Mutual Funds:Introductions
Mutual Fund is a type of fund which pools money from the different investors and invested according to the certain investment objectives.Mutual funds invest money in the different investment instruments like stocks,mony market instruments,bonds ect.The ownership of the fund in Mutual funds is joint or mutual and belong to the different investors who's money has invested.
Characteristics of Mutual Funds:
1.The owenership of Fund is in the hand of investors who pools there funds ,so it is joint or mutual.
2.Funds is beign manage by the professional investment managers and other service providers on the behalf of investors.
3.Funds pools by Mutual fund company is beign invested in portfolio of marketable investment like stocks,money market instruments ect.
4.The share of investors in Mutual fund is denominated by 'Units' whose value is called as Net assets Value(NAV) which is change every day according to the market movements.
5.The investment portfolio of different funds is beign made according to the different objectives of the funds,each funds have it's own objectives according to the customer demand.
6. In india Mutual fund is known as TRUST of different investors who are it's members.
7.Mutual Funds in india is known as financial intermediaries,which play a important role of financial inclusion in india.
Advantages of Mutual Fund:
1.Portfolio Diversification:Diversification means mixing of different investment in portfolio in order to manage risk.Fund manager invest fund polled from the investors into different sector's stocks.For example fund manager invest some fund in auto sector and remaining in FMCG sector because is auto sector went down the loss occured is managed by the some growth of FMCG sector.
2.Professional Management:Other benifit to invest in Mutual Fund is to get your investment manage by Proffesional Fund managers who have an expertise in Fundamental and Technical analysis.Fund manager research each and every stock before taking investment decision.Investors can also choose fund manager before investing in mutual funds.Every Funds have it's own fund managers,which depend upon it's expertise in the sector he/she is working.
3.Reduction in Risk:Investing in stock market through Mutual fund is less risky as compare to invest directly because mutual fund is manged by proffesional fund managers.Also because of Portfolio diversification reduce risk in Mutual funds.
4.Liquidity:Investment through Mutual fund is more liquid ,any investor can enter and exit quikly.There is no lock in period in Mutual funds.
5.Convenience and Flexibility:Investing in Mutual fund is flexible,any investor can easly switch into another secheme if he/se want.Also invetment is also very convenience in Mutual fund. By using online terminals any investors can easly invest in any scheme by one click.
6.Safety:Investing in Mutual fund is safe as compare to invest in any traditional investment avenues like lending in unorganized market.SEBI(Security Exchange Bord Of India) regulate Mutual Fund industry through proper guidelines made for Mutual funds.No Mutual Fund companies do illegal activities or divert fund pooled from investors into another activities apart from funds objectives.
7.Rupee cost averaging: Investing in Mutual fund regularly through SIP(Systematic Investment Plan) investor get rupee cost averaging.For example, if investor invest every month 1000 rupee every month through SIP he get an opportunity to buy more units when NAV decreases in any perticular month.This type of investment reduce the risk level for the investors.
Disadvantages of Mutual Funds:
1.Similar Objectives:Many Schemes in Mutual Funds have similar obectives,which create difficulty for the investors to select schemes.
2. Fluctuating Returns:Mutual funds schemes consists of different types of stocks which are traded in stock market.So the returns of Mutual funds schemes fluctuate as the market fluctuate,which is not give guarantees returns like Bonds,FD,Debentures ect.
3.Over diversification: Although diversification is a key in Mutual fund industry but many a times investor over diversify there portfolio by investing in many similar schemes,which does not reducte much risk but create unnecesry burden on portfolio.
4.Cost:Mutual fund carry cost of running schemes and fees for to the Fund Managers for managing funds,Also there is Entry load and exit load in Mutual funds which is ranging from 1-3%.
5.Misleading Advertisements:Many a times Mutual fund mislead investors by showing manipulated growth figures in there Advertisements,which sometimes suffers with a heavy loses to the investors wealth.
7.Rupee cost averaging: Investing in Mutual fund regularly through SIP(Systematic Investment Plan) investor get rupee cost averaging.For example, if investor invest every month 1000 rupee every month through SIP he get an opportunity to buy more units when NAV decreases in any perticular month.This type of investment reduce the risk level for the investors.
Disadvantages of Mutual Funds:
1.Similar Objectives:Many Schemes in Mutual Funds have similar obectives,which create difficulty for the investors to select schemes.
2. Fluctuating Returns:Mutual funds schemes consists of different types of stocks which are traded in stock market.So the returns of Mutual funds schemes fluctuate as the market fluctuate,which is not give guarantees returns like Bonds,FD,Debentures ect.
