Mutual Funds

PRESENTED BY:

PUJIL KHANNA

AVINASH JESWANI

ROBIN CHOUDHARY

Disclaimer• WE - no expert

• Not Comprehensive

• Majority from websites books and some practical experience

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 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.

History

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases:

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

of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. 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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). 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). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase – 1993-2003 In 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.

 The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

Fourth Phase – since 2003

In February 2003, following the repeal of the Unit Trust of Act 1963 UTI was bifurcated into two separate entities. 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.  

Organization of a Mutual Fund

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Regulations• Governed by SEBI (Mutual Fund) Regulation 1996

– All MFs registered with it, constituted as trusts ( under Indian Trusts Act, 1882)

• Bank operated MFs supervised by RBI too

• AMC registered as Companies registered under Companies Act, 1956

• SEBI- Very detailed guidelines for disclosures in offer document, offer period, investment guidelines etc.– NAV to be declared everyday for open-ended, every week

for closed ended– Disclose on website, AMFI, newspapers– Half-yearly results, annual reports– Select Benchmark depending on scheme and compare

Types of Mutual Fund • By Structure

– Open-Ended – anytime enter/exit– Close-Ended Schemes – listed on exchange, redemption after period of

scheme is over.

• By Investment Objective– Equity (Growth) – only in Stocks – Long Term (3 years or more)– Debt (Income) – only in Fixed Income Securities (3-10 months)– Liquid/Money Market (including gilt) – Short-term Money Market

(Govt.)– Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)

• Other Schemes– Tax Saving Schemes– Special Schemes

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Risks• Historical analysis

– Return is remembered, Risk forgotten

• Risk = Potential for Harm

• Market Risk

• Non-Market Risk

• Credit Rate Risk

• MF Risk = Volatility (fluctuation of NAV)– Standard Deviation– Websites give star rating ( basis = risk-adjusted return)

Investing Checklist • Draw up your asset allocation

– Financial goals & Time frame (Are you investing for retirement? A child’s education? Or for current income? )

– Risk Taking Capacity

• Identify funds that fall into your Buy List

• Obtain and read the offer documents

• Match your objectives – In terms of equity share and bond weightings, downside risk

protection, tax benefits offered, dividend payout policy, sector focus

• Check out past performance – Performance of various funds with similar objectives for at least 3-5

years (managed well and provides consistent returns)

Checklist Continued…• Think hard about investing in sector funds

– For relatively aggressive investors– Close touch with developments in sector, review portfolio regularly

• Look for `load' costs– Management fees, annual expenses of the fund and sales loads

• Does the fund change fund managers often?

• Look for size and credentials– Asset size less than Rs. 25 Crores

• Diversify, but not too much

• Invest regularly, choose the S-I-P – MF- an integral part of your savings and wealth-building plan.

Buying Mutual Funds• Contacting the Asset Management Company directly

– Web Site– Request for agent

• Agents/Brokers– Locate one on AMFI site

• Financial planners– Bajaj Capital etc.

• Insurance agents• Banks

– Net-Banking – Phone-Banking – ATMs

• Online Trading Account– ICICI Direct– Motilal Oswal, Indiabulls- Send agents

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Warning Signals• Fund's management changes

• Performance slips compared to similar funds.

• Fund's expense ratios climb

• Beta, a technical measure of risk, also climbs.

• Independent rating services reduce their ratings of the fund.

• It merges into another fund.

• Change in management style or a change in the objective of the fund.

ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a Mutual Fund are: Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

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