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A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money collected & invested by the fund manager in different types of
securities depending upon the objective of the scheme. These could range from shares to
debentures to money market instruments. The income earned through these investments and its
unit holders in proportion to the number of units owned by them (pro rata) shares the capital
appreciation realized by the scheme. Thus, a Mutual Fund is the most suitable investment for the
common person as it offers an opportunity to invest in a diversified, professionally managed
portfolio at a relatively low cost. Anybody with an investible surplus of as little as a few
thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment
objective and strategy

A mutual fund is the answer to all these situations. It appoints professionally qualified and
experienced staff that manages each of these functions on a full time basis. The large pool of
money collected in the fund allows it to hire such staff at a very low cost to each investor. In
effect, the mutual fund vehicle exploits economies of scale in all three areas - research,
investments and transaction processing. While the concept of individuals coming together to
invest money collectively is not new, the mutual fund in its present form is a 20th century
phenomenon. In fact, mutual funds gained popularity only after the Second World War.
Globally, there are thousands of firms offering tens of thousands of mutual funds with different
investment objectives. Today, mutual funds collectively manage almost as much as or more
money as compared to banks.

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A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciation realized is shared by its unit holders in proportion to the number of units
owned by them. Thus, a Mutual Fund is the most suitable investment for the common person as
it offers an opportunity to invest in a diversified, professionally managed basket of securities at a
relatively low cost. The flow chart below describes broadly the working of a mutual fund:


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 defines a mutual fund as a " a fund establishment 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 have been a significant source of investment in both government and corporate
securities. It has been for the decades the monopoly of the state with UTI being the key player
with invested funds exceeding Rs. 300 bn. (US $ 10 bn.). The state owned insurance companies
also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and
foreign companies. Banks - mainly state owned too have established Mutual Funds (MFs).
Foreign participation in mutual funds and asset management companies permitted on a case-by-
case basis.


 
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The Indian mutual fund industry is dominated by the Unit Trust of India, which has a total
corpus of Rs700bn collected from more than 20 million investors. The UTI has many
funds/schemes in all categories i.e. equity, balanced, income etc with some being open-ended
and some being closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which is a
balanced fund, is the biggest scheme with a corpus of about Rs200bn. Most of its investors
believe that the UTI is government owned and controlled, which, while legally incorrect, is true
for all practical purposes.

The second largest category of mutual funds is the ones floated by nationalized banks. Can bank
Asset Management floated by Canara Bank and SBI Funds Management floated by the State
Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and
Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones.

 
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Alliance Capital Asset Management (I) Private Limited Private foreign
Birla Sun Life Asset Management Company Limited Private Indian
Bank of Baroda Asset Management Company Limited Banks
Bank of India Asset Management Company Limited Banks
Can bank Investment Management Services Limited Banks
Cholamandalam Cazenove Asset Management Company Limited Private foreign
Dundee Asset Management Company Limited Private foreign
DSP Merrill Lynch Asset Management Company Limited Private foreign
Escorts Asset Management Limited Private Indian
First India Asset Management Limited Private Indian
GIC Asset Management Company Limited Institutions
IDBI Investment Management Company Limited Institutions
Indfund Management Limited Banks
ING Investment Asset Management Company Private Limited Private foreign
J M Capital Management Limited Private Indian
Jardine Fleming (I) Asset Management Limited Private foreign
Kotak Mahindra Asset Management Company Limited Private Indian
Kothari Pioneer Asset Management Company Limited Private Indian
Jeevan Bima Sahayog Asset Management Company Limited Institutions
Morgan Stanley Asset Management Company Private Limited Private foreign
Punjab National Bank Asset Management Company Limited Banks
Reliance Capital Asset Management Company Limited Private Indian
State Bank of India Funds Management Limited Banks
Shriram Asset Management Company Limited Private Indian
Sun F and C Asset Management (I) Private Limited Private foreign
Sundaram Newton Asset Management Company Limited Private foreign
Tata Asset Management Company Limited Private Indian
Credit Capital Asset Management Company Limited Private Indian
Templeton Asset Management (India) Private Limited Private foreign
Unit Trust of India Institutions
Zurich Asset Management Company (I) Limited Private foreign




   
    


The most important trend in the mutual fund industry is the aggressive expansion of the foreign
owned mutual fund companies and the decline of the companies floated by nationalized banks
and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties and got off to a
good start due to the stock market boom prevailing then. These banks did not really understand
the mutual fund business and they just viewed it as another kind of banking activity. Few hired
specialized staff and generally chose to transfer staff from the parent organizations. The
performance of most of the schemes floated by these funds was not good. Some schemes had
offered guaranteed returns and their parent organizations had to bail out these AMCs by paying
large amounts of money as the difference between the guaranteed and actual returns. The service
levels were also very bad. Most of these AMCs have not been able to retain staff, float new
schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of
continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also very
similar. They quickly realized that the AMC business is a business, which makes money in the
long term and requires deep-pocketed support in the intermediate years. Some have sold out to
foreign owned companies, some have merged with others and there is general restructuring going
on.

