Mutual Funds
Presented By:
Dr.P.Saradhamani
Professor in
Management
studies , SNSCE
OVERVIEW OF MUTUAL FUND
•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 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 low cost.
HISTORY OF MUTUAL FUND
• First Phase – 1964-87 -Unit Trust of India (UTI) was established on 1963
by an Act of Parliament. . The first scheme launched by UTI was Unit
Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under
management.
• Second Phase – 1987-1993 (Entry of Public Sector Funds) -SBI Mutual
Fund was the first non- UTI Mutual Fund established in June 1987
followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual
Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun
90), Bank of Baroda Mutual Fund (Oct 92
Cont….
• Third Phase – 1993-2003 (Entry of Private Sector Funds)
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 -In February 2003,
following the repeal of the Unit Trust of India Act 1963
UTI was bifurcated into two separate entities.
Cont…
• One is the Specified Undertaking of the Unit Trust of India with
assets under management of Rs.29, 835 crores as at the end of
January 2003, representing broadly, the assets of US 64 scheme,
assured return and certain other schemes. The Specified Undertaking
of Unit Trust of India, functioning under an administrator and under
the rules framed by Government of India and does not come under
the purview of the Mutual Fund Regulations
• The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB,
BOB and LIC. It is registered with SEBI and functions under the
Mutual Fund Regulations
Types Of Mutual Fund Schemes:
Mutual funds Schemes can be segregated into three heads –
1. Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended
scheme depending on its maturity period.
Open-ended Fund/ Scheme
Open-ended schemes are those schemes where investors can redeem and buy new
units all throughout the year as per their convenience at NAV related prices.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 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 public issue and
thereafter they can buy or sell the units of the scheme on the stock exchanges where
the units are listed.
NOTE: SEBI Regulations 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.
2. Schemes according to Investment Objective:
 Growth / Equity Oriented Scheme
Income / Debt Oriented Scheme
Balanced Fund
Money Market or Liquid Fund
Gilt Fund
Index Funds
Sector specific funds/schemes
Tax Saving Schemes
3. Load or no-load Fund:
Mutual funds incur certain expenses such as brokerage, marketing
expenses, and communication expenses. These expenses are known as
‘load’.
A Load Fund is one that charges a percentage of NAV for entry or
exit. That is, each time one buys or sells units in the fund, a charge
will be payable. This charge is used by the mutual fund for
marketing and distribution expenses. Suppose the NAV per unit is
Rs.10. If the entry as well as exit load charged is 1%, then the
investors who buy would be required to pay Rs.10.10 The investors
should take the loads into consideration while making investment
as these affect their yields/returns. A no-load fund is one that does
not charge for entry or exit. It means the investors can enter the
fund/scheme at NAV and no additional charges are payable on
purchase or sale of units.
The table below summarizes the funds according to their
nature of risk –
Nature of risk
Low risk
Categories of funds
Money market funds
G-Sec funds
Moderate risk
Income funds
Short term plans
Balanced funds
High risk
Index funds
Growth funds
Sector funds
ASSOCIATION OF MUTUAL FUNDS IN INDIA
Association of Mutual Funds in India (AMFI) was incorporated on
22nd August, 1995.
(AMFI) modeled on the lines of a Self Regulating Organization
(SRO) with a view to 'promoting and protecting the interest of
mutual funds and their unit-holders, increasing public awareness of
mutual funds, and serving the investor’s interest by defining and
maintaining high ethical and professional standards in the mutual
funds industry'
Association of Mutual Funds India has brought down the
Indian mutual fund industry to a professional and healthy market
with ethical lines enhancing and maintaining standards.
It follows the principle of both protecting and promoting the
interests of mutual funds as well as their unit holders.
OBJECTIVES OF AMFI
AMFI interacts with SEBI and works according to SEBIs guidelines in
the mutual fund industry.
To recommend and promote best business practices and code of
conduct to be followed by members and others engaged in the
activities of mutual fund and asset management including agencies
connected or involved in the field of capital markets and financial
services.
 Association of Mutual Fund of India do represent the Government
of India, the Reserve Bank of India and other related bodies on
matters relating to the Mutual Fund Industry.
It develops a team of well qualified and trained Agent distributors.
It implements a programme of training and certification for all
intermediaries and other engaged in the mutual fund industry.
Cont…….
AMFI undertakes all India awareness programme for investors in
order to promote proper understanding of the concept and working of
mutual funds.
Association of mutual fund of India also disseminate information on
Mutual Fund Industry and undertakes studies and research either
directly or in association with other bodies.
Advantages of investing in a Mutual Fund
• Affordability
A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc.
depending upon the investment objective of the scheme. An investor can
buy in to a portfolio of equities, which would otherwise be extremely
expensive. Each unit holder thus gets an exposure to such portfolios with
an investment as modest as Rs.5000/-.
• Diversification
We must spread our investment across different securities (stocks, bonds,
money market instruments, real estate, fixed deposits etc.) and different
sectors (auto, textile, information technology etc.).
• Variety
Mutual funds offer a tremendous variety of schemes.
• Professional Management
Qualified investment professionals who seek to maximize returns and
minimize risk monitor investor's money.
•Transparency
Being under a regulatory framework, mutual funds have to disclose
their holdings, investment pattern and all the information that can be
considered as material, before all investors. SEBI acts as a watchdog
and safeguards investors’ interests
• Liquidity
A distinct advantage of a mutual fund over other investments is that
there is always a market for its unit/ shares. It's easy to get one’s
money out of a mutual fund. Redemptions can be made by filling a
form attached with the account statement of an investor.
