentss acr across oss 40 active act ive schemes.The fund serves this vast family of investors by reaching out to them through network of over 100 points of acceptance, 26 investor service centers, 33 investor service desks and 52 district organizers. SBI Mutual is the first bank-sponsored fund to launch an offshore fund – Resurgent India Opportunities Fund. Growth through innovation and stable investment policies is the SBI MF credo.
26
Mutual fund
IMPORTANCE OF SBI MUTUAL FUND
1) SBI Mutual Fund helps in introducing a high degree of professional management and marketing concept in to banking 2) SBI Mutual Fund creates Healthy competition on general efficiency levels in the industry 3) SBI Mutual Fund is always trying to innovate the new products avenues, new schemes, services etc.
Business Objectives. The Primary Objective of SBI Mutual Fund is to Enhance the Investments in the country through the Provision of Different Mutual Fund Schemes in a systematic and Professional Manner, and to Promote the Investments In the Mutual Fund SBI Mutual Fund Main goals are to a) Develop a Close Relationship with Customer b) Transform Ideas in to Viable and Creative Solutions c) Provide Consistently high Returns to Shareholders, d) To Grow through diversification by leveraging off the existing client base. Business Focus
SBI Mutual Fund mission is to be world class Mutual Fund its Main aim is to build . Customer Franchises across distinct business So as to be the Preferred Provider of services in the SegmentsThat Fund Operates in and to achieve healthy growth in profitability, and consistencyThe SBI Mutual Fund is Committed
to maintain the highest level of ethical standards, professional
integrity and regulatory compliance
27
Mutual fund
S.B.I MUTUAL FUND SCHEMES EQUITY SCHEMES
The investments of these schemes will predominantly be in the stock markets and endeavor will be to provide investors the opportunity to bene be nefit fit fro from m tthe he hig highe herr ret return urnss whi which ch stoc st ock k marke mar kets ts can ca n provid pro vide. e. Howev How ever er they are also exposed to the volatility and attendant risks of stock markets and hence should be chosen only by such investors who have high risk taking capacities and are willing to think long term. Equity Funds include diversified Equity Funds, Sectoral Funds and Index Funds. Diversified Equity Funds invest in various stocks across different sectors while sectoral funds which are specialized Equity Funds restrict their investments only to shares of a particular sector and hence, are riskier than Diversified Equity Funds. Index Funds invest passively only in the stocks of a particular index and the performance of such funds move with the movements of the index. Magnum COMMA Fund,Magnum Fund ,Magnum Equity Fund. Fund. 2 DEBT SCHEMES
Debt Funds invest only in debt instruments such as Corporate Bonds, Government Securities and Money Market instruments either completely avoiding any investments in the stock markets as in Income Funds or Gilt Funds or having a small exposure to equities as in Monthly Income Plans or Children's Plan. Hence they are safer than equity funds. At the same time the expected returns from debt funds would be lower. Such investments are advisable for the risk-averse investor and as a part of the investment portfolio for other investors.
28
Mutual fund
Magnum Children`s Benefit Plan Magnum Gilt Fund
Magnum Gilt Fund (Long Term) Magnum Gilt Fund (Short Term)
SBI Premier Liquid Fund BALANCED SCHEMES
Magnum Balanced Fund invest in a mix of equity and debt investments. Hence they are less risky than equity funds, but at the same time provide commensurately lower returns. They provide a good investment opportunity to investors who do not wish to be completely exposed to equity markets, but is looking for higher returns than those provided by debt funds. Magnum Balanced Fund Magnum NRI Investment Fund - FlexiAsset Plan
SBI EQUITY SCHEMES DETAILS
MAGNUM GLOBAL FUND
Investment Objective
To provide the investors maximum growth opportunity through well researched investments in Indian equities, PCDs and FCDs from selected industries with high growth potential and Bonds.
Scheme Highlights
1.An open-ended equity scheme investing in stocks from selected industries with high growth potential. 2. Minimum Investment Rs. 2000 and in multiples of Rs. 1000 with Dividend and Growth options available. ^ Money Market Instruments will 29
Mutual fund
include Commercial Paper, Commercial Bills, Certificate of Deposit, Treasury Bills, Bills Rediscounting, Repos, Government securities having an unexpired maturity of less than 1 year, call or notice money, usance bills and any other such short-term instruments as may be allowed under the regulations prevailing from time to time. Launch Date: September 30, 1994 Entry Load
Investments below Rs. 5 crores - 2.25% Investments of Rs.5 crores and above – NIL Exit Load
Investments below Rs 5 crores <= 6 months - 1.00% and NIL thereafter. therea fter. Investments of Rs 5 crores and above - NIL
SBI GILT FUND DETAILS
SBI MAGNUM GILT FUND
Investment Objective
To provide the investors with returns generated through investments in government securities issued by the Central Government and / or a State Government Scheme Highlights
1. Open ended Gilt Scheme. 2. The scheme will invest in government securities only with the exception of investments made in the call money markets. Investment in Government Securities signifies no risk of default (zero credit risk) either in payment of princi pri ncipal pal or eve even n int intere erest st on the inve investme stments nts mad madee by the scheme sch eme . LongLon gTerm Plan - for investors with a long-term investment horizon. This Plan will have two options (a) Quarterly Dividend option and (b) Growth option The Long Term Plan Dividend Plan and the Growth Plan will each have 30
Mutual fund
three options for investment 1. Regular Dividend / Growth Option : This option will be the existing option in this Plan wherein investments in this option would be subject to a Contingent Deferred Sales Charge (CDSC) of 0.25% for exit within 90 days from the date of investment. 2. PF (Regular) Option : This option under both the Dividend and Growth Plans would be a no-load option. 3. PF (Fixed Period) Option : This option under both the Dividend and Growth Plan provides prospective investors with an option to lock-in their investments for a period of 1 year, 2 years or 3 years from the date of their investment Facility to reinvest dividend is available under both the Pla Plans. ns. Both the Pla Plans ns wil willl have hav e sep separa arate te investm inve stment ent portfoli port folios os and separate NAVs. Under the Long-Term Plan, the funds will normally be managed to an average portfolio-maturity longer than three years. Launch Date: January 1, 2003
SBI BALANCED FUND Investment Objective
To provide investors long term capital appreciation along with the liquidity of an open-ended scheme by investing in a mix of debt and equity. The scheme will invest in a diversified portfolio of equities of high growth companies and balance the risk through investing the rest in a relatively safe portfolio of debt. Scheme Highlights
1. An open-ended scheme investing in a mix of debt and equity instruments. Investors get the benefit of high expected-returns of equity investments with the safety of debt deb t investments in one scheme. 2. On an ongoing basis, magnums will be allotted at an eentry ntry load of 2.25% to the NAV. 3. Scheme open for Resident Indians, Trusts, Indian Corporates, on a fully repatriable basis for NRIs and, Overseas Corporate Bodies. 31
Mutual fund
4. Facility to reinvest dividend proceeds into the scheme at NAV available. 5. Switchover facility to any other open-ended schemes of SBI Mutual Fund at NAV related prices. 6. The scheme will declare NAV, Sale and repurchase price on a daily bas is. basis. 7. Nomination facility available for individuals applying on their behalf either singly or jointly upto three. Launch Date: May 1, 1996
32
Mutual fund
BIBLIOGRAPHY
Mutual Fund Insight by Value Researcher. Marketing Management by Philip Kotler www.mutualfundsindia.com www.indiainfoline.com www.valueresearcersonline.com www.amfi.com www.sbimf.com etc www.sbimf.com
33
