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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.

When you invest in a mutual fund, your money is combined with the money of many other investors. Professional fund managers use this pool of money to create a portfolio of investments, which may include: Stocks: ownership shares in publicly held companies Bonds: interest-bearing certificates issued by governments and corporations Money Market Securities: short-term instruments, such as U.S. Treasury bills and certificates of deposit, that matures in less than one year. Each mutual fund has specific investment goals that can range from long-term growth to current income. In addition, a fund may invest in specific types of investments to reach its goals, such as dividend-paying stocks, international investments or long-term bonds. Owning shares of a mutual fund is similar in some ways to owning shares of stock in an individual company. The mutual fund company will ask you to vote for its board of directors and to help determine other company matters. The mutual fund also may pay you dividends from the securities in which it invests or capital gains that the fund made from selling securities.

You can make money from a mutual fund in three ways: 1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. 2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Meaning of Share Price and Total Return

A mutual funds share price, which is referred to as its net asset value or NAV, is

determined at each days market close. The price reflects the closing value of all of the investments the fund holds in its portfolio on that day. Like stocks, the daily price of a mutual fund may go up or down. A funds share price can give you an idea of how a fund is performing on a day-to-day basis.

A funds total return shows you how much the funds shares appreciated or depreciated over the long term and takes into account any distributions of dividends or capital gains. Total return generally is stated as an annual percentage rate.

The Evolution
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. The history of mutual fund industry in India can be better understood divided into following phases:

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 de-linked in 1978 and the entire control was tranferred 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 (India's first offshore fund) in 1986, Mastershare (Inida's first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores.

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 Muatual 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.

1992-93 UTI Public Sector Total

Amount Mobilised 11,057 1,964 13,021

Assets Under Mobilisation as % of Management gross Domestic Savings 38,247 8,757 47,004 5.2% 0.9% 6.1%

Phase III. Emergence of Private Secor 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 mutal 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 investor-servicing 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 mobilisation of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds.

Invetors' 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. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. 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.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutal fund players on the same level. UTI was reorganised into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund

Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilisation of funds from investors and assets under management which is supported by the following data:


01-April-98 01-April-99 01-April-00 01-April-01 01-April-02 01-Feb.-03 01-April-03 01-April-04 01-April-05

31-March-99 31-March-00 31-March-01 31-March-02 31-Jan-03 31-March-03 31-March-04 31-March-05 31-March-06

11,679 13,536 12,413 4,643 5,505 * -

1,732 4,039 6,192 13,613 22,923 7,259* 68,558 1,03,246 1,83,446

7,966 42,173 74,352 1,46,267 2,20,551 58,435 5,21,632 7,36,416 9,14,712

21,377 59,748 92,957 1,64,523 2,48,979 65,694 5,90,190 8,39,662 10,98,158


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 mutal 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.

About Mutual Funds Definition of mutual fund:

A Mutual Fund is pooling from different people for their mutual benefits.These funds are then invested in shares and securities depending on the line of investment objective of the fund. Investors

Invest / Pool Their money

Profit/Loss from Portfolio Of investments

Mutual Fund Co. (Pool of money)

Investing a Number of Stocks/Bonds

Profit/Loss from individual Of investments

Market (Fluctuates)

A Mutual Fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the stated investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, an equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc.

Discover the Origins of Mutual Fund Investing

When three Boston securities executives pooled their money together in 1924 to create the first mutual fund, they had no idea how popular mutual funds would become. The idea of pooling money together for investing purposes started in Europe in the mid-1800s. The first pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard University. On March 21st, 1924 the first official mutual fund was born. It was called Massachusetts Investors Trust.

The first investment trust established by Robert Fleming and the first mutual fund of the world The Massachusetts Investors Trust, open-ended scheme was launched in Boston, USA in 1924. In contrast, there are over 10,000 mutual funds in the U.S. today totaling around 7$ trillion (with approximately 83 million individual investors) according to the investment company institute. Mutual funds are very popular today, known for ease-of-use, liquidity, and unique diversification capabilities. A Mutual Fund is the ideal investment vehicle for todays complex financial scenario. Markets for equity shares, bonds and other fixed income instrument, real estate, derivatives and other asset have become information driven. Price changes in these assets are driven by global events occurring in the faraway places. A typical individual is unlikely to have the knowledge, skills inclination and time to keep track of events, understand their implication and act speedily. An also finds it difficult to keep track of ownership of his assets, investment, brokerage dues and bank transactions, ect.


