MUTUAL FUNDS.

Published: 09th March 2011
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Explain the role of Mutual Funds?


Ans: ROLE OF MUTUAL FUNDS.


*INTRODUCTION:


~ A mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities.


~ All returns of the mutual funds are shared with the investors in the fund.


~ The Mutual Fund is managed by the Asset Management Company (AMC) that needs to be approved by the SEBI.


*DEFINITION:


~ According to SEBI (Mutual Funds) Regulations, 1996 " A mutual fund is a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments."


~ The above definition indicates that mutual funds raise money by selling shares / units of the fund to the public. Mutual Funds purchase various assets like stocks, bonds and money market instruments through the money so raised.


*ROLE OF MUTUAL FUNDS:


i) CHANNELISING SAVINGS:


~ Mutual funds channelize the saving of millions of individuals for investment in equity and debt instruments.


~ These savings are mobilized, invested and returns are distributed in the same proportion to unit holders.


ii) INSTRUMENT OF INVESTING MONEY:


~ Taking into account very low bank rate, keeping money in the bank deposits does not give high return.


~ Also, investing money in the stock market is not quite feasible with a common investor who is not well-versed with the complexities in the stock market.


~ So, mutual fund is a better option for investment for the common man who gets higher returns on his investment.


~ Thus, mutual fund is an important instrument of investing money.


iii) MOBILISATION OF SAVING:


~ Mutual funds mobilize the savings of millions of investors for profitable investments.


~ It facilitates flow of savings from common man to industries.


iv) BRIDGES GAP BETWEEN RETAIL INVESTORS AND CAPITAL MARKETS:


~ Mutual funds are important intermediaries in the capital market. Thus, they bridge the gap between investors and capital markets.


~ The growth of mutual funds indicates that retail investors are tapping the stock market through mutual funds.


v) HIGHER RETURNS:


~ Mutual funds provide investors to earn high returns on their savings.


~ There is high return-low risk combination as mutual funds have direct holding of equities and other assets.


vi) REDUCES RISK:


~ Mutual funds reduce risk of investing in stocks by spreading / diversifying investments.


~ Through mutual funds, a small investor can hold a share in a large and diversified portfolio of assets that reduces the risk of investment.


vii) PROFESSIONAL PORTFOLIO MANAGEMENT;


~ A small investor can enjoy the benefits of a professional management of portfolio through mutual funds.


~ This helps him to earn a relatively higher rate of return in his investment.


viii) SAVING FOR RETIREMENT AND EDUCATION:


~ Mutual funds now play a significant role to increase the households efforts to save for their retirement and for the education of their children.


~ Various schemes of funds with tax benefits help the households to save for their retirement.


Q2: Explain the importance of Mutual funds?


Ans: IMPORTANCE OF MUTUAL FUNDS:


*INTRODUCTION:


~ A mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities.


~ Thus, the investors try to minimize the risk and ensure steady returns on investments.


*IMPORTANCE:


~ Mutual funds provide benefits of a diversified portfolio and expert fund management to a large number of investors.


~ Hence, they form a very important part of the capital market.


~ The following points explain the increasing importance of mutual funds:-


i) MOBILIZATION OF DOMESTIC RESOURCES.


~ Mutual funds mobilize domestic resources and hence reduce dependence on outside funds.


~ They help to tap vast potential of domestic savings and channelize them for profitable investments.


ii) PROFESSIONAL MANAGEMENT:


~ An average investor requires the help of an expert to reap the benefits of investments in stock market.


~ The services of the expert are also expensive.


~ On the other hand, mutual funds are managed by professional managers who have the skill and expertise to make an organized investment strategy for the benefit of small investors.


iii) PORTFOLIO DIVERSIFICATION:


~ Lack of resources may limit the ability of an individual investor to invest in a diversified portfolio of securities.


~ Mutual funds invest in a number of companies and this diversification reduces the risk of investment.


iv) EQUITY RESEARCH:


~ Mutual funds invest in equity research that provides them with abundant information and data for investments.


~ This enables them to create a good portfolio.


v) REDUCE RISKS:


~ Portfolio management and diversification help mutual funds to reduce risk.


~ The experience and expertise of mutual funds helps in building a diversified portfolio that minimizes risks and maximizes returns.


vi) MAXIMISE GAINS:


~ Mutual funds are managed by professionals who are highly skilled and competent in their jobs.


~ They maximize gains for investors by proper selection and timing of investment.


~ It is to be noted that mutual funds are not a channel for getting rich quickly, but investment in them are long-term growth avenues.


vii) REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS:


~ The dividends and capital gains are automatically reinvested.


~ This reinvestment increases the value of investments in mutual funds in the long run.


viii) LOW TRANSACTION COST:


~ As mutual funds bring in the benefits of economies of scale, the cost of investment through mutual funds tends to be lower.