Risks Associated with Mutual Funds
• Professional Management- Some funds don’t perform in the market, as
their management is not dynamic enough to explore the available opportunity in
the market.
• Costs – The biggest source of AMC income is generally from the entry & exit load
which they charge from investors, at the time of purchase. The mutual fund
industries are thus charging extra cost under layers of jargon.
• Dilution - Because funds have small holdings across different companies, high
returns from a few investments often don't make much difference on the overall
return.
• Taxes - when making decisions about your money, fund managers don't consider
your personal tax situation. For example, when a fund manager sells a security, a
capital-gain tax is triggered, which affects how profitable the individual is from the
sale.
Taxing in mutual fund
• Since, April 1, 2003, all dividends, declared by
debt-oriented mutual funds (i.e. mutual funds
with less than 50% of assets in equities), are
tax-free in the hands of the investor. A
dividend distribution tax of 12.5% (including
surcharge) is to be paid by the mutual fund on
the dividends declared by the fund. Long-term
debt funds, government securities funds (Gsec/gilt funds), monthly income plans (MIPs)
are examples of debt-oriented funds.
• Section 2(42A):
Under Section 2(42A) of the Act, a unit of a mutual fund is
treated as short-term capital asset if the same is held for
less than 12 months.
• Section 10(38):
Under Section 10(38) of the Act, long term capital gains
arising from transfer of a unit of mutual fund is exempt
from tax if the said transaction is undertaken after October
1, 2004 and the securities transaction tax is paid to the
appropriate authority. Short-term capital gains on equityoriented funds are chargeable to tax @10%, Long-term
capital gains on debt-oriented funds are subject to tax
@20% of capital gain after allowing indexation benefit or at
10% flat without indexation benefit, whichever is less.
• Section 112: Under Section 112 of the Act,
capital gains, not covered by the exemption
under Section 10(38), chargeable on transfer of
long-term capital assets are subject to following
rates of tax:
• Resident Individual & HUF -- 20% plus surcharge,
education cess.
• Partnership firms & Indian companies -- 20% plus
surcharge.
• Foreign companies -- 20% (no surcharge).
Capital gains will be computed after taking into
account the cost of acquisition as adjusted by
Cost Inflation Index, notified by the central
government.
MARKETING
OF
MUTUAL
FUNDS
Product Focus
The performance of the fund in giving
returns to its investors.
The way in which that particular fund was
marketed.
Customer Ownership Focus
Specialized Product & Service Focus
Marketing Strategies:
Direct marketing
Personal Selling
Telemarketing
Direct mail
Advertisements in newspapers and magazines
Hoardings and Banners
Internet
Selling through intermediaries
Joint Calls
CHALLENGES AND OPPORTUNITIES:
•
•
•
•
•
•
Assessing the needs of the investors;
Expanding the customer base;
Responding to investors needs;
Studying the macro environment;
Choosing the distribution network;
Finalizing strategies for publicity and
advertisement;
• Preparing offer documents and other literature;
• Getting feedback about sales;
• Studying performance indicators about fund
performance like NAV;
• Sending certificates in time and other after
sales activities;
• Honoring the commitments made for
redemptions and repurchase;
• Paying dividends and other entitlements;
• Creating positive image about the fund;
• Spreading awareness about mutual funds;
• Creating new markets for mutual funds.
LATEST TRENDS OF MUTUAL
FUNDS IN INDIA
• The recent trends since last year clearly suggest that the
average investors have lost money in equity. People have
now started opting for portfolio managers.
• Entrance of multinational companies.
• Professional expertise to manage funds worldwide.
• Mutual funds in India now offer a wide range of schemes
to choose.
• Mutual funds are turned to be the most preferred choice
worldwide for both small and big investors due to their
numerous advantages which include diversification,
professional management, potential of returns, efficiency
and easy to use.
Assets Under Management (AUM)
AUM is a term used by financial services
companies in the mutual fund, hedge fund, and
money management, investment management,
wealth management, and private banking
businesses to gauge how much money they are
managing. Many financial services companies
use this as a measure of success and
comparison against their competitors.
Benefits Of Investing In Mutual
Funds
• Easy to buy and sell.
• Investments can be made in lump sum or
periodic payments (easy on the pocket).
• Mutual fund industry in India is very well
regulated and transparent.
• Professional management - saves time, costs
and reduces risk.
• Diversification - to protect from downside risk.
How to choose a fund for investing?
• Expense Ratio: Denotes the annual expenses of the funds,
including the management fee and administrative cost. Lower
expense ratio is better.
• Sharpe Ratio: An indicator of whether an investment's return
is due to smart investing decisions or a result of excess risk.
Higher Sharpe Ratio is better
• Alpha Ratio: Measures risk relative to the market or
benchmark index. For investors, the more positive an alpha is,
the better it is.
• R-squared: Measures the percentage of an investment's
movement that are attributable to movements in its benchmark
index. A mutual fund should have a balance in R-square
and ideally it should not be more than 90 and less
than 80.
ASSOCIATION OF MUTUAL FUNDS IN
INDIA
Association of Mutual Funds in India (AMFI) was incorporated on 22nd
August, 1995.
(AMFI) modeled on the lines of a Self Regulating Organization (SRO)
with a view to 'promoting and protecting the interest of mutual funds
and their unit-holders, increasing public awareness of mutual funds, and
serving the investor’s interest by defining and maintaining high ethical
and professional standards in the mutual funds industry'
Association of Mutual Funds India has brought down the
Indian mutual fund industry to a professional and healthy market with
ethical lines enhancing and maintaining standards.
It follows the principle of both protecting and promoting the interests
of mutual funds as well as their unit holders.