S. Advantage Particulars

No. Mutual Funds invest in a well-diversified portfolio of 1. Portfolio securities which enables investor to hold a diversified

Diversification investment portfolio (whether the amount of investment is big or small). Fund manager undergoes through various research works


Professional Management

and has better investment management skills which ensure higher returns to the investor than what he can manage on his own. Investors acquire a diversified portfolio of securities even

3. Less Risk

with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities.

Low 4. Transaction Costs

Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors. An investor may not be able to sell some of the shares held

5. Liquidity

by him very easily and quickly, whereas units of a mutual fund are far more liquid. >Mutual funds provide investors with various schemes with


Choice of Schemes

different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options

Funds provide investors with updated information pertaining 7. Transparency to the markets and the schemes. All material facts are disclosed to investors as required by the regulator. Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings 8. Flexibility from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes. Mutual Fund industry is part of a well-regulated investment 9. Safety environment where the interests of the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced.


S. No. 1.



Costs Control Investor has to pay investment management fees and fund Not in the distribution costs as a percentage of the value of his

Hands of an Investor

investments (as long as he holds the units), irrespective of the performance of the fund. The portfolio of securities in which a fund invests is a

No 2. Customized Portfolios

decision taken by the fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives.

Difficulty in 3. Selecting a

Many investors find it difficult to select one option from the plethora of funds/schemes/plans available. For this, they

Suitable Fund may have to take advice from financial planners in order to Scheme invest in the right fund to achieve their objectives.

Indian Mutual Fund Industry

The private sector players, after an indifferent start in the early years, have made a strong impression especially in the larger cities, with a high quality of fund management, sales and customer service. This sector has dented UTI's dominance resulting in a falling market share towards the end of the last millennium.

UTI Mutual Fund

UTI was set up in 1964 by an act of parliament and commenced its operation from July 1964, with a view to encouraging saving and investment and participation in the income, profit and gain accruing to corporation from the acquisition, holding, management and disposal of securities.

Unit trust of India (UTI) is the India's largest Mutual Fund organization. UTI manages funds over Rs. 58,221 crore as on 30/6/2001 and over 41.80 million investors account under 85 schemes.

UTI is a trust without ownership capital and independent Board of trustees. The first scheme was Unit scheme 1964. The contributors of initial capital of Rs. 5 crore for US-64 scheme were RBI, LIC, SBI and some contributors of initial capital of Rs. 5 crore for US-64 scheme were RBI, LIC foreign banks. Under the provision of the act, the Government of India would appoint chairman of the board. Today it has 54 branch offices, 266 chief representatives and about 67,000 agents. It provides complete range of services to its investors.

Birla Sun Life Mutual Fund

The sponsor of Birla Mutual Fund is Birla Global Finance Ltd. (BGFL) is an Aditya Birla Co. engaged in asset based financing, corporate finance, trade finance, treasury and capital market operations. The Birla Global Finance Ltd. Was responsible for setting up and establishing the Mutual Fund to be called Birla Mutual Fund.

Birla Mutual Fund has been constituted as a trust under the provisions of the Indian Trust Act, 1982 with SEBI. The objective of the Mutual fund is to offer to the public and other eligible investors units in one or more schemes in the Mutual Fund for making group or collective investments primarily in Indian securities in accordance with and as permitted under the directions and guidelines issued from time to time by SEBI.

Bank of Baroda Mutual Fund

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsorers nemely Housing Development Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch off share fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market .

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.

GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India undertaking and the four Public Sector General Insurance

Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882

Why Investor Need Mutual Funds?

