Kriti Verma M.B.

A II year

Concept

Mutual Funds in India

Objectives of Mutual Funds

Types of Mutual Funds

Benefit of Mutual Funds

Drawbacks of Mutual Funds

Concept of Mutual Fund

A Mutual Fund is an investment vehicle for investors who pool their savings for investing in diversified portfolio of securities with the aim of attractive yields and appreciation in their value. Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 define mutual funds as 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. Mutual Funds were first started in England during 19th century. These funds could not succeed due to highly speculative nature. Mutual funds started in USA during 1990 but they picked up only after 1924 when a number of such funds were started. After World War II mutual funds expanded rapidly.

Mutual Funds in India

In India first mutual fund was started in 1964 when Unit Trust of India was established to mobilise the savings of the public, and invest them in securities and other assets enabling the investors to earn good returns. Government provided several fiscal incentives to UTI to make its schemes attractive for investors.

UTI remained a monopoly until 1987 after which government controlled banks established mutual funds followed by the insurance companies.
SEBI (Mutual Funds) Regulations 1993 has also provided for the fair functioning of mutual funds by prescribing disclosure and advertising norms and that the fund sponsor, trustees, custodian and asset management company (AMC) must have an arms length relationship. During 1964 1987, when UTI was the only mutual fund in India, it mobilised 45.63 billion.

Funds mobilised by Mutual Funds

Period 1964-1987 1987 1992 1992 1997 1997 2002

Fund Mobilised (Rs. in billion) 45.63 329.77 458.45 833.85

2002 - 2003

45.80

Objective of Mutual Fund

The main objective of mutual funds is to mobilise savings from small investors and allow them to participate in the equity and other securities of the companies and other commercial organization with less risk. The return obtained from the mutual funds investment is shared among the investors, called shareholders or unit holders, in proportion to their investment. The main feature of mutual funds is that it makes diversification of portfolio a possibility for the small investors who otherwise may not be able to do so with their limited resources.

Mutual funds are sine qua non for the development of capital markets and the creation of the equity cult in an economy.

Types of Mutual Fund

Close Ended Mutual funds - Created for a specific duration which is specified at the start of the fund. - Has fixed number of shares or units outstanding. - After the initial issue of shares/units, they trade on stock exchanges or over- thecounter- markets. - The price of the shares/units is determined by the supply of and demand for the shares/ units. - The repurchase price, also called bid price, is the price at which a close ended fund repurchases its units and it may include a charge called the back end load. Open Ended Mutual Funds -They operate for unlimited period of time. - There is no fixed number of shares or units; it changes everyday depending on purchases and sales. - The price per share is determined by the net asset value (NAV) of the open end fund. - The price at which they repurchase the share / units is called the redemption price.

Various kinds of funds are possible within these two categories: Income funds They have the primary objective of a high current return, and investment is made in portfolios of high yielding shares. Growth funds They aim for capital gains and hence invest large proportion of their funds in equity shares with high growth potential. Balanced funds They combine the objectives of earning current income and capital appreciation. So, their portfolio consists of both equities and bonds. Taxes saving funds They are targeted to investors in high tax brackets. Income for these funds is tax exempt. Sector based funds Mutual funds may offer opportunities to investors to invest in the securities of specific sectors. For example, mutual funds have made available several sector based funds like Infrastructure, Technology, and Pharmaceutical to investors.

Benefits of Mutual Fund

Simplicity Diversification Professional Management Affordability Flexibility

Drawbacks of Mutual Fund

High fees and expenses Brokerage fees Hidden Costs Cost of Diversification Risk of Ownership