3.Over diversification: Although diversification is a key in Mutual fund industry but many a times investor over diversify there portfolio by investing in many similar schemes,which does not reducte much risk but create unnecesry burden on portfolio.
4.Cost:Mutual fund carry cost of running schemes and fees for to the Fund Managers for managing funds,Also there is Entry load and exit load in Mutual funds which is ranging from 1-3%.
5.Misleading Advertisements:Many a times Mutual fund mislead investors by showing manipulated growth figures in there Advertisements,which sometimes suffers with a heavy loses to the investors wealth.
EVALUATION OF MUTUAL FUND IN INDIA
1.Phase1:Growth of UTI(1964-87)
UTI was establish by the Act of Parliament in 1963 as a sole player in the Industry.First product lunch by UTI was a Unit scheme 1964.It also create popular product such as ULIP in 1971,MIP's,Children plans in 1986,Offshore funds ect.
Also,UTI lunch it's first Diversified equity scheme calles 'Mastershare' in 1987.In 1986,UTI lunch it's first offshore fund called 'India Fund'.
2.Phase2:Entry of Public Sector Fund(1987-1993)
In 1987,Public sector banks and Funancial Institutions got permission to set up Mutual Funds.SBI mutual fund was the first non UTI Mutual fund set up in 1987.This was followed by Can Bank Mutual fund,LIC Mutual fund,Indian Bank Mutual fund,GIC Mutual fund and PNB Mutual fund.In 1992,SEBI got regulatory power to regulate Mutual fund industry.By the year 1993,Mutual fund industry opened for private players.
3.Phase3:Emergence of Private funds(1993-1996)
In this era lots of private sector mutual funds were emerge,giving a choice to investors to choose from the wide variety of funds.Also,in 1993 first Mutual Fund Regulator is came into picture under SEBI which regulate entire industry except UTI.The first private Mutual fund was Kothari Pioneer(now merged with FranklinTempleton) which is registered in july 1994.
4.Phase4:Growth and SEBI Regulation(1996-1999)
In this Phase new SEBI Regulation came into picture,which helps in increasing the market size of Mutual fund industry.During this period Banks Mutual funds were recast as per SEBI Guidelines.Also,UTI came voluntarly under SEBI Regulation.In 1999,Dividend made tax free.
During this phase SEBI and AMFI launch investor awareness programe.Mutual fund assets during Mid 2002 cross aprox.100000 crore.
5.Phase5:Emergence of Large and Uniform industry(1999-2004)
During this phase Mutual fund industry in india became large and uniform,with the repletion of UTI act in 2003.Mutual fund industry grow rapidly during this phase,which helps private Mutual fund to grow there corpus.AUM(Assets Under Management) by the end of 2005 cross aprox.150000 crore.Tax break is offered durin this phase helps industry to crate arbitrage opportunity.During this period Bond funds and liquid funds became popular and registred high growth.
6.Phase6:Consolidation and Growth(From2004 onwards)
During this phase,merger and acquisition takes places like Allince Mutual fund acquired by Birla sunlife Mutual fund.Also,consolidation of different similar schemes within the Funds thake place.
Mutual Fund Classifications:
1.Open-Ended Fund:It is a types of Fund , which is bought and sell by investor any time at NAV(Net asset Value) related price.It is very conviniant vehical of investment for the investors who buy fund and sell it back to the AMC any time.This fund is open through out the year to subscribe the schemes by the investors.
Investors can recieve the account statement of there holdings.The number of outstanding unit and unit capital goes up and down every day.Also,corpus of this scheme change every day.
2.Close-Ended fund: It is a type of Fund,which is bought by the investors first time through IPO(Initial Public Offer)after that it is closed for futher sales is closed.After few day this type of schemes is listed on stock exchange for further buying and selling between investor to investors.Price at which unit sold and redeem depend on market price,which is linked to NAV.
Number of unit of close ended fund remail unchange.Also,unit capital is fixed because of one time sale.
3.Load fund:It is a type of fund which carry load,which is one time initial issue expences including brokers,agents,Distributor commision,advertisement and marketing expenses.Fund which charge front end(entry load) or back end load(exit load) are called Load funds.
4. No Load fund: Fund which does not charge front end load and back end load is calles no load fund.
5.Tax exempt fund:Thses are a funds which invest in the tax exempted security like infrastructure bonds.After 1991,dividend recieve by the mutual fund is tax free in the hand of investors.But all fund other than Open ended fund is liable to pay Dividend distribution tax.