Mutual Funds offer benefits, which are too significant to miss out. Any investment has to be judged on the yardsticks of return, liquidity and safety. Convenience and Tax efficiency are the other benchmark relevant in Mutual Fund investment. In the wonderful game of finance safety and return are two opposite goals and investor cannot be nearer to both at the same time. Mutual funds are pooled resources that get invested in a diversified portfolio. The crux of Mutual Fund investing is averaging the risk. When risk is equalized so are the returns.

Mutual funds vs. other investments

From investors viewpoint mutual funds have several advantages such as:

Professional management and research to select quality securities

Spreading risk over a larger quantity of stock whereas the investor has limited to buy only a hand full of stocks. The investor is not putting all his eggs in one basket

Ability to add funds at set amounts and smaller quantities such as $100 per month

Ability to take advantage of the stock market which has generally outperformed other investment in the long run

Fund manager are able to buy securities in large quantities thus reducing brokerage fees

However there are some disadvantages with mutual funds such as:

The investor must rely on the integrity of the professional fund manager Fund management fees may be unreasonable for the services rendered The fund manager may not pass transaction savings to the investor The fund manager is not liable for poor judgment when the investor's fund loses value

There may be too many transactions in the fund resulting in higher fee/cost to the investor - This is sometimes call "Churn and Earn"

Prospectus and Annual report are hard to understand Investor may feel a lost of control of his investment dollars There may be restrictions on when and how an investor sells/redeems his mutual fund shares


READING A PROSPECTUS When you request information on a mutual fund, they usually send you a letter mentioning how great the fund is, the necessary forms you will have to fill out to invest in the fund, and a prospectus. You can usually just throw away the letter because it is often more of an advertisement than anything else. But you should definitely read the prospectus because it has all the information you need about the mutual fund. The prospectus is usually broken up into different sections so we'll go over what each section's purpose is and what you should look for in it. OBJECTIVE STATEMENT

Usually near the front of a prospectus is a small summary or statement that explains the mutual fund. This short section tells what the goals of the mutual fund are and how it plans to reach these goals. The objective statement is really important in choosing your fund. When you choose a fund, it is important to choose one based on your investment objective and risk tolerance. The objective statement should agree with how you want your money managed because, after all, it is your money. For example, if you wanted to reduce your exposure to risk and invest for the long-term, you wouldn't want to put your money in a fund that invests in technology stocks or other risky stocks. PERFORMANCE The performance section usually gives you information on how the mutual fund has performed. There is often a table that gives you the fund's performance over the last year, three years, five years, and sometimes ten years. The fund's performance usually helps you see how the fund might perform but you should not use this to decide if you are going to invest in it or not. Funds that do well one year don't always do well the next. It's often wise to compare the fund's performance with that of the index. If a fund consistently under performs the index by 5% or more, it may not be a fund that you want to invest in for the long-term because that difference can mean the difference of retiring with Rs.200, 000 and retiring with Rs.1.5 million. Usually in the performance section, there is a small part where they show how a Rs.10, 000 investment would perform over time. This helps give you an idea of how your money would do if you invested in it but this number generally doesn't

include taxes and inflation so your portfolio would probably not return as much as the prospectus says.

FEES AND EXPENSES Like most things in life, a mutual fund doesn't operate for free. It costs a mutual fund family a lot of money to manage everyone's money so they put in some little fees that the investors pay in order to make up for the fund's expenses. One fee that you will come across is a management fee, which all funds charge. Mutual funds charge this fee so that the fund can be run. The money collected from the shareholders from this fee is used to pay for the expenses incurred from buying and selling large amounts of shares in stocks. This fee usually ranges from about 0.5% up to over 2%. Another fee that you're likely to encounter is a 12b-1 fee. The money collected from charging this fee is usually used for marketing and advertising the fund. This fee usually ranges between 0.25-0.75%. However, not all funds charge a 12b-1 fee. One fee that is a little less common but still exists in many funds is a deferred sales load. Frequent buying and selling of shares in a mutual fund costs the mutual fund money so they created a deferred sales charge to discourage this activity. This fee sometimes disappears after a certain period and can range from 0.5% up to 5%. When you are looking through a prospectus, be sure that you look over these fees because even if a mutual fund performs well, high expenses may limit its growth. The following are the steps, which will guide you to invest in Mutual Funds: -

