Introduction to Capital & Money Market

ASSIGNMENT 2

SESSION: 2023-24

SUBMITTED BY:

MOHAMMAD ARSALAN SHEIKH

ENROLLMENT No – 2000100276
COURSE - BBA
GROUP – B
YEAR/SEM – 3rd YR 6th SEMESTER

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Mutual funds -History

Origins in Europe: The precursor to modern mutual funds can be traced back to Europe in
the 18th and 19th centuries. In the early 1770s, the Dutch merchant Adriaan van Ketwich
established the first known investment trust called "Eendragt Maakt Magt" (Unity Creates
Strength). It allowed small investors to pool their money and invest in a diversified
portfolio of securities.

Early Investment Trusts: In the 19th century, investment trusts started emerging in
various countries. In 1868, the Foreign & Colonial Government Trust was launched in the
United Kingdom. It was the first investment trust to invest in a diversified portfolio of
stocks and bonds. The concept of investment trusts spread to other European countries,
including France, Germany, and Switzerland.

Development in the United States: The modern mutual fund industry as we know it today
originated in the United States. In 1924, Massachusetts Investors Trust (MIT) was
established by a Boston-based investment firm, offering the first open-ended mutual fund
in the U.S. The fund was managed by MFS Investment Management and allowed
investors to purchase or redeem shares at the fund's net asset value (NAV). This structure
laid the foundation for the open-ended mutual funds prevalent today.

Global Expansion: The concept of mutual funds expanded globally, with various
countries establishing their own mutual fund industries. Each country has its regulatory
framework and market dynamics, but the basic principle of pooling funds from multiple
investors and investing in a diversified portfolio remains the same.

Mutual funds –Objective

Diversification of Assets

Investors are often advised that they shouldn't "put all their eggs in one basket." Investors
who have too high of a percentage of their assets in one or two stocks can be severely
affected if one of the companies goes belly-up. Most financial experts say investors
should have at least 15 stocks in their portfolios. It takes a lot of time and effort to keep
up with that many companies. Conversely, mutual funds hold a number of stocks, which
gives investors instant diversification and protects them from a sharp decline in any one
holding.

Exploring Growth Funds

Some mutual fund investors are looking for rapid growth in the value of their funds.
Stocks have historically offered the best long-term returns of any asset class, though it
can be an up-and-down ride. Stock funds that are labeled "growth" typically invest in
companies with bright prospects, while "value" funds target stocks that seem inexpensive

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 compared with the company's earnings.

When discussing mutual fund investments, it is important to note the distinction between
closed-end and open-end funds. Whereas there is no limit to the number of open-end fund
shares that can be purchased or distributed, closed-end funds feature a limited number of
shares. Open-end funds are also not traded on the open market, whereas closed-end funds
are traded through standard markets.

Evaluating the Benefits of ETFs

Exchange-traded funds, or ETFs, have become attractive investment opportunities for

many individuals due to the numerous benefits they offer. Thanks to a highly diverse
grouping of assets, ETFs are considered a relatively stable form of investment, and are
linked to every major index today. Compared to mutual funds, ETFs typically feature a
lower expense ratio, making them more affordable for investors.

SEBI (Prohibition of Insider Trading) Regulations, 2015: These regulations aim to

prevent insider trading, which involves trading in securities based on unpublished price-
sensitive information. The regulations prohibit insider trading, mandate disclosures of
trades by insiders, and establish strict penalties for violations.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: These

regulations apply to companies listed on stock exchanges and prescribe disclosure and
compliance norms. They cover areas such as corporate governance, financial reporting,
board composition, related-party transactions, and shareholder rights, with the objective
of enhancing transparency and investor confidence.

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: These

regulations govern the issuance and listing of securities in the primary market. They lay
down the framework for public offerings, rights issues, preferential allotments, and other
capital raising activities. The regulations include provisions related to disclosures,
pricing, allocation, and post-issue obligations of issuers.

SEBI (Mutual Funds) Regulations, 1996: These regulations govern the functioning of
mutual funds in India. They cover areas such as the registration and operation of mutual
funds, investment restrictions, valuation of assets, disclosure requirements, and fund
management. The regulations aim to ensure transparency, investor protection, and proper
governance of mutual funds.

Factors influencing mutual fund investment

Fund House’s Experience

As an investor, you are responsible for checking the competency of your choice of fund

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house. This is because the competency of a fund manager and his/her team is a
major factor that affects a mutual fund’s performance.