6.No tax exempted funds:These are the funds which pay taxes on dividend recieve like the Close ended schemes pay dividend distirbution tax.After 2005,repurchase transaction of equity oriented schemes subjected to pay Security transaction tax.
TYPES OF FUNDS:On the Basis of Investment Objectives
1.Equity Funds:There is diffrent type sof equity funds
1.1 Equity Funds- These funds invest money into equity related investment instruments like shares of public ltd.companies.Main objectives of these funds is capital appreciation by investing in equities.It carry high risk and recommended to invest for the period of 5 years.it carry no entry load but carry exit load of 0.5% till 6 month.
1.1.1 Large cap Funds:These are the funds invest into the large cap stocks.
1.1.2 Mid cap Funds:These funds invest into the mid cap stocks.
1.1.3 Small cap Funds:These funds invest into the small cap stocks.
1.2 Index Funds:These funds invest money into the equities of any index like SENSEX,Nifty ect.It invest in each and every stock of any particular index.
1.3 Sectors Funds:These funds invest in stocks of any particular sector like FMCG,Real estate,Banking ect.
1.4 Selct Sector Funds:These funds invest money into the multiple sectors like any funds invest in Banking,Pharma,Auto ect.
1.5 Dividend yield funds:These funds invest into the companies who distribute high dividend like Reliance industries.
1.6 International Equity funds:These funds invest in stock of the companies,which are listed in foreign countries like Nestle,Pepsi,Coca Cola ect.
1.7 Growth Funds:These funds invest in high growth companies.
1.8 Value Funds:These are the funds which invest into the stocks whose market values are fallen below thre intinsic value or book value.
2.Debt Funds:
2.1 Fixed Income Funds:These funds provide fixed income and capital appreciation by inbesting in government securities ,Corporate debentures,Call money market,Bank deposits ect.These funds carry credit risk and interest rate risk.
2.2 GILT Funds:These are the funds invest money only in Govenment securities.The risk averse investors are investing in these funds,where he/she don't wont to take risk.
3.Money market Funds:These funds invest money in money market instruments like T- Bills,Commercial papers ect for very short duration of times.It's objectives is to provide investors with high level of incomes from short term investments.These funds are very liquide,investors can liquidate funds within 24 hours.
4.Balance funds:These funds is a mixture od Equity and Debt component.Also,known as hybride funds.Objective of these funds is long term capital appreciation by investing in equities,it maintain an optimum balance between debt and equity component and generate periodic return by managing debt component.
1.Phase1:Growth of UTI(1964-87)
UTI was establish by the Act of Parliament in 1963 as a sole player in the Industry.First product lunch by UTI was a Unit scheme 1964.It also create popular product such as ULIP in 1971,MIP's,Children plans in 1986,Offshore funds ect.
Also,UTI lunch it's first Diversified equity scheme calles 'Mastershare' in 1987.In 1986,UTI lunch it's first offshore fund called 'India Fund'.
2.Phase2:Entry of Public Sector Fund(1987-1993)
In 1987,Public sector banks and Funancial Institutions got permission to set up Mutual Funds.SBI mutual fund was the first non UTI Mutual fund set up in 1987.This was followed by Can Bank Mutual fund,LIC Mutual fund,Indian Bank Mutual fund,GIC Mutual fund and PNB Mutual fund.In 1992,SEBI got regulatory power to regulate Mutual fund industry.By the year 1993,Mutual fund industry opened for private players.
3.Phase3:Emergence of Private funds(1993-1996)
In this era lots of private sector mutual funds were emerge,giving a choice to investors to choose from the wide variety of funds.Also,in 1993 first Mutual Fund Regulator is came into picture under SEBI which regulate entire industry except UTI.The first private Mutual fund was Kothari Pioneer(now merged with FranklinTempleton) which is registered in july 1994.
4.Phase4:Growth and SEBI Regulation(1996-1999)
In this Phase new SEBI Regulation came into picture,which helps in increasing the market size of Mutual fund industry.During this period Banks Mutual funds were recast as per SEBI Guidelines.Also,UTI came voluntarly under SEBI Regulation.In 1999,Dividend made tax free.
During this phase SEBI and AMFI launch investor awareness programe.Mutual fund assets during Mid 2002 cross aprox.100000 crore.