Step One - Identify your Investment needs Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, and level of income and expenses among many other factors. Therefore, the first step is to assess your needs. You can begin by defining your investment objectives and needs, which could be regular income, buying a home or finance a wedding or educate your children or a combination of all these needs, the quantum of risk you are willing to take and your cash flow requirements. Step Two - Choose the right Mutual Fund The important thing is to choose the right mutual fund scheme, which suits your requirements. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are the track record of the performance of the fund over the last few years in relation to the appropriate yardstick and similar funds in the same category. Other factors could be the portfolio allocation, the dividend yield and the degree of transparency as reflected in the frequency and quality of their communications.

Step Three - Select the ideal mix of Schemes Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific

goals. Step Four - Invest regularly The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and do investors all over the world follow a disciplined investment strategy. You can also avail the systematic investment plan facility offered by many open-end funds.

Step Five- Start early It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return. Step Six - The final step All you need to do now get the application forms of various mutual fund schemes and start investing. You may reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor - whether starting a career or retiring, conservativor risk taking, growth oriented or income seeking.

Defining Mutual Fund Risk

Different Mutual Fund categories as previously defined have inherently different risk characteristics and should not be compared side by side. A bond fund with below-average risk, e.i. should not be compared to a stock fund with below average risk. Even though both funds have low risk for their respective categories, stock funds overall have a higher risk/return than bond funds. Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability but have Yielded the lowest long-term return. Bound typically experience more short-term price swings, and in turn have generated higher longterm returns. However, stocks historically have been subject to the greatest short-term price fluctuations- and have provided the highest long-term returns. Investors looking for a fund which incorporates all asset classes may consider a balanced or hybrid Mutual Fund.

Mutual Funds face risks based on the investments they hold. i.e., a bond fund faces interest rate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are directly related to interest rates falling as interest rates fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-term bond fund.

Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at risk that its price will decline due to development in its industry. A stock fund that invests across many industries is more sheltered from

this risk defined as industry risk.

Safety of Mutual Funds

Any Mutual Fund is as safe or unsafe as the assets that it invests in. There are 2 basic categories of Mutual Fund with others being variations or mixtures of these. Firstly, there are those that invest purely in equity shares (called equity fund or Growth funds) and Secondly, there are those that invest purely in bonds, debentures and other interest bearing instrument called income or debt funds. The NAV of growth funds fluctuates in line with the fluctuation of the shares held by them. They can also witness face substantial Erosion in value, which could be permanent in some cases. On the other hand, price of debt instruments fluctuate to a much lesser degree and an income fund is extremely unlikely to face erosion in value especially of the permanent kind.

Most Mutual Funds have qualified and experienced personnel, who understand the risks of investing. But, nobody is immune from making mistakes. However, funds diversify the investment portfolio substantially so that default in any single investment will not affect the overall performance of a fund in a significant manner. In the event of default of a part of the portfolio, an income fund is extremely unlikely to face erosion in face value.

Generally, Mutual Funds are not guaranteed by anybody. However, in the Indian

context, some of the Mutual Funds have floated guaranteed or assured return schemes which guarantee a certain annual return or guarantee a buyback at a specified price after some time. Examples of these include funds floated by the UTI , SBI Mutual Fund, LIC Mutual Fund ect.

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. 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. The flow chart below describes broadly the working of a mutual fund:

In the above graph shows how Mutual Fund works and how investor earns money by investing in the Mutual fund. Investors put their saving as an investment in Mutual Fund. The Fund manager who is a person who takes the decisions where the money should be invested in securities according to the schemes objective. Securities include Equities, Debentures, Govt. Securities, Bonds, and commercial paper etc. These securities generates returns to tha fund manager. The fund manager passes back return to the investor.

