M.F.S.
MUTUAL FUND
Mutual Funds: Chapter Objectives
• To understand the Concept & Structure of mutual funds,
• Mutual Fund development/s in India and
• To understand the types of Mutual fund Schemes.
Mutual Fund: Meaning
• A mutual fund is a financial intermediary that pools the
savings of investors for collective investment in a diversified
portfolio of securities. A fund is “mutual” as all of its returns,
minus its expenses, are shared by the fund’s investors.
• Mutual fund is a collective savings scheme. Mutual funds play an
important role in mobilizing the savings of small investors and
channelising the same for productive ventures in the Indian
economy.
Mutual Fund: Meaning
• According to the above definition, a mutual fund in India can raise
resources through sale of units to the public. It can be set up in the form
of a Trust under the Indian Trust Act.
• The definition has been further extended by allowing mutual funds to
diversify their activities in the following areas:
– Portfolio management services
– Management of pension or provident funds
– Management of venture capital funds
– Management of money market funds
– Management of real estate funds
Mutual Fund Operation Flow Chart
Mutual Fund Orgn. Structure
• Mutual Fund Industry has a Four –Tier structure:
• The four parties that are required to be involved are:
– Sponsor
– Board of Trustees/Trust
– Asset Management Company (AMC)
– Custodian.
Mutual Fund Orgn. Structure
• The Sponsor of a fund is the entity that sets up the mutual fund.
• The fund is administered/run either by a Board of Trustees, or The
Directors of A Trustees Company. The sponsor selects them. The Board of
Trustee is responsible for protecting the investors’ interests.
• The sponsor or the trustee if so authorized by the Trust Deed appoints the
Asset Management Company (AMC) for the investment and administrative
functions. The AMC does the research, and manages the corpus of the
fund.
• with the help of trustees, the AMC launches the various schemes of the
fund, manages them, and then liquidates them at the end of their term. It
also takes care of the other administrative work of the fund.
• AMC receives an annual management fees from the fund for its services.
• The Custodians are appointed by the sponsor for looking after the transfer
and storage of the securities and co-ordinate with the brokers.
Benefits of Mutual Funds
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Professional management
Portfolio diversification
Reduction in transaction costs
Liquidity
Convenience
Flexibility
Tax benefits
Transparency
Equity research
History of Mutual Funds
• The history of mutual funds, dates back to 19th century
Europe, in particular, Great Britain. Robert Fleming set up in
1868 the first investment trust called Foreign and Colonial
Investment Trust which promised to manage the finances of
the moneyed classes of Scotland by spreading the investment
over a number of different stocks.
• This investment trust and other investment trusts which were
subsequently set up in Britain and the US, resembled today’s
close-ended mutual funds. The first mutual fund in the US,
Massachusetts Investors’ Trust, was setup in March 1924. This
was the first open-ended mutual fund.
Growth of Mutual Funds in India
• Phase I:
• The mutual fund concept was introduced in India with the
setting up of UTI in 1963. The Unit Trust of India (UTI) was the
first mutual fund set up under the UTI Act, 1963, a special act
of the Parliament. It became operational in 1964 with a major
objective of mobilizing savings through the sale of units and
investing them in corporate securities for maximizing yield
and capital appreciation. This phase commenced with the
launch of Unit Scheme 1964 (US-64) the first open-ended and
the most popular scheme.
Growth of Mutual Funds in India
• Phase II:
• The second phase witnessed the entry of mutual fund companies
sponsored by nationalized banks and insurance companies. In 1987,
SBI Mutual Fund and Canbank Mutual Fund were set up as trusts
under the Indian Trust Act, 1982.
• In 1988, UTI floated another offshore fund, namely, The India
Growth Fund which was listed on the New York Stock Exchange
(NYSE). By 1990, the two nationalized insurance giants, LIC & GIC
and nationalized banks, namely, Indian Bank, Bank of India, and
Punjab National Bank had started operations of wholly-owned
mutual fund subsidiaries.
Growth of Mutual Funds in India
• Phase III:
• The year 1993 marked a turning point in the history of mutual
funds in India. Securities and Exchange Board of India (SEBI)
issued the Mutual Fund Regulations in January 1993. SEBI
notified regulations bringing all mutual funds except UTI under
a common regulatory framework.
