WORKING OF MUTUAL FUND - FLOW CHART

The working of the mutual funds is represented by the following flow chart
INVESTORS invests their monies in
MUTUAL FUND (TRUST) floated by a sponsor company, who through their
 ASSET MANAGEMENT COMPANY invests the monies in
DIFFERENT SCHEMES offered, by professional
FUND MANAGERS who are experts in the field based on the
FUND OBJECTIVES, based on the scheme, make
INVESTMENTS in different securities and earn
 RETURN & CAPITAL APPRECIATION (scheme based)
 MINUS CHARGES/FEES (LOADS) for the services and return to
INVESTORS with return/capital appreciation.
Thus the working of a mutual fund starts with the investor and ends with the
investor .The mutual fund acts as a financial intermediary which helps the investors
through different schemes, to enable the investors to achieve their financial goals. To
achieve this objective, the mutual fund operates through an organisational set up
prescribed by statute and the same is explained in the next chapter.
MUTUAL FUND - GENESIS
As explained earlier, mutual fund is a concept of mutual help of subscribers for
portfolio investment and management of these investments by experts in the field. The
concept of mutual fund is not new.
The first mutual fund, The Societie General de Belgique (Netherlands), which was
formed in 1822,embodied the concept of risk sharing.
The second mutual fund was started in Scotland in the 1880's.
The idea of pooling money together for investing purposes started in Europe in the
mid-1800s.
In England, The Foreign and Colonial Governments Trust of London was the real
pioneer in the field of mutual fund.
In United States of America (USA), mutual funds have evolved over a period of
seven decades. Originally called investment trusts, the first American one was the New
York Stock Trust, established in 1889. The first pooled fund in the U.S. was created in
1893 for the faculty and staff of Harvard University. After that the origin of mutual funds
in the USA dates back to the formation of the Massachusetts Investors Trust in 1924.
When three Boston securities executives pooled their money together in 1924 to create
the first mutual fund, they had no idea how popular mutual funds would become. On
March 21st, 1924 the first official mutual fund Massachusetts Investors Trust was born.
 Subsequently the mutual funds that came into existence began their operations in
Boston in the early 1920's, Some of the examples are State Street Fund, Massachusetts
Investor's Trust (now called MFS), Fidelity, Scudder, Pioneer, and the Putnam Fund. The
Wellington Fund, the first balanced fund that included both stocks and bonds, was
founded in 1928, and today is part of the giant Vanguard Funds Group.
After one year, the Massachusetts Investors Trust grew from $50,000 in assets in
1924 to $392,000 in assets (with around 200 shareholders). The first fund which set up in
Boston in 1924 has grown rapidly with Assets Under Management (AUM) of US $ 448
million in 1940 to more than 50 billion in the early seventies and further to more than US
$ 2.1 trillion at the end of 1994.The number of funds in operation has also gown from
426 in 1975 to 1528 in 1985 ad further to a staggering figure of 5761 by the end of
1995.In the USA, the mutual funds have grown into the second largest financial
intermediary after commercial banks, with $2.82 trillion in assets by the end of 1995.
There are over 10,000 mutual funds in the U.S. today totaling around $7 trillion (with
approximately 83 million individual investors) according to the Investment Company
Institute.
Growth for the industry during the first 27 years was slow. In 1951, the number of
funds surpassed 100 and the number of shareholders exceeded 1 million. The stock
market crash of 1929 slowed the growth of mutual funds. In response to the stock market
crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of
1934. These laws require that a fund be registered with the SEC (U.S. Securities and
Exchange Commission) and provide prospective investors with a prospectus. The SEC
helped create the Investment Company Act of 1940 which provides the guidelines that all
funds must comply with today.
With renewed confidence in the stock market, mutual funds began to blossom. By
the end of the 1960s there were around 270 funds with $48 billion in assets.
In 1976, John C. Bogle opened the first retail index fund called the First Index
Investment Trust. It is now called the Vanguard 500 Index fund and in November of 2000
it became the largest mutual fund ever with $100 billion in assets.
One of the largest contributors of mutual fund growth was Individual Retirement
Account (IRA) provisions made in 1981, allowing individuals (including those already in
corporate pension plans) to contribute $2,000 a year. Mutual funds are now popular in
employer-sponsored defined contribution retirement plans.
Hundreds of mutual funds both open and close ended have been developed and
expanded in many countries in Europe, the Far East and Latin America, subsequently
after the US phenomenon.
All over the world, there has been a sharp increase in investor preference for
mutual funds and India has proved to be no exception.
In the 1960's there was a phenomenal rise in aggressive growth funds (with very
high risk). Sometimes called "go-go" or "hot-shot" funds, they received the majority of
the billions of dollars flowing into mutual funds at that time. In 1968 and 1969, over 100
of these new aggressive growth funds were established.
A severe bear market began in the autumn of 1969. People became disillusioned
with stocks and mutual funds. "The market's toast. it'll never get back to where it was!"
was echoed by panicked investors.
Unemployment grew, inflation went crazy, and investors pulled billions back out
of the funds. They should have hung in there! Many funds have risen 9,000% since then.
The 1970's saw a new kind of fund innovation: funds with no sales commission
called "no load" funds.
In 1976, John C. Bogle opened the first retail index fund - First Index Investment
Trust (now the largest index fund - Vanguard 500 Index) and the next year Peter Lynch
took over at Fidelity Magellan, now the largest stock mutual fund
The largest and most successful no load family of funds is the Vanguard Funds,
created by John Bogle in 1977. At the end of the 1920's there were only 10 mutual funds.
At the end of the 1960's there were 244. Today there are more than 6,500 unique funds
and even thousands more that differ only by their share class (how they are sold, and how
their expenses are charged).
In 1981, Congress created the Individual Retirement Account and by the end of
the 80s there were 2,917 funds and $982 billion in assets.
The next big change for the industry was in 1991 when Morning Star introduced
its "star ratings." By 1994, 75% of all new investments were in funds with a rating of four
or five stars.
In 1992, Charles Schwab started One Source, the first "fund supermarket."
As of December 1998, stock mutual funds account for $2.981 trillion or 53.9% of
total mutual fund industry assets. Money market funds account for 24.5% ($1.353
trillion), bond funds comprise 15.0% ($830.5 billion), and hybrid funds hold 6.6%
($365.1 billion). Mutual funds held about 20% of all publicly traded U.S. stocks in 1998.
The remaining 80% was held by households, private pension funds, state and local
government retirement funds, insurance companies, private trusts, residents of foreign
countries, and other investors. These numbers are gathered by the Investment Company
Institute. The popularity of the Mutual Fund has increased manifold. In developed
financial markets, like the United States, Mutual Funds have almost overtaken bank
deposits and total assets of insurance funds. As of date, in the US alone there are over
7,000 Mutual Funds with total assets of over US $ 3 trillion (Rs. 100 lakh crores).
According to "The Investing Kit" (Dearborn Financial Publishing, Inc., Chicago), mutual
funds offer "professional portfolio management, diversification, a wide variety of
investment styles and objectives, easier access to foreign markets, dividend reinvestment,
ease of buying and selling shares and exchange privileges.
But the highlight of the concept of mutual funds is that since 1940 no mutual fund
has gone bankrupt.
 Mutual funds are very popular today, known for ease-of-use, liquidity, and unique
diversification capabilities.