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the per unit.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be

derivatives; or they may be private investments in unregistered financial

instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus. The price per share, or NAV (net asset value), is calculated by dividing the fund's assets minus liabilities by the number of shares outstanding. This is usually calculated at the end of every trading day. The most important part of the calculation is the valuation of the assets owned by the fund. The NAV is simply the net value of assets divided by the no. of units outstanding. The detailed methodology for the calculation of the asset value is given below :-

Asset value = Sum of market value of shares + Liquid assets + Dividends

Eligibility for investing Mutual Fund in India

Mutual Funds have been emerging as a big financial intermediary in India. In a vast country like India it is a challenge to market these funds. Fund distributors are a very important link between the fund management industry and the investors. However, it is equally essential to know who can invest in Mutual Funds in India. Mutual Funds in India are open to investment for :-

A) Residents Including :1. Residents Indian Individuals 2. Indian Companies 3. Indian Trusts 4. Banks 5. Non-Banking Finance Companies 6. Insurance Companies 7. Provident Funds B) Non Residents including :1. Non-residents Indians 2. Other Corporate Bodies (OCBs)

C) Foreign Entities :-

1. Foreign Institutional Investors (FIIs) registered with SEBI

Foreign citizens and other foreign entities are not allowed to invest in Mutual Funds in India.

How is Mutual Fund Structured?

A mutual fund is set up as a trust or trustee company and may be sponsored by individuals or corporate. SEBI has prescribed the duties and responsibilities of the trustees/board of directors of the trustee company, which includes appointing an Asset Management Company (AMC) to manage the assets of the various schemes floated by it. The assets of the various schemes are held in custody of a SEBI approved custodian and all purchases/sales of securities by the AMC are routed through the custodian. All these entities - the fund, AMC, custodian etc. are governed by SEBI (Mutual Funds) Regulations and each of them have separate internal and external auditors, in addition to special SEBI inspections, to ensure that they work in line with SEBI Regulations and in the best interest of investors.

Organization Legal Structure of Mutual Fund

There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:

The Fund Sponsor :

Sponsor is defined under SEBI regulations as any person who acting alone or in combination with another body corporate establishes a mutual fund. The sponsor of a fund is akin to the promote of a company as he gets the fund registered with SEBI. The sponsor will form a Trust and appoint a board of Trustees. The sponsor will also generally appoint an Asset Management Company as fund managers. The sponsor either directly or acting through the Trustees, will also appoint a custodian to hold the fund assets. All these appointments are made in accordance with SEBI regulations.

As per the existing SEBI regulations, for a person to qualify as a sponsor, he must contribute as least 40% of the net worth of the AMC and possess a sound financial track record over five year prior to registration.

Some of the AMCs operating currently are :Name of the AMC Nature of ownership Private foreign Private Indian Banks

Alliance Capital Asset Management (I) Private Ltd. Birla Sun Life Asset Management Company Ltd. Bank of Baroda Asset Management Company Ltd. Bank of India Asset Management Company Ltd. Canbank Investment Management Services Ltd. Cholamandalam Cazenove Asset Management Company Ltd. Dundee Asset Management Company Ltd. DSP Merrill Lynch Asset Management Company Ltd. Escorts Asset Management Ltd.



Private foreign Private foreign Private foreign Private Indian Private Indian

First India Asset Management Ltd.

GIC Asset Management Company Ltd. IDBI Investment Management Company Ltd. IND fund Management Ltd. ING Investment Asset Management Company Private Ltd. J M Capital Management Ltd.

Institutions Institutions

Banks Private foreign Private Indian Private Indian Private Indian Private Indian Institutions

Jardine Fleming (I) Asset Management Company Ltd. Kotak Mahindra Asset Management Company Ltd. Kothari pioneer Asset Management Company Ltd. Jeevan Bima Sahayog Asset Management Company Ltd. Morgan Stanley Asset Management Company Private Ltd. Punjab National Bank Asset Management Com. Ltd. Reliance Capital Asset Management Com. Ltd.

Private foreign Banks

Private Indian

State Bank of India Funds Management Banks Ltd. Shriram Asset Management Com. Ltd. Private

Indian Tata Asset Management Company Ltd. Private Indian

Credit Capital Asset Management Com. Private Ltd. Indian Unit Trust of India Zurich Asset Management Company Ltd. Templeton Asset Management (India) private Ltd. Institutions Private foreign Private foreign

A Summary of how the picture has changed from the past to the present :-

Mutual Funds

In the Past

At present

Scheme Structure

Close-end schemes with ling locking periods.