~ These benefits are passed on to the investors.


ix) SAFETY AND LIQUIDITY:


~ Investments in mutual funds are safer as they are controlled and regulated by SEBI.


~ Investors in mutual funds can encash their investments by selling their units to the funds (open-ended scheme) or on a stock-exchange (close-ended scheme).


x) FLEXIBILITY:


~ Investments in mutual funds are easy and flexible.


~ Investors have the option of investing in any of the various schemes and of transferring their holdings from one scheme to another.


xi) TAX BENEFITS:


~ Investment in mutual funds have many tax benefits.


xii) TRANSPARENCY:


~ Mutual funds declare their portfolio every month.


~ Due to this transparency, investors know where the mutual funds invest their money.


xiii) STABILITY TO THE STOCK MARKET:


~ Mutual funds have large amount of funds to invest and the ability to absorb losses in the stock market.


~ This provides stability to the stock market.


xiv) ANCILLARY SERVICES:


~ Various ancillary services are provided by mutual funds. They are:-


^ Saving schemes for regular monthly investment in units.


^ Life insurance schemes.


^ Automatic reinvestment of income distribution, etc.


Q3: Explain the various type of Mutual Funds?


Ans: TYPES OF MUTUAL FUNDS.


*INTRODUCTION:


~ A mutual fund is a financial intermediary that pools the savings of investors for a collective investment in a diversified portfolio of securities.


~ There are wide varieties of mutual fund schemes that cater to the needs, objectives and expectations of investors.


~ Thus, an investor can choose from a vast variety of mutual fund schemes and ensure steady returns on their investments.


*CLASSIFICATION:


~ Mutual funds can be classified into various types on the basis of the following factors:


A) GEOGRAPHIC CLASSIFICATION:


i) DOMESTIC FUNDS:


~ This fund mobilizes resources from within the country.


~ Therefore, the market is limited to the boundaries of the nation and so investment is made in those securities that are issued and traded in the domestic financial market.


~ Investment can be made in close-ended / open-ended schemes and in equity / debt market.


ii) OFF-SHORE FUNDS:


~ They mobilize resources from foreign markets for investment in the country of the issuing company, thus facilitating cross-border flow of funds.


~ Such funds not only open domestic market to international investors but also make possible to invest in securities of foreign companies.


B) FUNCTIONAL / STRUCTURAL CLASSIFICATION:


i) OPEN-ENDED FUNDS:


~ Open-ended funds that are available for subscription throughout the year and it offers to buy/sell units at Net Asset Value (NAV) related prices.


~ This fund offers a very high liquidity and the investors can enter / exit the scheme at any time during the life time of the fund.


~ These funds are not listed on the stock market and buying / selling can be done only through the mutual fund.


ii) CLOSE-ENDED FUNDS:


~ These funds have a fixed corpus and stipulated maturity period.


~ Investors can directly invest in the scheme at the time of the initial issue. After that, the fund is listed on the stock-exchange.


~ Thus, trading on this scheme can be done in the stock exchanges.


~ The NAV and market price may differ depending on the demand and supply forces.


~ The fund has no interaction with the investors till redemption except during payment of dividend / bonus.


iii) INTERVAL SCHEME:


~ They combine the features of open-ended and close-ended schemes.


~ They may be traded on the stock-exchange or may be open for sale / redemption during pre-determined intervals at NAV related prices.


C) CLASSIFICATION BY NATURE:


i) DEBT-ORIENTED SCHEME:


~ The objective of this fund is to invest in debt instruments.


~ So, they invest bulk of their funds in the debentures of private sector companies, public sector bonds, government securities and money market instruments.


~ The balance is invested in equities.


~ This fund provides low risk and stable income to investors.


~ This funds can be further classified as :


* GULT FUND:


^ This fund invests in securities issued by the government.


^ It carries no default risk but is subject to interest rate risk.


^ This scheme is safer as securities are backed by the government.


* INCOME FUND:


^ They provide regular and periodic income.


* MONTHLY INCOME:


^ This fund gets the benefit of debt market and equity market.


^ It ranks a little high on risk-return matrix because of equity exposure.


*SHORT TERM PLAN:


^ The investment is only for a period of 3 to 6 months.


^ The fund invests in short term securities (CDs and CPs) and in corporate debentures.


*LIQUID FUNDS:


^ This fund invests in money market instruments like call money market, treasury bills, CDs, CPs, etc.


^ This is suitable for short term cash management of corporate houses.


^ The investment period varies from 1 day to 3 months.


ii) EQUITY-ORIENTED SCHEME:


~ These funds invest bulk of their investment in equity shares and the balance in debt instruments.


~ These are close-ended schemes having high tax benefits.


~ They can be sub-divided into:


^ Diversified equity fund.


^ Mid-cap fund.


^ Sector specific fund.


^ Tax saving fund.


D) CLASSIFICATION BY OBJECTIVES:


i) INCOME SCHEMES:


~ The aim is to provide regular income and safety of investment.


