Unit 4
Unit 4
Unit 4
BBA, Semester 5
January 2022
1
REVIEW
• SEBI: Importance and Organization
• SEBI: Functions, Powers, Rights and Responsibilities
• Role of SEBI in marketing of Securities and Protection of Investor Interest
OVERVIEW
• Concept of Mutual Funds
• Growth of Mutual Funds in India
• Mutual Fund Schemes
• Money Market Mutual Funds
• Evaluation of the performance of Mutual Funds
• Functioning of Mutual Funds in India.
2
CONCEPT OF MUTUAL FUND
A mutual fund is a type of financial vehicle made up of a pool of money collected from
many investors to invest in securities like stocks, bonds, money market instruments, and
other assets. Mutual funds are operated by professional money managers, who allocate the
fund's assets and attempt to produce capital gains or income for the fund's investors. A
mutual fund's portfolio is structured and maintained to match the investment objectives
stated in its prospectus. Mutual funds give small or individual investors access to
professionally managed portfolios of equities, bonds, and other securities. Each
shareholder, therefore, participates proportionally in the gains or losses of the fund.
Investors typically earn a return from a mutual fund in three ways:
1. Income is earned from dividends on stocks and interest on bonds held in the fund's
portfolio. A fund pays out nearly all of the income it receives over the year to fund
owners in the form of a distribution. Funds often give investors a choice either to receive
a check for distributions or to reinvest the earnings and get more shares.
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 in the
market.
NATURE OF MUTUAL FUNDS
A mutual fund is a type of financial vehicle made up of a pool of money collected from
many investors to invest in securities like stocks, bonds, money market instruments, and
other assets. Nature of mutual funds can be described as follows:
a) A kind of trust
b) Accepting savings and investing wisely
c) Reduce the risks for individual investors
d) MFs can be open ended or closed ended
e) Four parties are necessary for it – Sponsors, Board of Trustees, AMC, Custodian and
Unit Holders
FUNCTIONS OF MUTUAL FUNDS
• Enabling economic units to exercise their time performance
• Separation, diversification and reduction of risk
• Transformation of financial claims to suit preferences of both savers and borrowers
• Enhancing liquidity of financial claims through securities trading
• Portfolio management
• Offering savers alternate forms of deposits according to their liquidity preferences
IMPORTANCE OF MUTUAL FUNDS
Convenience:
For investors, one of the most prominent benefits that mutual funds provide is
convenience. By investing in a single fund, they can gain access to a broad range of the
financial market. A typical diversified equity fund can spread out the money across tens
of stocks with some portion invested in fixed income securities as well.
Diversification:
Further, if an investor wants to focus on one segment of the market, for instance,
large-cap stocks, funds focused on this segment can spread out the investment across
multiple large-cap stocks in just one transaction of purchasing the fund. If the investor
were to try to do that themselves, it would take a lot of effort, transaction cost, and
time to create an individual large-cap stock portfolio. The situation with investing in
bonds is even more difficult if one tries to do it individually rather than taking the fund
route.
Ease Of Investment:
Apart from this, mutual funds are easy to buy and sell. One can either engage the
services of a distributor or agent to transact in funds or do it over the internet
themselves. In the case of latter, the transaction amount is debited from or comes
directly to the bank account linked to the mutual fund account depending on whether
a fund has been bought or sold.
expense ratio of a mutual fund.
IMPORTANCE OF MUTUAL FUNDS
Spoilt For Choice:
This feature follows from the convenience aspect discussed above. Investors have several choices
when it comes to mutual funds. And given their investment objectives, funds provide access to a
wide range of financial instruments, sectors, and strategies.
Professional Management:
This is one of the factors, which is a key highlight of the importance of mutual funds. Due to lack
of expertise several investors don’t have the confidence in taking the financial market route to grow
their wealth. They feel they have limited or no capability to invest in stocks and bonds on their own
and do not have the time to keep tracking their investments even if they manage to invest on their
own. Mutual funds take care of this issue by providing the expertise of the fund manager and their
team of analysts, which perform the analysis of financial markets and instruments on a daily basis.
They charge a fee for their professional services, which are bundled into the expense ratio of a
mutual fund.
Liquidity
The most important benefit of investing in a Mutual Fund is that the investor can redeem the units
at any point in time. Unlike Fixed Deposits, Mutual Funds have flexible withdrawal but factors like
the pre-exit penalty and exit load should be taken into consideration.
Lower cost
In a Mutual Fund, funds are collected from many investors, and then the same is used to purchase
securities. These funds are however invested in assets which therefore helps one save on
transaction and other costs as compared to a single transaction. The savings are passed on to the
investors as lower costs of investing in Mutual Funds. Besides, the Asset Management Services fee
cost is lowered and the same is divided between all the investors of the fund.
GROWTH OF MUTUAL FUNDS IN INDIA
First Phase - 1964-1987
Unit Trust of India (UTI) was established in 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 (Entry of Public Sector Funds)
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.
GROWTH OF MUTUAL FUNDS IN INDIA
Third Phase - 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 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 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.
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. The
Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other
mutual funds.
GROWTH OF MUTUAL FUNDS IN INDIA
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. 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, sponsored by SBI, PNB, BOB and LIC. It is registered with
SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI
which had in March 2000 more than Rs. 76,000 crores of assets under management and with the
setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with
recent mergers taking place among different private sector funds, the mutual fund industry has
entered its current phase of consolidation and growth.
MF SCHEMES: BASIS OF OPERATIONS
1. Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a
continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy
and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key
feature of open-end schemes is liquidity.
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. In order to provide an exit route to the
investors, some close-ended funds give an option of selling back the units to the mutual fund
through periodic repurchase at NAV related prices. 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.
MF SCHEMES: BASIS OF OBJECTIVES
https://cleartax.in/s/mutual-fund-performance-evaluation
FUNCTIONING OF MUTUAL FUNDS IN INDIA
1. Asset Management Company
AMC is appointed by trustees for managing fund schemes and corpus. AMC functions under the
supervision of its own board of directors and also under directions of SEBI.
1. Custodian and Depositories
Custodians are appointed by trustees for safekeeping of physical securities while demat holdings are
held in depositary through depositary participant. Custodiams and Depositaries work under the
instructions of AMC.
1. Registrar and Transfer Agents
Responsible for issuing and redeeming units of mutual fund as well as providing other related
services like transfer of documents and updating investor records.