Open-end schemes with bank like convenience. Debt products and equity

Investment focus Equity products.

Range of products

Equity products.

Full range of income, growth, balanced and liquid funds.

Investor expectations

Little understaning of the concept, unreasonable expectations of returns. Too much attention to returns preferred equity schemes to debt ones.

Better understanding of the concept. Values transparency and service. Convenience and tax efficiency are the key decision drivers.

Selling methods

Vast networks of untrained sub brokers and agents.

Direct selling and reliance of fewer distributors who are more committed and knowledgeable. Entry of big names like banks and institutional networks.

Market competition

Many players but each offered similar products. Investors hardly bothered to check credentials.

Fewer players with good performance and service track record control bulk of the market. Investors are getting sensitive to issues of servicing transparency.


Large media Splashes with lots of type.

Low key and focused approach towards brand building.


AMCs charged high prices by fully passing on all expenses to investors.

Investors resistance to higher loads. No loads funds became the industry for debt funds.

Reason of poor performance of Mutual Fund in India (In past) :Most investors associate Mutual Funds with Master gain, Monthly Equity plans of SBI Mutual Fund, UTI and Canbank Mutual Fund and of course Morgan Stanley Growth Fund. This is so because these funds truly had participation from masses, with a fund like Morgan Stanley having more than 1 million investors. Investors feel that 5 year; Morgan Stanley Growth Fund units still trade below the original IPO price of Rs. 10.

It is incorrect to think that all Mutual Funds have performed poorly. If looks at some income funds, they have come with reasonable returns. It is only the performance of equity funds, which has been poor. Their poor performance has been amplified by the closed end discounts i.e. units of these funds quoting at sharp discounts to their NAV resulting in an even poorer return to the investor.

Most Mutual Fund managers took some time to realize the changed circumstance where in the open economy ushered in by the liberalization took the full impact of the global deflation in commodity prices. This problem was compounded further by the Asian crisis after which cheap imports from Asia caused severe

pressure on profits.

To add to this, most funds had invested some part of their portfolio in medium sized Growth companies. Many of these companies have performed even worse than bigger ones and quite a few have been share prices dip more than 90 % from their 1994 high. More important, funds could not sell these shares because of complete lack of liquidity with, at best, few hundred shares being traded every day.

One more issues is that the fund managers in many funds were not professionally qualified and experienced. This is especially true of some of the funds floated by nationalized banks. Some of these individuals were transferred from the parent organization and did not really know much about investment management.

Lastly, investors would do well to have a look at the investments, which they made on their own. In most cases, they would have done much worse than the Mutual Funds.

Markets Shares in Total Fund Size

AMC Market share (%)



Private Sector


Public Sector & Financial Institution

UTI MF Pru ICICI MF Frankin Templet on Investment HDFC MF Birla Sunlife MF

4% 4% 12% 7% 4% 5% 8% 12% 18% 14% 12%

Standard chartered MF Reliance Capital MF SBI MF DSP ML MF Kotak Mahindra MF

Interpretation :Until 1986, Bank was sole player in Mutual Fund sector, but in present situation thighs are some what different. Now Mutual Fund sector is open for private and foreign players, so that market share of Bank has come down to 70%. But still it enjoys the leader position in the Mutual Fund sector. While other players like private sector, public sector, & Financial Institutes are still new for Mutual Fund.

Comparison of Investment Product

Investors tend to constantly compare one form of investment with another. However, such comparisons ought to be done carefully, comparing only options that are comparable.

Until 1980s, Indian investors had bank deposits as virtually the only investment options. The only Mutual Fund scheme was perceived by investors and managed as a fixed return investment, as safe as banks, and paying out comparable though slightly higher dividends. Later, the investors were introduced to direct investing on the stock markets including direct purchases of capital market securities in the primary markets. This form of high-risk investment was not perceived as such because of the under-pricing of primary share issues.