• Private domestic and foreign players were allowed entry in the
mutual fund industry. Kothari group of companies, in joint
venture with Pioneer, a US fund company, set up the first
private mutual fund the Kothari Pioneer Mutual Fund, in 1993.
Growth of Mutual Funds in India
• Phase IV:
• During this phase, the flow of funds into the pot of mutual
funds sharply increased. This significant growth was aided by
a more positive sentiment in the capital market, significant tax
benefits, and improvement in the quality of investor service.
• ENTRY OF PRIVATE PLAYERS AFTER YEAR 2000
• MF MARKET SCENARIO:
• YEAR 2000: AUM Rs. 1,00,000 CRORE (UTI 64% SHARE)
• YEAR 2009: AUM Rs. 7,50,000 CRORE
RECENT MF INDUSTRY STATUS
AMC/FUND HOUSE
BARODA PIONEER MF
AUGUST 2009
(Rs. In Crore)
SEPT 2008 (Rs. In Crore)
5,414
56
LIC MF
42,646
16,168
IDFC MF
24,855
11,855
KOTAK MAHINDRA MF
36,934
18,615
799
408
7,49,738
5,28,493
TAURUS MF
TOTAL INDUSTRY AUM
Total investment 7,81,71,152 Lakhs (as of 28 February,2010)
(Source: Association of Mutual Funds, India)
in MF Rs
NAV: NET ASSET VALUE
• Calculation of NAV:
The NAV simply means =
NET VALUE OF ASSETS
NO. OF UNITS OUTSTANDING
• Here, Net Value of Assets = Sum of market value of shares/
debentures + Liquid assets/cash held, if any + Dividends/interest
accrued - Expenses accrued but not paid.
EXP. of NAV Calculation
• Name of the scheme: AB Balanced
Size of the scheme: Rs.200 Crore
Face value of the Share: Rs 10
No. Of outstanding units: 20 Crore
Market value of the funds investments: Rs.280 Crore
Receivables: Rs.2 Crore
Accrued Income: Rs.2 Crore
Liability: Rs.1 Crore
Accrued Expense: Rs.1 Crore
NAV = 280 + 2 + 2 – 1 – 1 /20
= Rs. 14.1 per share.
Types of Mutual Fund Schemes
FUNCTIONAL
PORTFOLIO
GEOGRAPHICAL
OTHER
OPEN ENDED
INCOME SCHEME
DOMESTIC
SECTOR SPECIFIC
CLOSE ENDED
GROWTH SCHEME
OFF-SHORE
TAX SAVINGS
BALANCED SCHEME
ELSS
SPECIAL
INDEX FUNDS
GILT FUNDS
GOLD FUND
Types of Mutual Fund Schemes
• OPEN-ENDED SCHEMES:
• KEY FEATURES:
• Most mutual funds are open-ended.
• What does it mean by OPEN – ENDED?
- THE NUMBER OF UNITS/CORPUS ARE NOT FIXED
- ENJOY PERPETUAL LIFE
- FREE ENTRY AND EXIT
• Unlike close-ended schemes, open-ended schemes are listed on the stock
exchange and can be purchased directly from company or broker.
• The investor can purchase the MF schemes by paying “NAV” form MF CO’
• The corpus of fund increases or decreases, depending on the purchase or
redemption of units by investors.
• There is no fixed redemption period in open-ended schemes.
• The key feature of open-ended funds is LIQUIDITY.
• FOR EXP. UTI’s US-64
Types of Mutual Fund Schemes
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CLOSE-ENDED SCHEMES:
KEY FEATURES:
Close ended Funds are just like Eq. Share/IPOs
What does it mean by COSED – ENDED?
- Fixed corpus means total units to be issued
- Fixed maturity period ranging between 2 to 5 years.
- The scheme remains open for a period not exceeding 45 days.
• Investors in close-ended schemes can buy units only from the
market, once initial IPO is over and thereafter the units are
listed on the stock exchanges where they can be bought and
sold.
• The price of a share in a closed-end fund is determined entirely
by market demand, so UNITS can either trade below their net
asset value ("at a discount") or above it ("at a premium").