Most investors want to invest in mutual funds because they either don’t know much about
the stock market or do not have any time to monitor their investments constantly. That is
why they rely on the fund manager to look after their money for as long as they are
invested.

The fund manager is responsible for actively managing the fund’s portfolio after thorough
research and analysis. The more experienced a fund management team is, the more
competent they will be at making investment decisions. So, try to choose a mutual fund
whose fund managers have a proven track record of managing investors’ money
efficiently.

Expense Ratio
The expense ratio is the amount of money charged annually by a fund house for
managing a mutual fund. This includes the fund manager’s remuneration for managing
the investors’ funds on their behalf. 

Other than their remuneration, the expense ratio also consists of any charges that the fund
house has to pay to distributors in some cases. So, the higher the expense ratio of your
fund, the lower will be your net returns. 
This is why SEBI had created a guideline where any fund house in India cannot charge
expense ratio more than 2.25%. So, choose a mutual fund with a lower expense ratio to
get better returns.
 
Economic Changes 
Economic changes refer to any social or political reason that can bring fluctuations in the
economic outlook. Moreover, if you invest in a sector specific mutual fund and the
government makes policy changes specific to that sector, then there is a high chance that
your fund’s performance may get affected.
For example, if the government brings any change to the IT sector in India, then the stock
prices of IT companies will fluctuate. The impact of such policies can be both negative
and positive. Similarly, if the economy goes through a recession, many people tend to sell
their fund units because they do not want to incur losses. 
This is why you need to keep a close eye on the economic changes that are taking place
in the country.
 
Fund Cash Flows
Fund cash flow refers to the influx or outgo of cash for a particular mutual fund. For
instance, there is Fund X in the market, and many investors start investing their money in
that fund. Now, the fund manager will  have the financial cushion to make better
investment decisions. 

As a result, if the cash flow for a particular mutual fund is positive, then you can try
investing in the fund because it will potentially give you better returns. However, in

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 another scenario, when too many investors start to pull out from a particular mutual fund,
the fund house will be forced to sell off these securities, resulting in the fund’s poor
performance.

Assets Under Management (AUM)

AUM is the size of the mutual fund or the total market value of the investments  that
particular mutual fund handles. The AUM is one of the factors that can affect a mutual
fund’s performance. Therefore, a good fund management team will always try to keep the
size of the fund large enough until they can manage it without any hassle. 
If it is too large, the fund becomes hard to manage as the manager has to make large
investments; if it is too small, then the management team will not be able to diversify
their holdings properly. That is why the AUM should be well balanced to generate good
returns.

Benefits of mutual fund

Divisibility
The owner of a mutual fund can invest a regular round sum every month, say $100 or $200. That
gives the investor another tiny bite of many assets. A stock-picker, by contrast, might get one or
two shares of stock, with an odd number of dollars left over. Or the investor can save up for
many months to get one share of Amazon.

These periodic investments in a mutual fund also allow the investor to take advantage of the
benefits of dollar-cost averaging, a strategy that cushions a portfolio from the impact of price
volatility.

So, rather than waiting until you have enough money to buy higher-cost investments, you can get
in right away with a mutual fund. This choice provides an additional advantage: liquidity.

Liquidity
An investor who is hit with a financial emergency might have to sell out in a hurry. That can be
disastrous if the assets have taken a hit at the wrong moment. It tends to be less so in mutual
funds, which swing in value less wildly because of their diversification.

Watch out for any fees associated with selling, including back-end load fees, which are
percentages deducted from your total when you sell the fund. Also, note that mutual funds,
unlike stocks and exchange-traded funds, transact only once per day after the fund's net asset
value is calculated.

Professional Management
When you buy a mutual fund, you also are choosing a professional money manager. This
manager makes the decisions on how to invest your money, based on a good deal of research and
an overall strategy for making money. Only you can decide whether you are more comfortable
with that than with making the decisions on your own.

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The Bottom Line
If you decide to forego stock-picking and go with a mutual fund, you still have one last
investment decision to make, and that is which fund to buy. There are thousands of them out
there.

Read the prospectuses until you find one that matches your attitude toward risk-taking or risk-
avoidance. Read the fine print to understand what fees you will pay for investing in the fund, as
they vary widely.

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