They can be credited with introducing many new practices such as new product innovation,
sharp improvement in service standards and disclosure, usage of technology, broker education
and support etc. In fact, they have forced the industry to upgrade itself and service levels of
organizations like UTI have improved dramatically in the last few years in response to the
competition provided by these.
   
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Let us start the discussion of the performance of mutual funds in India from the day the concept
of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or
rather to those who believed in savings, to park their money in UTI Mutual Fund. The
performance of mutual funds in India in the initial phase was not even closer to satisfactory
level. People rarely understood, and of course investing was out of question. But yes, some 24
million shareholders were accustomed with guaranteed high returns by the beginning of
liberalization of the industry in 1992. This good record of UTI became marketing tool for new
entrants. The expectations of investors touched the sky in profitability factor. However, people
were miles away from the preparedness of risks factor after the liberalization.
The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate
about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets
Under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher
performance by April 2004. It rose as high as Rs. 1,540bn. The net asset value (NAV) of mutual
funds in India declined when stock prices started falling in the year 1992. Those days, the market
regulations did not allow portfolio shifts into alternative investments. There was rather no choice
apart from holding the cash or to further continue investing in shares. One more thing to be
noted, since only closed-end funds were floated in the market, the investors disinvested by
selling at a loss in the secondary market.
The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal,
the losses by disinvestments and of course the lack of transparent rules in the whereabouts
rocked confidence among the investors. Partly owing to a relatively weak stock market
performance, mutual funds have not yet recovered, with funds trading at an average discount of
1020 percent of their net asset value. The measure was taken to make mutual funds the key
instrument for long-term saving. The more the variety offered, the quantitative will be investors.
At last to mention, as long as mutual fund companies are performing with lower risks and higher
profitability within a short span of time, more and more people will be inclined to invest until
and unless they are fully educated with the dos and don'ts of mutual funds.

 

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A lone UTI with just one scheme in 1964 now competes with as many as 400 odd products and
34 players in the market. In spite of the stiff competition and losing market share, Last six years
have been the most turbulent as well as exiting ones for the industry. New players have come in,
while others have decided to close shop by either selling off or merging with others. Product
innovation is now passé with the game shifting to performance delivery in fund management as
well as service. Those directly associated with the fund management industry like distributors,
registrars and transfer agents, and even the regulators have become more mature and responsible.

The industry is also having a profound impact on financial markets. While UTI has always been
a dominant player on the bourses as well as the debt markets, the new generations of private
funds, which have gained substantial mass, are now flexing their muscles. Fund managers, by
their selection criteria for stocks have forced corporate governance on the industry. Rewarding
honest and transparent management with higher valuations has created a system of risk-reward
created where the corporate sector is more transparent then before.

Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and
technology sector. Funds performances are improving. Funds collection, which averaged at less
than Rs100bn per annum over five-year period spanning 1993-98 doubled to Rs210bn in 1998-
99. In the current year mobilization till now have exceeded Rs300bn. Total collection for the
current financial year ending March 2000 is expected to reach Rs450bn.

What is particularly noteworthy is that bulk of the mobilization has been by the private sector
mutual funds rather than public sector mutual funds. Indeed private MFs saw a net inflow of Rs.
7819.34 Crore during the first nine months of the year as against a net inflow of Rs.604.40 Crore
in the case of public sector funds.

 

 



The benefits on offer are many with good post-tax returns and reasonable safety being the
hallmark that we normally associate with them. Some of the other major benefits of investing in
them are:

    
 

Mutual funds invest according to the underlying investment objective as specified at the time of
launching a scheme. So, we have equity funds, debt funds, gilt funds and many others that cater
to the different needs of the investor. The availability of these options makes them a good option.
While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of
security that aimed at the time of making investments. Money market funds offer the liquidity
that desired by big investors who wish to park surplus funds for very short-term periods. The
only pertinent factor here is that the fund has to selected keeping the risk profile of the investor
in mind because the products listed above have different risks associated with them. So, while
equity funds are a good bet for a long term, they may not find favor with corporate or High Net
worth Individuals (HNIs) who have short-term needs.

 


Investments spread across a wide cross-section of industries and sectors and so the risk is
reduced. Diversification reduces the risk because not all stocks move in the same direction at the
same time. One can achieve this diversification through a Mutual Fund with far less money than
one can on his own.