5.Phase5:Emergence of Large and Uniform industry(1999-2004)
During this phase Mutual fund industry in india became large and uniform,with the repletion of UTI act in 2003.Mutual fund industry grow rapidly during this phase,which helps private Mutual fund to grow there corpus.AUM(Assets Under Management) by the end of 2005 cross aprox.150000 crore.Tax break is offered durin this phase helps industry to crate arbitrage opportunity.During this period Bond funds and liquid funds became popular and registred high growth.
6.Phase6:Consolidation and Growth(From2004 onwards)
During this phase,merger and acquisition takes places like Allince Mutual fund acquired by Birla sunlife Mutual fund.Also,consolidation of different similar schemes within the Funds thake place.
Mutual Fund Classifications:
1.Open-Ended Fund:It is a types of Fund , which is bought and sell by investor any time at NAV(Net asset Value) related price.It is very conviniant vehical of investment for the investors who buy fund and sell it back to the AMC any time.This fund is open through out the year to subscribe the schemes by the investors.
Investors can recieve the account statement of there holdings.The number of outstanding unit and unit capital goes up and down every day.Also,corpus of this scheme change every day.
2.Close-Ended fund: It is a type of Fund,which is bought by the investors first time through IPO(Initial Public Offer)after that it is closed for futher sales is closed.After few day this type of schemes is listed on stock exchange for further buying and selling between investor to investors.Price at which unit sold and redeem depend on market price,which is linked to NAV.
Number of unit of close ended fund remail unchange.Also,unit capital is fixed because of one time sale.
3.Load fund:It is a type of fund which carry load,which is one time initial issue expences including brokers,agents,Distributor commision,advertisement and marketing expenses.Fund which charge front end(entry load) or back end load(exit load) are called Load funds.
4. No Load fund: Fund which does not charge front end load and back end load is calles no load fund.
5.Tax exempt fund:Thses are a funds which invest in the tax exempted security like infrastructure bonds.After 1991,dividend recieve by the mutual fund is tax free in the hand of investors.But all fund other than Open ended fund is liable to pay Dividend distribution tax.
6.No tax exempted funds:These are the funds which pay taxes on dividend recieve like the Close ended schemes pay dividend distirbution tax.After 2005,repurchase transaction of equity oriented schemes subjected to pay Security transaction tax.
TYPES OF FUNDS:On the Basis of Investment Objectives
1.Equity Funds:There is diffrent type sof equity funds
1.1 Equity Funds- These funds invest money into equity related investment instruments like shares of public ltd.companies.Main objectives of these funds is capital appreciation by investing in equities.It carry high risk and recommended to invest for the period of 5 years.it carry no entry load but carry exit load of 0.5% till 6 month.
1.1.1 Large cap Funds:These are the funds invest into the large cap stocks.
1.1.2 Mid cap Funds:These funds invest into the mid cap stocks.
1.1.3 Small cap Funds:These funds invest into the small cap stocks.
1.2 Index Funds:These funds invest money into the equities of any index like SENSEX,Nifty ect.It invest in each and every stock of any particular index.
1.3 Sectors Funds:These funds invest in stocks of any particular sector like FMCG,Real estate,Banking ect.
1.4 Selct Sector Funds:These funds invest money into the multiple sectors like any funds invest in Banking,Pharma,Auto ect.
1.5 Dividend yield funds:These funds invest into the companies who distribute high dividend like Reliance industries.
1.6 International Equity funds:These funds invest in stock of the companies,which are listed in foreign countries like Nestle,Pepsi,Coca Cola ect.
1.7 Growth Funds:These funds invest in high growth companies.
1.8 Value Funds:These are the funds which invest into the stocks whose market values are fallen below thre intinsic value or book value.
2.Debt Funds:
2.1 Fixed Income Funds:These funds provide fixed income and capital appreciation by inbesting in government securities ,Corporate debentures,Call money market,Bank deposits ect.These funds carry credit risk and interest rate risk.
2.2 GILT Funds:These are the funds invest money only in Govenment securities.The risk averse investors are investing in these funds,where he/she don't wont to take risk.
3.Money market Funds:These funds invest money in money market instruments like T- Bills,Commercial papers ect for very short duration of times.It's objectives is to provide investors with high level of incomes from short term investments.These funds are very liquide,investors can liquidate funds within 24 hours.
4.Balance funds:These funds is a mixture od Equity and Debt component.Also,known as hybride funds.Objective of these funds is long term capital appreciation by investing in equities,it maintain an optimum balance between debt and equity component and generate periodic return by managing debt component.
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