Only after the crises of 1992 and the introduction of free market pricing of shares, the virtual guarantee of secondary market prices being higher than issue prices ended. Faced with the risks of direct investing, the investors are now turning to indirect investing through Mutual Funds that provide the benefits of professional management & lower risk through diversification.

Two types of comparison of investment product :1) Comparison of Nature of investment 2) Comparison by Current Performance

1) Comparison of Nature of investment :Investors certainly look for the best returns on different options. However, to determine which an option is better, the comparison should also be made in terms of other benefits that the investors ought to look for in any investment. Besides returns other potential benefits of any investment also include the safety of the capital, the risk or the stability of returns, the liquidity of access to the funds when needed, and the convenience with which the investment can be managed.

The table below compares the investment options discussed in the previous section under the broad heads viz. return, safety, volatility, liquidity and convenience.






Equity FI Bonds Corporate Debentures Company Fixed Deposits Bank Deposits PPF Life Insurance Gold Real Estate

High Moderate Moderate

Low High

High Moderate



Moderate High Low Low

Moderate Moderate











Moderate Low

High High

Low Low

Moderate High Low Moderate

Moderate High



Moderate Low Low High Low High

Moderate High High Moderate

Mutual Funds High

Although the table provides a qualitative evaluation of various financial products, the comparison serves as a useful guide toward determining the best options.

It is clear from the above that equity investing in general has good potential in terms of return liquidity and convenience. However, as discussed in the previous section, individual stocks can give varied performance, one stock being more liquid than another or one stock giving lower return that another. For this reason, equity investing is fraught with risk and is not ideal for every individual investor. It is recommended only for investors who are willing to invest the time required for research in stock selection and possess the capacity to bear the inherent risk.

Bonds issued by institutions are an attractive option, particularly now with the liquidity that accompanies their listing on stock exchanges. Bonds are a stable option in terms of fixed returns, and are recommended for the risk-averse investors. However, bonds can lose value when general interest rates go up. Bonds are also subject to credit risk of default by the borrower. In indicated by the credit rating assigned to the bonds. In the absence of credit rating, it is extremely difficult for the investors to decide on the quality of the bonds or debentures. The secondary market in corporate bonds in India is also very thin, leading to lack of liquidity for the investors who wish to sell.

Company fixed deposits fall short on several counts and recommended only if the issuing company and the deposits on offer are rated highly by credit rating


PPF combines stability with a respectable return. Its tax-exempt status makes it an attractive mechanism for the small investor to build his saving portfolio. However, the lock in period involved in PPF means that the investors loses out in terms of liquidity supported investment, PPF scores very high on safety, compared even to bank deposits.

Insurance could become a serious investment vehicle once the insurance market in India is opened To private players. In todays scenario, the opportunity cost in terms of return is too high for insurance to be compared on even terms with the other options.

2) comparison by Current Performance : Besides the inherent advantages of investing through Mutual Funds, recent tax amendments have also helped to enhance the attractiveness of Mutual Funds. Dividends distributed by Mutual Funds are exempt from tax in the hands of the investor. Investments in recognized Mutual Funds also quality for tax rebate under section 88 and as approved investment under section 54EA/EB.

Comparison among different investment options are not valid for all times

as the financial markets are now deregulated and dynamic, causing frequent changes in comparative returns from time to time. Each year, the Mutual Funds and other options may give different returns. I.e. When the banks increase or reduce the deposit interest rates, the Mutual Funds performance may look better or worse. If the government changes the PPF interest rate, again there will be an impact on the comparative status of different options. Similarly, the individual tax payers situation may change, whereby he may pay higher or lower tax on his income. That will make a difference in his after-tax return on different options.

The Investor Perspective: Funds Vs. Other Products

Investment objective Equity Capital Appreciation Fl Bonds Income Low High

Risk Tolerance

Investment Horizon Long Term

Medium to long term

Corporate Debentures



The same

Company Fixed Deposits Bank Deposits


The Same



Generally Low

Flexible all terms Long Term Long Term Long Term Flexible all Terms

PPF Gold Real Estate Mutual Funds



Inflation Hedge Low Inflation Hedge Low Capital , Growth, Income H-M-Low

Interpretation :-