~ A bulk of fund is invested in income-bearing instruments (bonds, debentures, CPs and govt. securities)


~ Both, risk and return are comparatively lower.


ii) GROWTH SCHEME:


~ The aim is capital appreciation over a long term.


~ Hence investment is made in equity shares having significant growth potential in the long run.


~ These are close-ended schemes listed on stock-exchanges.


iii) BALANCED SCHEME:


~ The aim is to provide capital appreciation as well as regular income.


~ The investment is divided between equity shares and fixed income securities.


~ Investment is made in companies having a good profit and dividend track re cord.


iv) TAX SAVING SCHEME:


~ They are close-ended schemes.


~ They are designed on tax policy with special tax incentives to investors.


E) OTHER SCHEMES:


i) SECTROL FUNDS:


~ Investment is made in specific sectors like energy, telecommunication, IT, etc.


~ These is less diversification as investment is made among selected stocks in the same industry / sector.


ii) MONEY MARKET MUTUAL FUNDS:


~ This fund invests in money market instruments like call money market, treasury bills, CDs, CPs, etc.


~ This is suitable for short term cash management of corporate houses.


~ The investment period varies from 1 day to 3 months.


Q4: Write a note on the growth and performance of mutual funds in India?


Ans: GROWTH AND PERFORMANCE OF MUTUAL FUNDS IN INDIA.


*INTRODUCTION:


~ Mutual funds came into existence in India in 1963.


~ Unit Trust of India (UTI) was the first association to launch the concept of Mutual Fund in India.


~ It aimed at attracting small investors through the collective efforts of the government and the RBI.


*GROWTH:


~ The growth of mutual funds can be explained through the following five phases:


i)PHASE I : ESTABLISHMENT OF UTI (1964-1987):-


~ UTI was established (1963) and it launched its first scheme-Unit Scheme 1964 (US 1964)


~ It attracted many investors and enjoyed complete monopoly till 1987.


~ Gradually it launched more innovate schemes to suit the need of its investors.


ii) PHASE II: ENTRY OF PUBLIC SECTOR FUNDS (1987-1993) :


~ In 1987, public sector banks and financial institutions were permitted to set up mutual funds.


~ This resulted in setting up of SBI Mutual Fund (1987), Canara Bank Mutual Fund, LIC Mutual fund, etc.


iii) PHASE III: PRIVATE SECTOR FUNDS (1993-1996):


~ In 1993, private sector funds, including foreign funds were allowed to enter the mutual fund industry.


~ This brought in more competition in the industry along with innovative products, investment techniques and technology.


~ Thus, the investor was provided with a vast variety of investment schemes to choose from.


iv) PHASE IV: SEBI REGULATION AND GROWTH (1996-2004):


~ SEBI (Mutual Funds) Regulations 1996, set uniform standards and stricter regulations for all mutual funds in India.


~ It aimed at protecting the interest of the investors and providing tax benefits to them.


~ This led to enormous growth of the mutual fund industry as the mobilization of funds and number of players in the industry grew substantially.


v) PHASE V: GROWTH AND CONSOLIDATION (2004 ONWARDS):


~ After 2004, the mutual fund industry witnessed:


^ Mergers and acquisitions.


^ Entry of international players in the market (eg. Fidelity, Franklin, Templeton Mutual Funds, etc)


~ So, this is the phase of growth through consolidation and entry of new private sector players (domestic as well as international).


~ Assets under Management of mutual funds has increased considerably as shown below:


YR(End March) Assets (RS.Crore)


1997 85,822


2004 1,39,615


2008 5,05,152


2009 4,17,300


* PERFORMANCE:


~ The mutual fund industry in India has witnessed its share of ups and downs.


~ The performance of mutual funds improved greatly with a consistent good performance of UTI mutual fund. It attracted a large number of investors.


~ In 1992, there was a terrible decline in the stock prices that further led to decrease in the performance of mutual funds.


~ The confidence of the retail investors was badly shaken and the mutual funds witnessed a very bad performance in the year 1994-95.


~ Then, there was a slow and gradual recovery for the mutual funds.


~ Again in the year 200-2001, extreme volatility in the market and depressed equity market conditions led todecline of the assets under management of mutual funds.


~ And in 2008-2009, the situation worsened even further due to global financial crisi s.


~ Then there was greater focus on corporate investments and mutual fund industry again witnessed aspectacular growth in assets, especially among the private sector players.


~ Over the years, the industry focused on make existing products more attractive and introducing many innovative products.


~ The mutual fund industry has shown remarkable resilience in the last decade despite varying economic conditions, capital market scams, financial crisis and increasing competition.


~ At present, there are 38 mutual funds in India offering about 3780 schemes.


~ In 2009, the net resource mobilization by mutual funds amounted to Rs:143775 crores with 80% of funds mobilized by private sector Mutual Funds.






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