MUTUAL FUNDS

TOPICS COVERED Concept Types of Mutual Fund Schemes Advantages of Mutual Funds Organisation of a Mutual Fund Investment Strategies Mutual Fund Market in India Growth of Mutual Fund Industry in India Future of Mutual Fund in India

CONCEPT A 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 realised are shared by its unit holders in proportion to the number of units owned by them.

MUTUAL FUND OPERATION FLOW CHART

Investors

Fund

Securities

Return

Pool their money in

Which is invested in

That generates

Given back to

ADVANTAGES OF MUTUAL FUNDS

TYPES OF MUTUAL FUNDS

No matter what type of investor you are, there is bound to be a mutual fund that fits your style. It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.

Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, mutual funds can be classified on three parameters:1) On the basis of structure.

2) On the basis of investment objective.

3) On the basis of special schemes.

TYPES OF MUTUAL FUNDS

Type of Mutual Fund

Schemes

StructureInvestment

Objective

Special Schemes

Open Ended Funds

Close Ended Funds

Growth Funds

Income Funds

Balanced Funds

Money Market Funds

Industry Specific Schemes

Index Schemes

Sectoral Schemes

ON THE BASIS OF STRUCTURE Open ended Schemes Closed ended Schemes.

OPEN ENDED SCHEMES

Open ended Schemes are schemes which offers unit for sale without specifying any duration for redemption.

They sell and repurchase schemes on a continuous basis.

The main feature of such kind of scheme is liquidity

CLOSED ENDED SCHEMES

These are the schemes in which redemption period is specified.

Once the units are sold by mutual funds, then any transaction takes place in secondary market only i.e stock exchange.

Price is determined by forces of market.

ON THE BASIS OF GROWTH OBJECTIVE Growth funds Income funds Balanced Funds Money Market funds

GROWTH FUND 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

INCOME FUNDS Funds that invest in medium to long-term debt

instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds

BALANCED FUND These funds provide both growth and regular

income as these schemes invest in debt and equity. The NAV of these schemes is less volatile as

compared pure equity funds.

MONEY MARKET FUNDS Money market / liquid funds invest in short-term

(maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types.

ON THE BASIS OF SPECIAL SCHEMES Industry Specific Schemes Index Schemes Sectoral Schemes.

INDUSTRY SPECIFIC SCHEMES

Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like Infotech, FMCG, Pharmaceuticals etc

INDEX SCHEMES In this schemes, the funds collected by mutual

funds are invested in shares forming the Stock Exchange Index.

Example- Nifty Index Scheme of UTI Mutual Fund and Sensex Index Scheme of Tata Mutual Fund.

SECTORAL SCHEMES

Sectoral funds are those mutual funds which invest in a particular sector of the market, e.g. banking, information technology etc. Sector funds are riskier than equity diversified funds since they invest in shares belonging to a particular sector which gives them fewer diversification opportunities

OTHER SCHEMES Gilt Security Schemes Funds of Funds Domestic Funds Tax Saving Schemes.

ORGANISATION OF A MUTUAL FUND

INVESTMENT STRATEGIES Systematic Investment Plan (SIP)

Invest a fixed sum every month. (6 months to 10 years- through post-dated cheques or Direct Debit facilities)

Fewer units when the share prices are high, and more units when the share prices are low.

Convenience and Discipline are the benefits of SIP.

Systematic Withdrawal Plan (SWP) Is a facility provided by a mutual fund to withdraw

money on a regular basis.

MUTUAL FUNDS IN INDIAN CAPITAL MARKET

First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of

Parliament. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase1987-1993( Entry of Public Sector Funds) SBI MF marked the entry of non- UTI, public sector mutual

funds set up by public sector banks and Life Insurance Corporation (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase-1993-2003(Entry of Private Sector Funds) 1993 was the year in which the first Mutual Fund Regulations

came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

Fourth Phase – since February 2003 There have been several amalgamation of mutual funds. The

MF have also become popular among retail investors. There were 28 mutual funds operating in India in April,2005.

GROWTH IN MF INDUSTRY IN INDIA

The size of Indian mutual fund industry has grown in recent few years. The total AUM has increased from Rs.1, 01, 565 crores in January 2000 to Rs.5, 67, 601.98 crores in April 2008. As on august end 2000, there were 33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores. There are 34 Mutual Fund organizations in India managing 1,02,000 crores.

Indian Mutual Funds Future - Growth Facts

In the past 6 years, Mutual Funds in India have recorded a growth of 100 %.

One of the major factors contributing to the growth of this industry has been the booming stock market with an optimistic domestic economy.

Second most important reason for this growth is a favorable regulatory regime which has been enforced by SEBI. This regulatory board has improved the market surveillance to protect the investor’s interest.

In India, the rate of saving is 23 %.

In the future, there lies a big scope for the Indian Mutual Funds industry to expand.

Several asset management companies which are foreign based are now entering the Indian markets.

A number of commodity Mutual Funds will be introduced in the future. The SEBI (Securities Exchange Board of India) has granted the permission for the same.

More emphasis is put on the effective Mutual Funds governance.

There is also enough scope for the Indian Mutual funds to enter into the semi-urban and rural areas.

Financial planners will play a major role in the Mutual Funds market by providing people with proper financial planning.

FUTURE OF MF IN INDIA

By end of 2012, the mutual fund industry of India will reach Rs 40,90,000 crore. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9% annually.

Future of Mutual Funds in India - An Overview Financial experts believe that the future of Mutual

Funds in India will be very bright. It has been estimated that by March-end of 2010, the mutual fund industry of India will reach Rs 40,90,000 crore, taking into account the total assets of the Indian commercial banks. The estimation was based on the December 2004 asset value of Rs 1,50,537 crore. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9% annually. Based on the current rate of growth, it can be forecasted that the mutual fund assets will be double by 2010.