   

Mutual Funds employ the services of skilled professionals who have years of experience to back
them up. They use intensive research techniques to analyze each investment option for the
potential of returns along with their risk levels to come up with the figures for performance that
determine the suitability of any potential investment.


  
 

Returns in the mutual funds are generally better than any other option in any other avenue over a
reasonable period. People can pick their investment horizon and stay put in the chosen fund for
the duration. Equity funds can outperform most other investments over long periods by placing
long-term calls on fundamentally good stocks. The debt funds too will outperform other options
such as banks. Though they are affected by the interest rate risk in general, the returns generated
are more as they pick securities with different duration that have different yields and so are able
to increase the overall returns from the




Investing in individual stocks can be fun because each company has a unique story. However, it
is important for people to focus on making money. Investing is not a game. Your financial future
depends on where you put your hard-earned dollars and it should not take lightly.

 

By pooling investors' monies together, mutual fund companies can take advantage of economies
of scale. With large sums of money to invest, they often trade commission-free and have
personal contacts at the brokerage firms.

  

Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The bookkeeping
duties involved with stocks are much more complicated than owning a mutual fund. If you are
doing your own taxes, or are short on time, this can be a big deal.

Wealthy stock investors get special treatment from brokers and wealthy bank account holders get
special treatment from the banks, but mutual funds are non-discriminatory. It doesn't matter
whether you have $50 or $500,000, you are getting the exact same manager, the same account
access and the same investment.


In general, mutual funds carry much lower risk than stocks. This is primarily due to
diversification (as mentioned above). Certain mutual funds can be riskier than individual stocks,
but you have to go out of your way to find them.

With stocks, one worry is that the company you are investing in goes bankrupt. With mutual
funds, that chance is next to nil. Since mutual funds, typically hold anywhere from 25-5000
companies, all of the companies that it holds would have to go bankrupt.

I will not argue that you should not ever invest in individual stocks, but I do hope you see the
advantages of using mutual funds and make the right choice for the money that you really care
about.

  
  

Mutual funds have their drawbacks and may not be for everyone:

 
 No investment is risk free. If the entire stock market declines in value, the
value of mutual fund shares will go down as well, no matter how balanced the portfolio.
Investors encounter fewer risks when they invest in mutual funds than when they buy and sell
stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing
money.

     All funds charge administrative fees to cover their day-to-day
expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial
consultants, or financial planners. Even if you don't use a broker or other financial adviser, you
will pay a sales commission if you buy shares in a Load Fund.

! During a typical year, most actively managed mutual funds sell anywhere from 20 to 70
percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay
taxes on the income you receive, even if you reinvest the money you made.
 
 When you invest in a mutual fund, you depend on the fund's manager to
make the right decisions regarding the fund's portfolio. If the manager does not perform as well
as you had hoped, you might not make as much money on your investment as you expected. Of
course, if you invest in Index Funds, you forego management risk, because these funds do not
employ managers


 


   
  

The asset management company shall launch no scheme unless the trustees approve such scheme
and a copy of the offer document has filed with the Board.

Every mutual fund shall along with the offer document of each scheme pay filing fees.

The offer document shall contain disclosures, which are adequate in order to enable the investors
to make informed investment decision including the disclosure on maximum investments
proposed to make by the scheme in the listed securities of the group companies of the sponsor a
close-ended scheme shall fully redeemed at the end of the maturity period. "Unless a majority of
the unit holders otherwise decide for its rollover by passing a resolution".

The mutual fund and asset management company shall be liable to refund the application money
to the applicants,-

(i) If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub-
regulation (1);

(ii) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of
sub-regulation (1).

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ent or opinion, which are incorrect or false.

  
 

The financial year for all the schemes shall end as of March 31 of each year. Every mutual fund
or the asset management company shall prepare in respect of each financial year an annual report
and annual statement of accounts of the schemes and the fund as specified in Eleventh Schedule.

Every mutual fund shall have the annual statement of accounts audited by an auditor who is not
in any way associated with the auditor of the asset management company.



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A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by
a single issuer, which are rated not below investment grade by a credit rating agency authorized
to carry out such activity under the Act. Such investment limit may be extended to 20% of the
NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset
Management Company.

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Mutual funds are funds that pool the money of several investors to invest in equity or debt
markets. Mutual Funds could be Equity funds, Debt funds or balanced funds.

Fund are selected on quantitative parameters like volatility, FAMA Model, risk adjusted returns,
and rolling return coupled with a qualitative analysis of fund performance and investment styles
through regular interactions / due diligence processes with fund managers.