Types of Mutual Fund Schemes
• INCOME FUNDS:
• KEY FEATURES:
• The aim of income funds is to provide safety of investments
and regular income to investors.
• Such schemes invest predominantly in income-bearing
instruments like bonds, debentures, government securities,
and commercial paper. The return as well as the risk is lower
in income funds as compared to growth funds.
• Corpus invested in Bonds of Govt./Blue Chip Co’s/Money Mkt.
Types of Mutual Fund Schemes
• GROWTH FUNDS:
• KEY FEATURES:
• The main objective of growth funds is capital appreciation
through investment into equity share.
• They invest most of the corpus in equity shares with
significant growth potential and they offer higher return to
investors in the long-term. They assume the risks associated
with equity investments.
• There is no guarantee or assurance of returns.
• Threat of
“CAP. DEPRECIATION”
Types of Mutual Fund Schemes
• BALANCED FUNDS:
• KEY FEATURES:
• The aim of balanced scheme is to provide both capital
appreciation and regular income.
• They divide their investment between equity shares and debt
instruments in such a proportion that, the portfolio is
balanced.
• The portfolio of such funds usually comprises of companies
with good profit and dividend track records and Govt. Bonds.
• RISK – RETURN IS MODERATE as compared to Growth Funds.
Types of Mutual Fund Schemes
• MONEY MARKET MUTUAL FUNDS:
• KEY FEATURES:
• The corpus of MF is invested in short-term money market
instruments like treasury bills, CP and certificate of deposits.
The objective of such funds is high liquidity with low rate of
return.
• This is a safe place to park your money. “CAP. PROTECTION”
• DOMESTIC FUNDS: KEY FEATURES:
• Funds which mobilize resources from a particular geographical
locality like a country or region are domestic funds. The market
is limited and confined to the boundaries of a nation in which
the fund operates.
Types of Mutual Fund Schemes
• OFFSHORE FUNDS:
• KEY FEATURES:
• Funds that invest mainly in the foreign markets are referred to
as international funds (also called offshore funds). They
facilitate cross-border fund flow which leads to an increase in
foreign currency and foreign exchange reserves.
• Such mutual funds can invest in securities of foreign co’s.
• They open international market to domestic investors.
• The first offshore fund, the India Fund, was launched by UTI in
July 1986 in collaboration with the US fund manager, MERRIL
LYNCH.
Types of Mutual Fund Schemes
• SECTORAL:
• KEY FEATURES:
• These funds invest in specific core sectors like energy, power,
telecommunications, IT, construction, transportation, and financial
services. Some of these newly opened-up sectors offer good investment
potential.
• Market Niche Strategy
• TAX SAVING SCHEMES:
• KEY FEATURES:
• Tax-saving schemes are designed on the basis of tax policy with special tax
incentives to investors. Mutual funds have introduced a number of taxsaving schemes.
• These are close--ended schemes and investments are made for 3 to 10
years, although investors can avail of encashment facilities after 3 years.
• These schemes contain various options like income, growth or balanced.
Types of Mutual Fund Schemes
• Equity-linked savings scheme (ELSS):
• KEY FEATURES:
• In order to encourage investors to invest in equity market, the
government has given TAX-CONCESSIONS through special
schemes.
• Investment in these schemes entitles the investor to claim an
income tax rebate, but these schemes carry a lock-in period
before the end of which funds cannot be withdrawn.
Types of Mutual Fund Schemes
• Index funds:
• KEY FEATURES:
• An index fund is a mutual fund which invests in in those shares
which comprise the market index Viz. NIFTY AND BSE SENSEX.
• Fund Manager’s job becomes EASIER in such fund.
Mutual Fund Investors
• Mutual funds in India are open to investment by:
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Residents including Resident Indian Individuals, including high net worth
individuals and the retail or small investors.
Indian Companies
Indian Trusts/Charitable Institutions
Banks
Non-Banking Finance Companies
Insurance Companies
Provident Funds
Non-Residents, including Non-Resident Indians
Other Corporate Bodies (OCBs)
Foreign entities, namely, Foreign Institutional Investors (FIIs) registered
with SEBI.